Understanding the Qualified Improvement Property (QIP) provision in the CARES Act

Friday, April 3rd, 2020; 2:45pm-3:45pm

Understanding the Qualified Improvement Property (QIP) provision in the CARES Act

Panelists: Jack Earle / Doug Curtis / Matt Lathrop

Webinar Summary –

This webinar discussed IFA’s role in correcting the Qualified Improvement Property (QIP) provision via the recently passed CARES Act, as well as laid out the technical details of the QIP fix and effects for small businesses. Panelists both explained the requirements of what is QIP, as well as how to claim bonus depreciation.

Key Bullets –

• The 2017 Tax Cuts and Jobs Act included a drafting error for QIP, which was corrected in the recently passed CARES Act. IFA lobbied Congress and the Administration directly on this issue
• The QIP “retail fix” would be 15-year property beginning in 2018 and bonus eligible
• QIP is any interior portion of a building already placed into service
• QIP fix presents significant opportunities to many taxpayers to recapture immediate cash savings

Full Bullets –

• QIP at the forefront of the CARES Act. Reversing this drafting error in 2017 Tax Reform was a major agenda for IFA members
• Recapturing previous years’ improvement
• Assists with liquidity issues for franchise businesses
• IFA as part of a coalition working on this issue over the past few years
  • Advocacy issue: never been a disagreement around the policy itself
  • 15 year depreciation and bonus depreciation should have been included in the TCJA
  • But there were some hard feelings around how the TCJA was passed
• QIP correction is retroactive, and will help employees, small business owners

• Tax Benefits and Implications of CARES Act
  • QIP: any improvement to interior portion of building that is already placed in service (non structural)
  • Inside walls: drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing
  • Bonus depreciation on such property, rather than depreciating over 39 years previously required under the 2017 tax reform bill
  • You can amend your 2018 return and carry the losses back five years under the new provisions of the CARES Act to tax years when tax rates were 35% and fully offset income to generate immediate cash savings
• Taxpayers with QIP placed in service during 2019 can claim bonus depreciation prospectively on their 2019 return, corporate taxpayers should also consider filing Form 4466 for quick refund of 2019 overpaid estimated taxes
• Presents significant opportunities to many taxpayers and cost segregation studies are vital tools that can provide a supportable breakdown between eligible and ineligible costs
• Any state taxes are still at 39 year, rather than QIP; property can be segregated out from 5,7,15 year property. Even though you can’t get the bonus depreciation, 5 years is better than 39 when it comes to depreciation.
• Increased IRS scrutiny must be assumed – anytime you have large depreciations adjustments, they’ll want documentation of depreciation
• Talk to your tax preparer and professional on these issues

Questions:

In section 2307, they added “made by taxpayer” – does this include acquired assets?

• Clarification: you cannot acquire the property and then claim QIP. They wanted to clarify that you couldn’t acquire a property with improvements and then claim QIP. You yourself have to spend the money to qualify for QIP
• Bear in mind, when you acquire a property, used assets are eligible for bonus depreciation

Does Congress have a penchant for fixing this? It’s about finding bills that would include a tax provision as a vehicle for QIP fixes. Identifying further opportunities to make corrections

Can a new restaurant under construction qualify for QIP for interior finished out

Placed in service is defined as “capable and ready for intended service” so a new ground-up building would not qualify