Special Tax Alert
As part of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136), improvements made by the taxpayer to the interior of a nonresidential building after the building was first placed in service (i.e., qualified improvement property or QIP) are classified as 15-year MACRS property and are eligible for 100% bonus depreciation. This corrects the so-called “Retail Glitch” resulting from a drafting error in the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) that reduced the incentive for retailers (among others) to implement operational improvements inside their facilities. The QIP correction is effective as if included in the TCJA and applies to all QIP placed in service after December 31, 2017.
In this alert, we discuss:
Relevant Provisions Pre-TCJA and Related TCJA Changes
Summary of relevant Pre-TCJA provisions
Before the TCJA, certain interior improvements to nonresidential buildings were depreciated under the straight-line method and were assigned a 15-year cost recovery period under the MACRS depreciation system, instead of the general 39-year recovery period for nonresidential buildings and their improvements. Specifically, the following improvement were given this favorable treatment:
QLIP, QRP, and QRIP were specific types of improvements generally made under a lease or related to restaurant or retail facility (as applicable).
Taxpayers could elect instead to use the alternative depreciation system (ADS) under which nonresidential buildings and improvements and QLIP, QRP, and QRIP were depreciated under the straight-line method over 40 and 20 years, respectively. This ADS election allowed taxpayers to defer deductions, which could be beneficial if the deductions gave rise to no current cash tax benefit. For example, the ADS election prevented (or reduced) the conversion of depreciation deductions into net operating losses (NOLs), which would have been subject to a 20-year carryforward limit as well as other potential limitations (such as a section 382 limitation due to an ownership change).
Assets with cost recovery periods of 20 years or less (which includes QLIP, QRP, and QRIP if the taxpayer did not choose to use the ADS) or QIP, the original use of which commences with the taxpayer, were generally eligible for 50% bonus depreciation under section 168(k), at the taxpayer’s election. QIP generally included improvements made by the taxpayer to the interior of a commercial building after the building was first placed in service, such as new flooring, lighting fixtures, sprinkler systems, or other types of remodeling and interior improvements, but specifically excluded improvements attributable to enlargements of a building, an elevator or escalator, or the internal structural framework of a building.
Summary of relevant TCJA changes
The TCJA made two key changes with respect to improvements to nonresidential buildings: