The Tax Cuts and Jobs Act (hereinafter “TCJA”) was supposed to provide for a 15-year GDS recovery period (20-yr ADS recovery period) for Qualified Improvement Property (hereinafter “QIP”). However, that specific recovery period was not included in the statutory text of the TCJA. Therefore, under the TCJA, QIP retained the 39-year GDS recovery period for nonresidential rental property (40 years for ADS). Additionally, because the TCJA removed the specific reference to QIP under §168(k)(2), QIP became ineligible for bonus depreciation for property placed in service after 12/31/17.
Fortunately, the CARES Act has provided a technical correction to the TCJA, and now specifically designates QIP placed in service after 12/31/17 as 15-year property (20-year property for ADS). See §168(e)(3)(E)(vii) & (g)(3)(B). Additionally, this change makes QIP that is also acquired after 9/27/17 eligible for 100% bonus depreciation (see Treas. Reg. §1.168(k)- 2(b)(5)). For QIP acquired before 9/28/17, the applicable bonus depreciation percentage is the one in effect for the in-service year under pre-TCJA law (50% bonus depreciation if placed in service in 2017, 40% if placed in service in 2018, and 30% if placed in service in 2019).
These CARES Act changes for QIP were made retroactive for assets placed in service after 12/31/17, and are not elective (i.e., the statute doesn’t say you may classify QIP as 15-yr property; it states that QIP is 15-yr property). Therefore, as odd as it may seem to a taxpayer who was following the law as in effect at the time, they are now using an impermissible method of accounting by grouping QIP assets with other nonresidential real property.
Recently, we have received questions regarding the proper procedures for implementing a change to the depreciation treatment for QIP assets originally capitalized as 39-year nonresidential real property.
2019 QIP assets not expensed under §179(e)(1) as Qualified Real Property are
straight-forward; if the original return capitalized the QIP as nonresidential real property, the taxpayer can file an amended/superseding return to correct the classification before filing for 2020. See Rev. Proc. 2020-25, §3.02(3)(a). Unless there is a specific reason to, taxpayers shouldn’t wait to file an accounting method change under Rev. Proc. 2020-25, §3.02(3)(b) (discussed next) on their 2020 return if an NOL can be generated for 2019 and they had taxable income in any of the five previous taxable years. See our whitepaper Net Operating Loss Changes Under the CARES Act for further information.
For 2018 assets, in addition to filing an amended return for 2018 (if filed prior to the filing of the 2019 return), a taxpayer can file for an accounting method change under Rev. Proc. 2019-43 (as amended by Rev. Proc. 2020-25), §6.19 (Change # 244; impermissible to permissible method of accounting for depreciation of any item of QIP) on their 2019 return (either an original or amended return filed before the extended due date). See also Rev.
Proc. 2020-25, §6.03.
For 2018 or 2019 QIP assets that were expensed under §179(e) as qualified real property, the change in method of accounting under Rev. Proc. 2019-43, §6.19 is not available. See Rev. Proc. 2019-43, §6.19(1)(c)(ii). Instead, a taxpayer that wants to revoke a §179 election or specification for QIP assets and/or make a late election or specification for other assets may do so on an amended return for the taxable year in which the taxpayer placed the §179 property into service. See Rev. Proc. 2017-33, §3.02.
For taxpayers that previously mailed a hard copy Form 1045 after 3/27/20, the IRS will allow the taxpayer to submit the same claim using this procedure. To be processed, the Form 1045 must reflect the taxpayers originally filed or previously processed amended information (The information provided on the Form 1045 must match the information in the taxpayer’s IRS account). Taxpayers that have electronically filed an amended return should note that on the fax cover page and the date that it was accepted. If a taxpayer needs to amend a previously filed return by filing a hard copy Form 1040-X, they should follow the normal filing procedures by timely filing a hard copy of Form 1139 containing only the taxpayer’s name, address, and taxpayer identification number. The statement required to make the election must indicate the section under which the election is being made and shall set forth information to identify the election, the period for which it applies, and the taxpayer’s basis and entitlement to make the election.1045 in order to adhere to any filing deadlines.