The IRS issued Rev. Proc. 2020-25 on April 17, 2020, providing guidelines for how taxpayers can take advantage of the recently enacted technical correction to the rules for qualified improvement property (QIP) and outlines the procedures to change depreciation for certain QIP or to make, revoke or withdraw certain elections.
Under the Tax Cuts and Jobs Act (TCJA), QIP was unintentionally classified as nonresidential real property with a 39-year depreciable life, which does not qualify for bonus depreciation. The Coronavirus Aid, Relief, and Economic Security (CARES) Act included a provision to correct this mistake by making QIP 15-year property and allowing it to qualify for bonus depreciation retroactively.
As a result of this change, most businesses are now allowed to claim 100% bonus depreciation for QIP placed in service after Dec. 31, 2017, as long as certain other requirements are met. QIP is defined as “any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” It excludes costs for elevators, escalators, structural framework, or building expansions.
In the current business climate, you may not be in a position to undertake new capital expenditures, however, the CARES Act presents favorable opportunities for qualifying expenditures you’ve already made. For prior-year returns that didn’t claim 100% bonus depreciation for QIP that may now be eligible, taxpayers can make changes to take advantage of this tax break.
The IRS guidance requires taxpayers who previously filed two or more returns using what is now an “incorrect” depreciation period (usually 39 years) to file Form 3115, Application for Change in Accounting Method to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file an accounting method change or an amended return.
If you have filed returns that did not claim 100% bonus depreciation for what may prove to be QIP, we can investigate your ability to take advantage of this favorable change. If there is QIP that was in fact eligible for 100% bonus depreciation, we can assist in the preparation of the accounting method change or the preparation of the amended tax returns.