Following the passage of the massive CARES Act in March, business leaders were appropriately focused on the Paycheck Protection Program (PPP), shifting employment rules, modifications to payroll taxes and new rules around net operating losses. At Daszkal Bolton, our dedicated CARES Act Task Force analyzed the 880-page bill to educate our own team of professionals and guide our clients through these unprecedented circumstances.
Daszkal Bolton’s CARES Act Task Force, including professionals in tax, audit, and advisory services, continues to meet regularly to analyze the Act’s ever-changing rules and their impact on our clients. As always, we strive to communicate complex information simply, thoughtfully, and strategically to our clients. This is especially important during economic uncertainty.
Qualified Improvement Property
One important change that was overshadowed by the PPP and the size of the stimulus plan was the correction of the “retail glitch” that taxpayers, especially those in the real estate, retail, restaurant and hospitality business, sought due to a legislative drafting error in the 2017 Tax Cuts and Jobs Act. Before 2017, most interior improvements to nonresidential buildings were eligible for bonus depreciation now known as “qualified improvement property” (QIP). QIP includes any improvement to the interior of a nonresidential building after the building was placed in service. Residential rental property is excluded.
The 2017 Act, which received significant media attention and scrutiny for its flat tax rates and reduction of the state and local tax exemption, among others, inadvertently combined qualified leasehold improvement, qualified restaurant property, and qualified retail improvement property in one QIP category that eliminated bonus depreciation eligibility for all.
The heavily negotiated CARES Act finally corrected the depreciation rules for such improvements to non-residential property after years of confusion. As an additional sweetener for taxpayers, the changes are retroactive making them effective as if they had been part of the original Act.
Recommendations
Daszkal Bolton recommends that taxpayers with qualified property go back to 2018 to take full advantage of the correction in the law for 2018 and 2019. The “retail” glitch got its name because retailers and other consumer-facing businesses are known to refresh and renovate interior properties more regularly than other property owners.
However, immediate expensing is available to any taxpayer that made improvements or put assets in service that improve the inside of a nonresidential building or the non-structural framework. Examples of qualifying improvements include installation or replacement of drywall, ceilings, interior doors, flooring, mechanical, electrical, fire protection, plumbing and other improvements. Investments that enhance the entire structure such as the roof do not qualify.
Taxpayers who made qualified improvements in 2018 and after should claim the 100% bonus depreciation (immediate expensing) instead of depreciating them over 39 years as provided by the original 2017 Act.
Next Steps?
It is important to consult a tax advisor to review your 2018 and 2019 tax return to determine if you had any qualified improvement property in order to claim any additional deductions under the new tax law. Depending on the type of entity holding the property and other factors, taxpayers have multiple options to catch up on bonus depreciation. To evaluate your prospects for such savings, a member of the Daszkal Bolton team simply needs to review your prior years’ tax returns along with a detailed description of improvements made to your property in 2018 and 2019, including all costs.
The CARES Act was designed to get cash into taxpayers’ hands to offset the adverse economic impacts of COVID-19. The “glitch” correction presents opportunities for taxpayers to recoup and/or reduce taxes. Your tax advisor will carefully review the options with you to provide the best result for your tax position.
