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Qualified Improvement Property (QIP) was originally defined in the IRC as a result of The Protecting Americans from Tax Hikes (“PATH”) Act of 2015. The CARES Act made three significant changes to the IRC in regards to QIP which have a significant impact on tax reporting and may provide immediate cash flow opportunities.
The effective date of the changes is AS IF they were included as part of the original Tax Cuts and Jobs Act (the TCJA created a new class of depreciable property).
- A 15-year recovery period was assigned to QIP. This is a significantly shorter recovery period as compared to 39 years. QIP is also now eligible for bonus depreciation.
- The definition of QIP was changed (clarification was added):
FROM: Any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service. TO: Any improvement MADE BY THE TAXPAYER to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.
This was a significant change because of the impact on new property acquisitions. Under the old definition, a portion of the purchase price of an acquired building may have been considered QIP and thus eligible for bonus depreciation, but this is no longer possible. The QIP asset category will only be applicable for improvements actually made by the reporting taxpayer.
- The Alternative Depreciation System (ADS) recovery period has changed from 39 years to 40 years. This is only a one-year change, but should be considered for tax reporting updates since many entities either elect to use, or are required to use, the ADS recovery period for certain assets including QIP.
Some QIP qualifying improvements include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing or a farmer redoing an office in the shop.
If you have questions as it relates to Qualified Improvement Property (QIP) or to any other part of the CARES Act, please reach out to our experts for assistance.