On April 17, 2020, the Treasury Department released additional guidance for taxpayers seeking to take advantage of recently passed legislation included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). A long-awaited fix for Qualified Improvement Property was retroactively provided for in the CARES Act, and taxpayers have been eager to find out how this might apply to tax returns they previously filed. Revenue Procedure 2020-25 lays out step-by-step instructions for taxpayer relief but also provides a limited time period to take action.
Qualified Improvement Property (QIP) and Bonus Depreciation: An error in the TCJA
To provide context, a mistake in the hastily-passed Tax Cuts and Jobs Act of 2017 (TCJA) resulted in Qualified Improvement Property (QIP) not being assigned a 15-year life. As a result, QIP had to be depreciated over 27.5 years for residential rental property and 39 years for commercial property, and it was therefore not eligible for bonus depreciation. This came as a surprise to many business owners who were counting on the immediate deductions for improvements they placed in service starting in 2018. A technical correction was required to make this adjustment, and fortunately, the CARES Act corrected the drafting error by assigning QIP a 15-year life.
A Limited Time Period to Act
In essence, the CARES Act goes back in time to amend TCJA and assign a 15-year life to QIP. Effectively, this change is put in place at the time that the TCJA bill was passed and applies to QIP placed in service after December 31, 2017. However, in order for taxpayers to benefit from the shorter life and 100% bonus depreciation on assets placed in service in prior tax years, they will have to file an amended return, administrative adjustment under Section 6227 (ARR), or Form 3115 (Change in Accounting Method).
In addition, the Department of Treasury and Internal Revenue Service had the foresight to predict that the flood of incoming returns would create an administrative nightmare, and therefore decided to limit the time period in which this could be done. Therefore, returns filed before April 17, 2020 for the 2018, 2019, and 2020 tax years can be amended or adjusted (by the methods in the preceding paragraph) by October 15, 2021, to make depreciation changes to QIP.
As with all tax law changes and guidance provided by the IRS, many factors are involved in determining how it may apply to each taxpayer’s circumstances. Please contact your Blue & Co. advisor to discuss whether the information included in Rev Proc 2020-25 may be advantageous to your business and tax return filings.