Righting the Wrong for Qualified Improvement Property Expenditures

An error in the drafting of the Tax Cuts and Jobs Act (TCJA) is still keeping qualified improvement property (QIP) expenditures from being depreciated over a reduced time span—and the delay could require you to file an amended tax return.

Qualified improvement property is defined as any improvement to an interior portion of a building that is nonresidential real property as long as that improvement is placed in service after the building was first placed in service by any taxpayer (Section 168(k)(3)). QIP specifically excludes expenditures for the enlargement of a building, elevators or escalators, or the internal structural framework of a building.

When the TCJA was passed in late 2017, it included changes to qualified improvement property and bonus depreciation. The intent was to classify such property as “15-year property” eligible for a 100% bonus write-off instead of requiring the existing 39-year timeframe.

However, a mistake in the language left QIPs off of the 15-year list when the legislation was drafted. So unless you can take Section 179 on your property (which has its own limitations), for now you will still have to write it off over 39 years.

What is being done?

In March of 2019, legislation was introduced in both the U.S. Senate and the House of Representatives to fix the error. Named the Restoring Investment in Improvements Act in the Senate, it would allow the shorter timeframe to take effect retroactively—thereby treating these properties as if they were part of the original 2017 TCJA.

However, the bills have stalled in the first stage of the legislative process. Several industry organizations, such as the Real Estate Roundtable, the National Retail Federation and the National Restaurant Association, have pleaded with Congress to pass the bill. They argue that this unintended restriction on qualified improvement property has hindered investment and job creation nationwide, impacting both businesses and individuals.

How could this affect me?

If you have a qualified improvement property that was placed in service in 2018 and have filed an extension on your return for that year, you should stay alert for developments on this topic. Should the law not pass before the September 15 deadline for extended returns, you might be required to file an amended tax return.

Correcting this error in the tax law can make a big difference on your taxable income. For example, let’s say that in January of 2018, you spent $50,000 of interior improvements to a property that qualifies as QIP. Under the current law, the annual depreciation would be calculated over 39 years and you would be able to reduce your income by approximately $1,200 with depreciation expense.

If the law is corrected, however, the annual depreciations would be calculated over 15 years (or approximately $3,000 per year). And it gets better because from 2018 until 2021, you can take what is called bonus depreciation and write off 100% of the improvement—thereby reducing your taxable income by $50,000. At a 37% tax rate, the technical correction would save you an additional $18,000 in taxes.

What should I do?

While there is no timetable at the moment for the legislation’s path, it has bipartisan support and is expected to have little trouble passing once it actually comes to a vote. But again, it’s difficult to know when this will happen. So it’s important to stay in touch with your CPA for up-to-the-minute news on this legislation.

James Moore’s CPAs are monitoring the issue closely to make sure you’re kept informed on any developments that affect your business and your tax return. We’ll guide you on your extended return whether Congress takes action before or after the deadline and advise you on the next steps to take.

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