COVID-19 CARES Act Provides Significant Benefits to Property Owners and Others That Invest Capital in Commercial Real Estate Improvements by Angie Adames, CPA
Posted on April 01, 2020
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) grants a 15-year depreciation period to qualified improvement property (QIP), making it eligible to bonus depreciation. With this legislation, businesses with commercial real estate holdings may immediately write-off expenses incurred to improve the interiors of non-residential buildings rather than depreciating those costs over 39 years.
This provision of the CARES Act corrects a drafting error from the Tax Cuts and Jobs Act (TCJA), enacted in 2018, and represents significant benefits to property owners, franchisors and other businesses that invest considerable capital to improve commercial real estate, including restaurants, retail centers, office and medical buildings, and industrial warehouses. For example, the regulation correction could help businesses realize after-tax savings and free-up cash flow to make property improvements and be more competitive, attracting new customers and tenants while the economy recovers from the pandemic.
The updated QIP regulations under the new law are retroactive to Jan. 1, 2018. Therefore, businesses may be entitled to file amended tax returns for tax year 2018 and immediately write-off improvement costs that the TCJA required them to depreciate over a 39-year cost-recovery period. Alternatively, taxpayers that placed QIP into service in 2018 may file an automatic IRS Form 3115, Application for Change in Accounting Method, with their 2019 tax returns to take advantage of the more favorable treatment. If taxpayers already filed their 2019 tax returns and filed extensions, they may file a superseded tax return prior to the extended due date instead of amending their 2019 tax return. This provision, in conjunction with the CARES Act’s removal of limitations on net operating loss (NOL) carrybacks and removal of the 80 percent limitation on NOL carryforwards, can result in current refunds of taxes previously paid.
QIP Interaction with the Business Interest Expense Limitation
Many taxpayers previously made irrevocable elections to opt-out of the TCJA’s deduction limitations for business interest expense to 30 percent of adjusted taxable income (ATI). This allowed them to depreciate certain assets, including QIP, under a slower depreciation method, known as the Alternative Depreciation System (ADS) rather than the usual Modified Accelerated Cost Recovery System (MACRS).
Taxpayers that made this election to maximize their business interest expense could not claim bonus depreciation on any assets depreciated under the ADS method. At the time, the trade-off was not considered significant, since QIP was depreciated over 39-years and was ineligible for bonus depreciation, whereas the ADS recovery period for QIP was 40 years; one more year of depreciation did not seem to make a difference.
Now that QIP is back to a 15-year depreciation period and eligible for 100 percent bonus depreciation, however, these same taxpayers find themselves in a predicament. Under the CARES Act, the ADS depreciation recovery period for QIP is 20 years, which is more beneficial than a 40-year depreciation period under MACRS. This leaves taxpayers to wonder whether the IRS will eliminate QIP from the assets required to be depreciated over ADS when electing-out of the business interest expense limitation, and whether relief will be provided to unwind already-filed elections and free-up QIP stuck in less than desirable depreciation deductions.
While these changes under the CARES Act are, indeed, beneficial to taxpayers, further guidance from the IRS and U.S. Treasury is required to understand how taxpayers may take advantage of these new provisions. It is possible that taxpayers may amend previously-filed tax returns or file accounting-method changes (IRS Form 3115) with their 2019 tax returns in order to claim 100 percent bonus depreciation on now eligible QIP or to change the ADS recovery period to 20 years on QIP trapped in the Section 163(j) election.
The advisors and CPAs with Berkowitz Pollack Brant are available to help you navigate through these complex tax rules and maximize your depreciation deductions.
About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and business consulting services to real estate companies, manufacturers and closely-held entities. She can be reached at the firm’s Miami office at (305) 379-7000 or email@example.com.
Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.