As businesses and individuals continue to deal with COVID-19 and look to survival and recovery, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has incorporated provisions that could provide some much-needed relief for taxpayers. The amendments made to the rules governing qualified improvement property depreciation will provide some of those benefits to qualifying taxpayers and have provided a long-awaited correction to the Internal Revenue Code.
Qualified Improvement Property Updates and Background
Due to a previously uncorrected oversight resulting from the Tax Cuts & Jobs Act (TCJA), taxpayers lost the ability to use the MACRS 15-year straight-line depreciation method and take additional first year bonus depreciation for qualified improvement property placed in service after December 31, 2017.
On March 27, 2020, Section 2307 of the CARES Act retroactively amended the Internal Revenue Code under §168(e)(3)(E) to provide that qualified improvement property be classified as 15-year property, amended the definition of qualified improvement property under §168(e)(6) to provide that the improvements be made by the taxpayer and amended §168(g)(3)(B) to provide a recovery period of 20 years under the ADS system. All amendments are effective as if included in the TCJA.
As a result, qualified improvement property placed in service after December 31, 2017 once again has a 15-year straight-line recovery period using the half-year or mid-quarter convention, depending on when the asset was placed in service during the year (20-year recovery period using the half-year or mid-quarter convention under ADS). Additionally, qualified improvement property acquired after September 27, 2017 and placed in service after December 31, 2017 is now eligible for additional first year bonus depreciation if the requirements under §168(k) and the related regulations are met.
Shortly thereafter on April 17, 2020, the IRS released Rev. Proc. 2020-25 which provided essential guidance on the matter.
Rev. Proc. 2020-25 Guidance
Revenue Procedure 2020-25 provides guidance to taxpayers on allowable methods for updating depreciation of qualified improvement property and previously-filed elections to reflect the qualified improvement property amendments, including:
- Changing a taxpayer’s depreciation of qualified improvement property placed in service after December 31, 2017
- Making a late election out of bonus depreciation or revoking an election out of bonus depreciation
- Making a late election to use ADS or withdrawing an election to use ADS
The following options are available to taxpayers to make these changes for the 2018, 2019, or 2020 tax years:
- Amending returns
- Filing an administrative adjustment request under §6227 (AAR)
- Filing Form 3115 Application for Change in Accounting Method with a § 481(a) adjustment
Please note that withdrawing an election to use ADS can only be performed with an amended return or AAR filing.
Also, if the taxpayer chooses a Form 3115 filing, the following two new automatic method changes have been added:
- DCN 244 – To change depreciation of qualified improvement property placed in service after December 31, 2017
- DCN 245 – To make a late election out of bonus depreciation, revoke an election out of bonus depreciation or make a late election to use ADS
Additional Items of Note
The ability to request depreciation changes under Rev. Proc. 2020-25 does not apply to the following:
- Qualified improvement property placed in service after December 31, 2017 for a taxpayer which made a late election, or withdrew a late election, under §163(j)(7)(B) for an electing real property trade or business or under §163(j)(7)(C) for an electing farming business for the tax year the qualified improvement property was placed in service [See Rev. Proc. 2020-22 for making or withdrawing an election under §163(j)]
- Qualified improvement property deducted as expense
The ability to change depreciation, make late elections, or revoke existing elections under Rev. Proc. 2020-25 is available for a limited time through October 15, 2021 or the applicable statute of limitation for amended returns—whichever comes first.
What Can I Do Now?
Our team continues to work through the various tax relief provisions resulting from the COVID-19 pandemic, and we understand that any tax benefit that will provide additional cashflow to taxpayers will likely be valued at a premium. One of our goals is to search out and help taxpayers understand the opportunities for those benefits. If you have any questions or would like to discuss the qualified improvement property relief provisions and requirements, please reach out to Grant Patterson at 240.364.2684 or Mario DeLuca at 301.222.8210.