The CARES Act corrects a drafting error in the “2017 Tax Cuts and Jobs Act” (TCJA) regarding the depreciation of “Qualified Improvement Property” (QIP).

“Qualified Improvement Property” are changes to the interior space of nonresidential buildings made after the building has been placed into service.  But there are exceptions to be noted. QIP excludes specific expenditures that are attributable to the:

  • Enlargement of the building
  • The elevators or escalators  
  • The internal structural framework of the building

Under the 2017 TCJA, the costs of QIP had to be depreciated over 39 years, and were not eligible for bonus depreciation (currently 100%).

But the CARES Act corrects this oversight, allowing QIP to be depreciated over 15 years. Further, because the assets are depreciated over 15 years, they are eligible for bonus depreciation.  Currently, under the bonus depreciation rules, 100% of the cost of the asset can be expensed in the year the asset is placed in service. The change is retroactive to December 31, 2017. 

Taxpayers who have made the real property trade or business (RPTOB) election, and use alternative depreciation system (ADS) recovery period, can now use 20 year life to depreciate QIP. (Note that bonus depreciation does not apply to ADS.)

To illustrate, here is an example:

Assume that Partnership ABC makes the following improvements to the interior portion of three offices in an office building, and the assets are placed in service January 1, 2018.

Prior to the technical correction, ABC had to depreciate these improvements over 39 years, mid-month.

Cost

Federal depreciation cost under TCJA

New Jersey depreciation cost under TCJA

50,000

1,229

1,229

75,000

1,843

1,843

100,000

2,457

2,457

225,000

5,529

5,529

Under CARES Act, these assets can be depreciated over 15 year recovery period half-year or mid-quarter convention, and are eligible for bonus depreciation. Assuming that New Jersey follows the CARES act and changes the depreciation life of these assets, depreciation cost will be:

Cost

Federal depreciation cost under TCJA

New Jersey depreciation cost under TCJA

50,000

50,000

1,667

75,000

75,000

2,500

100,000

100,000

3,333

225,000

225,000

7,500

As you can see, there is a big change in depreciation expense under the CARES Act. Although New Jersey does not allow bonus depreciation, if they change the life to 15 years, there would be an increase in depreciation expense.

As mentioned before, this is retroactive to assets that were placed in service after December 31, 2017. Guidance on how to retroactively claim missed bonus depreciation from QIP may be needed. Clients may be able to file An Automatic Change of Accounting Method, Form 3115, or amend tax returns filed for 2018, or 2019.