The IRS has released several pieces of guidance providing taxpayers with the ability to receive immediate cash flow benefits and implement tax planning opportunities associated with changes made to depreciation under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  One of those pieces of guidance is associated with certain capitalized cost termed “qualified improvement property (QIP).”

The legislative history to the 2017 tax law known as the Tax Cuts and Jobs Act (TCJA) signaled Congress’ intent to treat QIP as 15-year, bonus-eligible property. However, due to a drafting error, QIP was inadvertently characterized as 39-year property ineligible for bonus depreciation. On March 27, 2020, the CARES Act corrected this drafting error by treating QIP placed in service after December 31, 2017, as bonus-eligible, 15-year property. In response to the retroactive correction, the IRS released Rev. Proc. 2020-25 to provide guidance allowing taxpayers to claim additional depreciation by amending their prior income tax return or filing an automatic Form 3115, Application for Change in Accounting Method, to include the additional depreciation in the current year income tax return.

The difference in depreciation between QIP classified as 39-year property (depreciated on a straight-line basis) and QIP classified as 15-year property (eligible for immediate 100% bonus depreciation) can be significant and could result in significant tax savings.

Your Somerset advisor will be looking at your QIP placed in service after December 31, 2017 and determining the best course of action. Please contact your Somerset advisor at 317-472-2200 with any questions.