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Qualified Improvement Property

Last Updated Jan. 26, 2021

Qualified improvement property is an improvement made by the taxpayer to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service.

Any enlargement of the building, any elevator or escalator, and any internal structural framework do not qualify. Qualified improvement property is depreciated using the straight-line depreciation method.

What is considered qualified improvement property?

To qualify, the improvement 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

Floor plan

Subscriber-only resource: OnPoint: Qualified Improvement Property

Download this presentation to learn about the key takeaways from the CARES Act provisions related to qualified improvement property.

How does the CARES Act affect qualified improvement property?

The Coronavirus Aid Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, contains provisions related to QIP that can reduce taxes, increase liquidity, and generate non-operating loss carrybacks to tax years with higher tax rates. The CARES Act, however, added the requirement that qualified improvements to the property must have been made by the taxpayer. Prior to the CARES Act, a portion of the purchase price of an acquired building was QIP, but now no amount of the purchase price can be written off as QIP in the year of acquisition, and improvements are QIP only if made by the taxpayer claiming depreciation.

Modern office

Download: Cost Segregation and Fixed Assets: What You Need to Know

A solid cost segregation strategy can yield significant benefits and has become even more valuable following the Tax Cuts and Jobs Act’s bonus depreciation opportunities and the CARES Act’s changes to net operating loss rules.

What is the bonus depreciation rate for QIP?

The CARES Act also addresses the so-called “retail glitch” embodied in the 2017 Tax Cuts and Jobs Act that failed to assign a 15-year recovery period to QIP, making it 39-year property and ineligible for 100% bonus depreciation. The CARES Act fix is retroactive and applies to QIP placed in service after December 31, 2017. Businesses can now treat QIP placed in service after December 31, 2017, as 15-year property. It is eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets that are being depreciated over 39 years under the previous law.

Bonus depreciation rate:

  • QIP placed in service in 2018 and later generally qualifies for 100% bonus depreciation
  • QIP acquired after September 27, 2017, and placed in service in 2017 qualifies for 100% bonus depreciation
  • QIP acquired before September 28, 2017, does not qualify for the 100% rate even if it is placed in service after 2017, but:

– 50% bonus depreciation rate if placed in service in 2017

– 40% bonus depreciation rate if placed in service in 2018

– 30% bonus depreciation rate if placed in service in 2019

Families First

In Brief: Correcting the “Retail Glitch”

Learn more about how the CARES Act effectively allows businesses to claim 100% bonus depreciation on qualified improvement property placed in service after 2017.

What tax opportunities are offered under the CARES Act by reclassification of QIP?

Corporations can use tax arbitrage to create NOLs and increase liquidity. By amending the 2018 return (or changing the accounting method), corporations can claim bonus depreciation for QIP placed in service in 2018. By reducing 2018 income, this may generate an NOL for 2018, which under the CARES Act can be carried back five years to when the corporate tax rate was 35%, thus potentially creating or increasing refunds for carryback years.

Glass building

Subscriber-only resource: Portfolio 532-2nd: First-Year Expensing and Additional Depreciation

Learn about the temporary 100% bonus depreciation allowance that applies to qualified property acquired and placed in service after September 27, 2017, but before January 1, 2023.

Key IRC Sections

§168

Accelerated Cost Recovery System

§179

Election To Expense Certain Depreciable Business Assets

Tax Research and Practice Tools

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Portfolio

PORTFOLIO

Portfolio 531-3rd: Depreciation: MACRS and ACRS

A basic reference tool for determining the depreciation deduction under both the modified accelerated cost recovery system (MACRS) and the original accelerated cost recovery systems (ACRS) of §168.

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PRACTICE TOOL

Cost Recovery of Building Improvements Placed in Service 2004–Present

An overview of depreciation and cost recovery based on the type of improvement and date placed in service.

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PRACTICE TOOL

Tax Practice Series: Depreciation of Realty and Tangible Property

This section of our Tax Practice Series provides a detailed overview of the three systems of depreciation available for tangible property.

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