Qualified Improvement Property Definition

Qualified Improvement Property Definition

The category of Qualified Improvement property was first introduced under the PATH Act of 2015. At that time qualified improvement property had a life of 39 years. However, after the CARES Act of 2020 qualified improvement property life changed to 15 years. While the change seems minor the qualified improvement property 15-year designation opens it up for bonus deprecation and other opportunities. According to the IRS qualified improvement property is non-structural improvements to the interior of a building after the building is originally placed in service. While the qualified improvement property definition has not changed since the PATH Act of 2015, there have been numerous other changes over the years. For example, the TCJA made qualified improvement property section 179 eligible. However, the TCJA included errors including confusion on the qualified improvement property depreciable life. The TCJA included a change to make qualified improvement property 179 eligible, but they forgot to update the depreciable life. Because of this qualified improvement property depreciation followed the rules under the PATH Act, or a 39-year life until this was corrected under the CARES Act. This was important as they wanted to separate the ability of taxpayers to write off qualified improvement property from other building improvements. Building improvements’ depreciation life has historically been 39 years. The drafting error on the life was not the only issue with qualified improvement property. There was also a question as to how to handle used property. Under the TCJA used property is bonus eligible, however, it was not expected that this would include qualified improvement property. This was also addressed under the CARES Act. Under the CARES Act, it was specifically stipulated that QIP must be put in by the taxpayer. This means that acquired property will not qualify. QIP has also led to other confusion for taxpayers. Since the definition states that it must be placed in service after the building is placed in service, there is a question of timing. If a speculative building is built before any tenants is the first tenant qualified? This answer is still not 100% defined and depends on facts and circumstances.

Qualified Improvement Property 2022

With the ever-changing rules surrounding bonus depreciation and qualified improvement property, it is critical to always understand where things stand on a year-by-year basis. As it relates to qualified improvement property IRS positioning has not changed over the recent years. Qualified Improvement Property in 2021 and Qualified Improvement Property in 2022 remain unchanged. However major changes will start occurring for qualified improvement property in 2023 as bonus depreciation starts leveraging down. As part of the Tax Cuts and Jobs Act, or TCJA, of 2017 bonus depreciation is scheduled to start decreasing by 20% per year starting in 2023. This means that bonus depreciation in 2022 is 100%, but in 2023 it will be limited at 80%, and in 2024 at 60%. For items like qualified improvement property bonus depreciation is a critical factor. While other 15-year assets like land improvements are calculated using a 150% declining balance, Qualified improvement property is depreciated over a straight-line method. This means that without bonus depreciation qualified improvement property will be limited to only a small fraction of what would be available with bonus depreciation. In order to understand why the rules are so confusing, it is sometimes important to understand the history behind qualified improvement property. Qualified improvement property was first enacted under the PATH Act of 2015, prior to this bill the only bonus-eligible real property was Qualified Leasehold Improvements. Under the PATH Act Qualified Improvement Property was a 39-year asset eligible for bonus depreciation. The TCJA of 2017 attempted to simplify the rules by combining Qualified Improvement Property and Qualified Leaseholds, unfortunately, due to a drafting error it was erroneously given a 39-year life and was no longer bonus eligible. Then under the CARES Act, this drafting error was fixed. Qualified Improvement Property in the CARES Act was appropriately provided a 15-year life. However, the CARES Act still has the expiration of bonuses as included in the TCJA. Many in Congress would like to extend 100% bonus deprecation, but this will require a larger piece of legislation to move forward. Without this extension cost segregation is more valuable.

Qualified Improvement Property Examples

With the full bonusing on qualified improvement property, many taxpayers think they can just expense certain items without doing a full cost segregation study. This may require more thought as not all property qualifies for qualified improvement property, residential rental for example is one of these areas. Qualified improvement property does not exist for residential property as one of the requirements is that it is installed in non-residential property. Due to the fact that it also has to be “interior” other questions can arise, such as is HVAC qualified improvement property and are windows qualified improvement property. For windows, the answer is almost always no, however, for HVAC the answer can be more complex. Qualified Improvement Property on HVAC qualifies when the assets are interior, but not when they are externally located. Qualified Improvement property examples for HVAC could be internal VAV boxes or ductwork. This affects HVAC bonus depreciation, internal components would qualify, but external components would not. Another question that comes up often would be “is flooring qualified improvement property” just like other questions the answer to this is it depends. Some flooring is personal property, which is not qualified improvement property, however, some flooring is real property, which would be qualified improvement property. Then the question gets even more difficult when considering is a roof qualified improvement property, the answer here is no it is not, however, it may qualify for immediate expensing as a repair or under 179. After stating what is not qualified improvement property some people may question as to what is qualified improvement property. Some examples of qualified improvement property would be internal drywall partitions, bathrooms, and kitchens. While it was stated above that only nonresidential property qualifies, there are limited situations where residential qualified improvement property may exist. Specifically, when a residential property is used for short-term rental, the property may qualify for QIP. Just because something is not QIP does not mean it cannot take a bonus, for example when researching are land improvements eligible for bonus depreciation. You would note that although land improvements are not QIP they are bonus eligible.