Under the Tax Cuts and Jobs Act (TCJA), a new category of real property termed “qualified improvement property” (QIP), was created. The TCJA failed to assign a depreciable life to this category and, therefore, the life defaulted to 39 years. This 39-year depreciable life rendered the category ineligible for bonus depreciation (a circumstance which was often referred to as “the retail glitch”). The Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) corrects this issue by updating the recovery period for qualified improvement property to 15 years, now making this category eligible for bonus depreciation. Pursuant to the CARES Act, qualified improvement property placed into service after December 31, 2017 will generally qualify for bonus depreciation at the 100% rate.
In April 2020, the IRS issued Revenue Procedure 2020-25 which provides guidance on how taxpayers can benefit from this change. The guidance applies to tax years ending in 2018, 2019, or 2020.
The IRS requires all taxpayers who had previously filed two or more returns using the longer 39-year recovery period for their 2018, 2019, or 2020 QIPs, to complete and file Form 3115, claiming the now applicable 15-year recovery period. Taxpayers who had previously filed only one return for the affected years, can either complete Form 3115 or file an amended return.
Additionally, for a limited period of time, Rev. Proc. 2020-25 also permits taxpayers who had placed their QIPs into service in 2018, 2019, or 2020, to make various new elections related to QIP or to withdraw similar elections previously made for those associated tax years, using Form 3115 or an amended return. Only taxpayers who filed on time and before April 17, 2020 can make new elections or revoke previously made elections. The revised regulations impact the following elections which:
- Use the MACRS alternative depreciation system;
- Claim bonus depreciation on specified plants in the year of planting/grafting;
- Elect out of bonus depreciation for a class of property; or
- Claim bonus depreciation at 50% instead of at the 100% rate for all depreciated qualified improvement property placed into service in a tax year that included September 28, 2017.
There are certain key exceptions that apply. QIP that had been previously expensed as qualified real property, including IRC Sec. 179, is not eligible under the new rules. Similarly, the new rules do not apply if, in the past, late elections were made or revoked for real property trade or business or for a farming business in relation to business interest deduction limitations.
Amended returns (which include an amended Form 1065), are due on or before October 15, 2021 and cannot extend beyond the expiration date of the period of limitations for the tax year associated with the amended return.
Those who elect to make the qualified improvement property change via Form 3115, instead of filing an amended return, can have the entire effect of the bonus depreciation adjustment included in their 2019 return pursuant to IRC Sec. 481(a). There are many factors to consider in choosing whether to amend your return or File Form 3115. However, one item to consider is that making the adjustment to your 2019 return allows you the flexibility of filing electronically and can immediately trigger a reduction in your taxes owed for that return.
For questions concerning your eligibility for bonus depreciation on your qualified improvement property or the new procedures on filing an amended return or Form 3115 to claim the benefit, please contact your Untracht Early advisor.