Section 163j Guidance
Qualified improvement property (QIP) placed into service after 2017 (i.e., regardless of the tax year involved) now is in MACRS 15-year class, which makes it eligible for 100 percent bonus depreciation.
This might mean that an amended return could be filed for 2018 and a possible five-year NOL carryback.
A QIP for both Sec. 179 immediate and bonus depreciation, however, must be placed in service after the building is already placed in service.
As a side note: Sec. 163(j) “real estate T/B election” which means no bonus depreciation for “real estate assets” including:
- Land improvements
- Gas station/convenience stores
- Car wash buildings
- Permanent billboards
- Qualified improvement property
Sec. 163j Does Not Impact MACRS 5- Or 7-Year Assets.
Example: A taxpayer owning a chain of fast-food restaurants spent $1 million to make interior improvements during 2018. But, due to the glitch in the TCJA, these improvements had to be capitalized with depreciation deductions being spread out over the normal 39-year MACRS recovery period for commercial real estate.
Now, with the technical correction to qualified improvement property (and, assuming 2019 return has not yet been filed), the 2018 return can be amended to take an immediate deduction for the $1 million (and, the mid-month depreciation deduction originally taken would be eliminated). And, if an NOL resulted, it could be carried back as far as the 2013 tax year (i.e., due to the new carryback exception contained in the CARES Act).
If the QIP is capitalized on 2018 and 2019 returns already filed, then Form 3115 used to “catch up” on missing depreciation (including bonus depreciation).
If the 2019 return was not yet filed, just amend the 2018 return.
This assumes “election out of bonus depreciation” not made for MACRS 15-year assets.
Qualified improvement property assets must have been “put in service” by your client. The taxpayer cannot “purchase” them in an existing building.
Authored by:
Dr. John Connors, JD, CPA, LLM
Tax Educator’s Network, LLC
For subscription information on Dr. John Connors’ educational materials, click here
