In addition to numerous other provisions, the CARES Act provided the technical correction for the drafting error in the TCJA known as the “retail glitch.”
The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted earlier this year is an extremely robust package of legislation. In addition to numerous other provisions that aimed to provide cash flow to businesses, the CARES Act provided the technical correction for the drafting error in the Tax Cuts and Jobs Act (TCJA) known as the “retail glitch.” The CARES Act reestablished and made permanent the shortened recovery period for qualified improvement property (QIP).
Under the CARES Act, a 15-year depreciation recovery period is retroactively assigned to QIP placed in service after December 31, 2017. Therefore, qualified improvement property is depreciated over 15 years and qualifies for 100 percent bonus depreciation if all bonus requirements are met.
QIP is broadly defined as 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. However, it does not include improvements related to elevators and escalators, the internal structural framework, or an enlargement of the building.
As a result of the retroactive application of the reduced recovery period, taxpayers who have already filed their 2018 or 2019 tax returns have various options to correct and benefit from the reduced recovery period and the bonus depreciation available for QIP.
Most taxpayers have the option to retroactively apply the new law for QIP placed in service in 2018 either by amending their 2018 tax return or by correcting for the change on a Form 3115 with their 2019 or 2020 tax returns. If a taxpayer has already filed their 2019 tax return but did not correct for the QIP change they can file a superseding return to correct and also include a Form 3115 for any 2018 QIP; however, that must be filed within six months of the original due date of the 2019 tax return.
Taxpayers were also provided with various options to retroactively change depreciation‑related tax elections. There are a variety of due dates and options available to make these changes—taxpayers should carefully consider these with the help of their tax advisors.
Taxpayers should also model the retroactive tax adjustments to determine the best year to implement the change. For example, taxpayers should consider the impact the retroactive application may have on their taxable income/loss and the expanded NOL (net operating loss) provisions such as the temporary five-year carryback, also provided for in the CARES Act.
Taxpayers that completed major renovations in 2018 and 2019 should review their depreciation schedules for potential significant benefits. Taxpayers that had cost segregation studies prepared prior to the CARES Act should have their advisors revisit those studies considering this law change.
Assets that were part of a renovation that were previously classified as 39-year assets may now be eligible 15-year assets and therefore after applying bonus depreciation would be 100% deductible in the year the renovation was complete.
Also, taxpayers that had previously elected to be treated as real property trades or business post the enactment of the TCJA should reassess this decision. Real property trades or businesses who made the election are required to depreciate their QIP using a method that is not eligible for bonus depreciation.
Before the CARES Act correction QIP was not eligible for bonus depreciation so the electing real property trade or business election didn’t have much of a downside. With the CARES Act correction, electing real property trades or businesses have the ability, within certain parameters, to revoke this election if they chose.
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Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation