The IRS has released guidance (Revenue Procedure 2020-25) that will help affected taxpayers determine how best to utilize the depreciation relief offered for qualified improvement property (QIP) in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The recent legislation corrected a drafting error in 2017’s Tax Cuts and Jobs Act (TCJA) that made certain assets ineligible for 100% bonus depreciation. Because the relief is effective for QIP acquired after September 17, 2017, and placed in service after December 31, 2017, affected taxpayers can choose from two different methods to claim the relief due on previously filed returns:

  • File a change in accounting method
  • File amended tax returns for affected years

Simplification Gone Wrong

Prior to the TCJA, QIP was separated into three categories: leasehold improvements, retail property, and restaurant property. These asset classes were intended to cover nonstructural interior building improvements, such as carpets and furniture that high-traffic nonresidential establishments like retailers and restaurants tend to replace more frequently than other businesses. The act took the positive step of consolidating these into one umbrella QIP category, but it failed to assign the category an asset life that would qualify it for the TCJA’s generous 100% bonus depreciation provision.

CARES Act Relief

The CARES Act assigned the umbrella QIP asset class a 15-year recovery period effective retroactively, as if the change had been part of the TCJA, making these assets eligible for the act’s 100% bonus depreciation. Taxpayers who have incurred these costs since enactment of the TCJA may qualify for a reduction in taxes on previously filed returns, and this latest guidance focuses on how to claim that relief.

What’s the Best Option?

At a time when liquidity is a critical concern for many taxpayers, it’s best to check with your CRI advisor to determine which of these options will deliver the best results based on the specific facts and circumstances of your business.