The Coronavirus, Aid, Relief and Economic Security Act (the CARES Act), is designed to provide financial relief and assistance to business and individuals. The CARES Act was signed into law on Friday, March 27th and is one of the largest economic stimulus packages in history with anticipated $2 trillion dollars of financial assistance.
One of the key business provisions included a retroactive amendment to the treatment of qualified improvement property as it related to bonus depreciation.
When the Tax Cuts and Jobs Act was released in 2017, there were concerns of a drafting error that required all qualified improvement property to be depreciated over the same 39 years as the building itself. The CARES Act corrects this oversight.
Qualified improvement property is defined as any improvement to an interior portion of a building which is nonresidential real property (whether or not depreciated under MACRS) if the improvement is placed in service after the date the building was first placed in service by any taxpayer. Expenditures which are attributable to (1) the enlargement of a building, (2) any elevator or escalator, or (3) the internal structural framework of the building are excluded from the definition of qualified improvement property. No lease between related parties
Under the CARES Act, all qualified improvement property is now given a 15-year life and bonus eligible. This modification is to be treated as retroactive to all assets placed in service as of January 1, 2018. In order to account for this change, the taxpayer is allowed the option to file an Amended 2018 tax return or a change of accounting method with Form 3115. It is important to note that Form 3115 is required if the 2019 tax return has already been filed.
The additional bonus depreciation is not allowed if an election out of bonus has been made, or if an election to be treated as a Real Property Trade or Business was filed to avoid the business interest expense limitations.
This key provision could provide taxpayers with large tax savings and planning opportunities. To discuss your opportunities related to qualified improvement property or any other provision under the CARES Act, please consult your HLB Gross Collins adviser.