IRS Issues Procedures for Addressing QIP Change

Under the Tax Cuts and Jobs Act of 2017 (TCJA) Qualified Improvement Property (QIP) was intended to be a 15-year lived asset eligible for bonus depreciation, but due to a drafting error was erroneously given a 39-year life and was ineligible for the bonus treatment. Under the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) Congress addressed this drafting error making QIP placed in service after 12/31/2017 eligible for bonus depreciation. However, this left a lot of questions to CPAs and taxpayers as to how to handle decisions made in prior years. For many taxpayers, decisions were made as it related to Real Property Trade or business election, or elections out of bonus, that were considered irrevocable elections on 2018 or 2019 returns prior to this change being made.

On Friday, April 10th the IRS issued Rev Proc 2020-22 (https://www.irs.gov/pub/irs-drop/rp-20-22.pdf) to answer the first of these questions. Under the TCJA, taxpayers were limited in their ability to deduct interest. This limitation was set at 30% of the adjusted taxable income of the taxpayer for the year, this was adjusted to 50% under the CARES Act. However, taxpayers could opt out by electing to be treated as a “Real Property Trade or Business”. This election was to be considered irrevocable and would require that all real property and QIP be depreciated utilizing the Alternative Depreciation System (ADS) Rules. Under the ADS rules, QIP is not eligible for bonus depreciation.

This created an issue as many taxpayers made this election when QIP was not bonus eligible. Now that the CARES Act makes these assets bonus eligible, taxpayers may find it more advantageous to revoke this election. Under Rev Proc 2020-22, the IRS provides taxpayers the ability to withdraw this election to take advantage QIP.

Additionally, taxpayers need to consider how to address the change of QIP from 39-year to 15-year bonus eligible. Late on Friday, April 17th the IRS issued Rev Proc 2020-25 to answer many of these questions (https://www.irs.gov/pub/irs-drop/rp-20-25.pdf?). Rev Proc 2020-25 allows taxpayers to file an amended return, file an administrative adjustment request (AAR), or file a Change in Accounting Method (Form 3115) to fix this error on their 2018, 2019 or 2020 tax return (depending on the method utilized). Additionally, the IRS allows taxpayers to revoke elections out of bonus depreciation made under 168(g)(7), (k)(5), (k)(7) or (k)(10).

Combining these new revenue procedures with the changes to the Net Operating Loss carryback provisions under the TCJA create new tax planning opportunities for taxpayers and tax preparers. Companies looking for cash flow should look at their tax returns for 2018, 2019 and earlier years to determine if the correct elections were made based on the information now available.

McGuire Sponsel is monitoring the tax updates as it relates to the CARES Act, TCJA, and other legislation on a daily basis. If you have any questions about these provisions or how they might affect you, please reach out to your McGuire Sponsel representative.