Qualified Improvement Property
What is qualified improvement property?
As defined by §168(e)(6), qualified improvement property (QIP) must be:
- Made by the taxpayer
- Made to an interior portion of a nonresidential (commercial, retail, factory) building
- Made to a building that is already in service
Exclusions include:
- Building enlargements
- Elevators and escalators
- Internal structural framework
Does bonus depreciation apply to qualified improvement property?
Qualified improvement property is generally eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets up front.
Bonus depreciation may be retroactively applied to qualified improvement property placed into service in the 2018 and 2019 taxable years and may create losses, which could result in tax refunds.
The tax treatment of depreciation for qualified improvement property impacts owners of commercial, retail, and factory real estate and leaseholders by lowering their cost of capital.
Although bonus depreciation doesn’t change the amount deductible for the cost of qualified improvement property, it accelerates depreciation of qualified improvement property. This defers payment of tax on earnings, thus lowering the pre-tax rate of return that an investment in qualified improvement property must earn to achieve the desired after-tax rate of return.
Is qualified leasehold improvement property eligible for bonus depreciation in 2021?
For property placed in service after Dec. 31, 2017, the 2017 TCJA eliminated the 15-year MACRS property classification for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, and replaced them with a single classification: qualified improvement property.
The 2020 CARES Act further clarified that businesses can claim 100% bonus depreciation on qualified improvement property placed in service after 2017 provided all other requirements are met.
What is the rate of bonus depreciation on QIP?
Qualified improvement property is generally eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets up front.
Bonus depreciation rate:
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2018 through 2022 (2023 for long production property and specified aircraft) generally qualifies for 100% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2023 (2024 for long production property and specified aircraft) generally qualifies for 80% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2024 (2025 for long production property and specified aircraft) generally qualifies for 60% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2025 (2026 for long production property and specified aircraft) generally qualifies for 40% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2026 (2027 for long production property and specified aircraft) generally qualifies for 20% bonus depreciation.
How is qualified improvement property depreciated if it is ineligible for bonus depreciation or if the taxpayer elects out of bonus depreciation for qualified improvement property?
A real property trade or business or farming business that elects out of the §163(j) business interest deduction limit must instead use the ADS to depreciate qualified improvement property using the straight-line method over 20 years.
A taxpayer that elects out of bonus depreciation for qualified improvement property placed in service in a given year can depreciate qualified improvement property placed in service during that year using the straight-line method over 15 years (GDS), or 20 years (ADS).