QIP Fix: Not the Correction We Deserved, But the Correction We Needed
Mathew Feuerbach Supervisor, CPA
30 November 2020
It took a pandemic to get a fix, but we finally have a 15-year depreciation life for Qualified Improvement Property (QIP). QIP generally consists of non-structural improvements to the interior of a nonresidential building, made by the taxpayer after a building is placed in service.
Since the passage of the Tax Cuts and Jobs Act, a major topic of discussion has been the error in drafting the TCJA which gave QIP a 39-year life instead of the intended 15-year life and 100% bonus depreciation eligibility. Since the time the error was realized, several attempts have been made to include the correction in congressional bills that were ultimately not passed.
Finally, the technical correction we needed was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The correction not only fixes QIP for 2020, but also retroactively applies for QIP placed in service in 2018 and 2019. The IRS released Rev. Proc. 2020-25, which details the ways in which taxpayers may correct prior returns for the change in depreciable life and availability of 100% bonus depreciation.
The easiest option may be to file a Form 3115 with the 2020 tax return for the change in depreciation. This method allows taxpayers to expense the remaining unclaimed depreciation on the 2020 return in the form of a 481(a) deduction. This will further reduce 2020 income and possibly generate larger losses that will not be limited by the 461(l) excess business loss rules which were also temporarily suspended under the CARES Act. Amending the 2018 and 2019 tax returns is another option if there are other tax changes that may need to be reflected on the returns or if there have been changes in ownership interests.
While there is a benefit from the increased expense of depreciating over 15 years instead of 39 years, businesses will yield even greater tax savings if they were eligible to take bonus depreciation in 2018 or 2019.
For companies with floorplan financing, final regulations released in 2020 clarified that they cannot subject their floor plan interest expense to the 163(j) interest limitation in exchange for being allowed to claim 100% bonus depreciation. This was a topic that many accountants and companies believed was allowed from their interpretation of the tax code and from the Joint Committee on Taxation’s Blue Book guidance available at the time.
Companies remain eligible to take bonus depreciation if their total business interest expense (floor plan interest expense plus business interest expense) does not exceed 30% of their adjusted taxable income plus business interest income. Another provision of the CARES Act is that corporations may use a 50% adjusted taxable income threshold instead of 30% in determining their 163(j) interest limitation for 2020. This increased limitation also applies in determining whether they are eligible for bonus depreciation. The 50% limitation was also in effect for 2019, but it applied only to companies who are organized as
S Corporations, not as partnerships.
Inflation adjustments have increased the allowable section 179 expense for qualifying property and listed vehicles placed in service in 2020. The total allowable section 179 expense for 2020 increased to $1,040,000, an increase of $20,000 from 2019. The phaseout for assets placed in service has also been increased with a new starting threshold of $2,590,000, and a complete phaseout at $3,630,000. Listed vehicles with a gross vehicle weight over 6,000 lbs. and under 14,000 lbs. can take up to $25,900 of section 179 in 2020, a $400 increase from 2019. Depreciation on any vehicle placed in service in 2020 with a gross vehicle weight rating of under 6,000 lbs. remains limited to $10,100 or $18,100 if the vehicle is eligible for bonus depreciation.