During this last year, there were some facets of life for which we learned to have an appreciation. As exciting as it is to order take-out from your couch or scroll through items while shopping on your smart device, there’s something special about walking through the doors of a local business. Perhaps it’s the greeting you receive from a representative, or the sights, sounds, and even smells of commerce. Maybe there’s a new renovation or added improvement to the location that wasn’t there the last time you visited. Typically, improvements to real estate can be an expensive undertaking; but there is an accelerated tax deduction to help recoup the cost of these renovations.
Qualified Improvement Property (QIP) is a classification defined as any improvement made by the taxpayer to an interior portion of a non-residential building if the improvement is placed in service after the building was first placed in service by any taxpayer. Key words to note in this definition are “by the taxpayer,” meaning you are not allowed to allocate purchasing someone else’s prior improvements as qualified. Another key part of this definition is “non-residential,” meaning offices, restaurants, retail, hotels, banks, etc. are qualified buildings. Lastly, “after the building was placed in service by any taxpayer,” meaning if you’re finishing-out the interior of your newly constructed building, it is not a qualified improvement. Specific items not eligible to be QIP are any improvement to a residential building as well as expenditures for the enlargement of a building, elevators or escalators, and the internal structural framework of a building.
A key tax benefit of QIP is that it is eligible for 100% first-year deduction by way of bonus depreciation. Under current tax law, bonus depreciation allows businesses to write off the cost of assets with 20-year class-lives or less in the year they are placed in service. It is 100% deductible through 2022 with a gradual phase-out until 2026. However, when QIP was initially enacted into law, a clerical error made it ineligible for bonus depreciation from September 27, 2017 – December 31, 2026. Thankfully, this BIG mistake was corrected by the 2020 CARES Act, retroactively making qualified renovations eligible for bonus depreciation. Therefore, two BIG questions that you should ask yourself are:
- Did I renovate or improve a non-residential building from September 28, 2017 – December 31, 2020?
- Did I deduct 100% of the Qualified Improvement Property the tax-year the improvement was made?
If the answer to question one is “Yes,” but question two is “No,” all is not lost. The IRS has provided a way to retroactively correct your tax return by amending the prior tax return or, in some instances, making the election on your current tax return. For those of you planning to or have been on-the-fence about fixing-up your building, utilizing the QIP classification can help keep more money in your pocket. ADKF can help you with this.