There is a bigger tax incentive for businesses to buy assets – such as in-building cellular coverage solutions – for non-residential buildings before the end of the year, thanks to the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Act fixed a technical error relating to the depreciation of Qualified Improvement Property (QIP). Here’s what you need to know.
The CARES Act offers substantial relief in the form of new and modified tax provisions and loans to individual and commercial taxpayers financially struggling due to the pandemic. The legislation recently addressed a drafting error with bonus depreciation (which allows businesses to deduct a large percentage of the cost of eligible purchases the year they acquire them, rather than depreciating them over a period of years), potentially providing businesses with the liquidity they need to expand.
First enacted on January 1, 2016, the rules regarding QIP provided 50% depreciation with a 39-year recovery period. Under the Tax Cuts & Jobs Act of 2017 (TCJA), QIP was intended to be classified as a 15-year benefit, but a drafting error meant it was not assigned a recovery period of 15 years. QIP placed-in-service after December 31, 2017, was assigned a recovery period of 39years and was not eligible for bonus depreciation.
The CARES Act rectified the mistake by assigning a 15-year recovery period for QIP, and also expanded bonus depreciation to a broad category of QIP. The fix is retroactive. Qualified improvements dating back to January 1, 2018, can qualify for 100% bonus depreciation and could provide additional deductions on your tax return.
Businesses who filed 2018 and 2019 tax returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change, or amend both 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.
Broader QIP Offers More Options for Improvement
QIP is often perceived as a retail and restaurant issue but it applies to almost any improvement to the interior of a non-residential building that is owned or leased. Building examples include, but are not limited to, hospitals, banks, manufacturing facilities, casinos, hotels, offices and so on. Hotels are eligible since hotel guests are considered transient and therefore, hotels are considered non-residential property.
QIP can help these businesses particularly if they are expanding and want to get assets in place in November or December to get the tax credit and hit the ground running in Q1 2020 as their growth starts. But it is also important to keep in mind that many companies don’t make decisions to buy assets solely on tax benefits; there has to be a real demand coming that the asset is 100% needed. With research showing that 90 percent of buildings in the U.S. have no cellular coverage solution in place, this might be an area to investigate for sales opportunities.
There’s much to consider when it comes to the Qualified Improvement Property benefit. It is critical for building owners to understand their eligibility, how it works with other credits and deductions, and more. At the end of the day, this is a business decision, and most finance executives won’t let the “tax tail wag the dog” if you will.