by John Juntunen, CPA

One of the benefits of the Tax Cuts and Jobs Act (TCJA) was the extension of the 100% bonus depreciation rules. Thanks to a technical error, the updated rules excluded qualified improvement property from accelerated depreciation, essentially shutting businesses out of the benefit. Then came an unexpected silver lining. 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) gave Congress an opportunity to finally pass legislation that corrected the error. Here’s how you could benefit from the latest bonus depreciation rules.

First, what is qualified improvement property?

Qualified improvement property (QIP) is defined as any interior improvement to nonresidential real property. To fall into the QIP category, the improvement must have been made after the building was first placed in service by the taxpayer.

How does the CARES Act change existing bonus depreciation rules?

The bonus depreciation rules ushered in by the TCJA allowed for a complete (i.e., 100%) write-off of certain property that was acquired after September 27, 2017, and placed in service by January 1, 2023. But the changes were not clear. In fact, the TCJA unintentionally excluded QIP from bonus depreciation eligibility, even though previous guidance from the IRS seemed to indicate it would be included.

The IRS and U.S. Treasury confirmed the mistake in final regulations. But there wasn’t much else they could do at the time. Remedying the error required more than an administrative change; it had to be corrected through legislation. Finally, in March 2020, the CARES Act provided an opportunity to make it happen.

Now, QIP can be depreciated over 15 years instead of 39, making it eligible for bonus depreciation through 2026.

How can you take advantage of the latest rules?

If you placed QIP in service after December 31, 2017, the new legislation gives you the opportunity to correct the depreciation. To do this, you must file an amended tax return, administrative adjustment request (AAR), or Form 3115.

The course of action you take will depend on a few things. If your business is structured as a partnership, you’ll file an AAR. For other entity types, there are additional considerations. If your business had higher income in the year the QIP was placed in service, it will be more beneficial to file an amended tax return. If you expect higher income in subsequent years, it will be more beneficial to file Form 3115.

You must file an amended tax return or AAR within the first three years after December 31, 2018. The Form 3115 must be filed with the originally filed tax return of the first or second year succeeding the year the QIP was placed in service.

Entity type, however, isn’t the only factor to consider when determining how to correct the depreciation. If you have filed more than one tax return using the 39-year recovery period to depreciate QIP, then you would have adopted an impermissible method of accounting. In this case, you must file Form 3115 instead of an amended tax return. If you have filed only one tax return using the 39-year recovery period, an amended tax return would still be an option.

Don’t let this silver lining pass you by.

The updated bonus depreciation rules ushered in by the CARES Act could help you reduce your taxable income—and possibly provide an extra shot of relief during this time of economic uncertainty. If you’d like to explore how these updates could benefit you, we can help. From preparing the correct tax forms to determining the best way to correct previous filings, we’ll make sure you don’t miss out on this silver lining. Contact us today!

John Juntunen, CPA, is a senior accountant in the Business Tax and Audit groups at Abdo, Eick & Meyers. Through specializing in the manufacturing and professional services industries, he is able to assist these clients to make informed business decisions to improve their financial future. 

You can reach John at 612.939.3229 or click here to contact him via email.

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