Cost Segregation and Qualified Improvement Property Studies CLA CliftonLarsonAllen
Major thanks to our new Cost Segregation Leader, Mona Stocki, for her assistance with this post. Please contact her directly to see how a cost segregation or QIP study could benefit your organization and your rental investments. Corvee has achieved positive results for its clients who have used its business development strategies and practice management tools, but the revenue figures and successes of our top clients are not typical. Because past performance is not a predictor of future success, you may have more or less success depending on many factors, including your background, experience, work ethic, client base, and market forces. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice.
If the taxpayer is considered the owner of the TI when the improvements are made, then the TI can be classified as QIP if the other conditions of QIP are met. QIP placed-in-service on or after January 1, 2018 has a 15-year recovery period and is eligible for 100% bonus through December 31, 2022. On and after September 28, 2017, and before December 31, 2017, QIP has a 39-year recovery period but is eligible for 100% bonus. Based on current tax law, it is more important than ever to properly identify and quantify property that is eligible for QIP treatment. As part of the CARES Act, new technical corrections allow for QIP to be depreciated over 15 years, thereby making it bonus eligible. Extends the time for making such elections even further for certain taxpayers.
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After 2022, bonus depreciation rates gradually decline, as illustrated in the bonus depreciation table below. Property placed in service after December 31, 2004 and before January 1, 2008 is not eligible for bonus depreciation. Capital improvements are permanent structural changes to a property that enhance its value, increase its useful life, or allow for a new use. A leasehold refers to an asset or property that a lessee contracts to rent from a lessor in exchange for scheduled payments over an agreed-upon time. Landlords budget and pay for improvements by offering a tenant improvement allowance or through rent discounts. They may also pay by offering the tenant a package of modifications from which they can choose.
What property is qualified for bonus depreciation?
In order to qualify for bonus depreciation deduction, certain criteria must be met. Qualifying assets can include: Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less. This includes such property as computer equipment and office furniture.
In real property, different types of property that are purchased or installed can sometimes be depreciated at a faster rate than the larger structure or building it is attached to. As the name suggests,qualified improvement property relates to improvements to property, namely, nonresidential buildings such as retail buildings, hospitals, banks, manufacturing facilities, hotels, and motels. Residential property such as family homes, condos, townhomes, and apartments are considered non-qualifying realty. For partnerships seeking to amend a prior year return, it will be necessary to consider whether the partnership is subject to the Centralized Partnership Audit Regime . If a partnership validly elects out of the CPAR, the partnership may amend its Schedules K-1 after the due date of the partnership return to which the statements relate.
UPDATE: Bonus Depreciation on Qualified Improvement Property
Building enlargements, elevators or escalators, or the internal structural framework of the building did not qualify. Qualified Leasehold Improvement Property was gradually replaced by Qualified Improvement Property between 2016 and 2017. QIP expanded upon QLIP by eliminating the three-year rule and also treated any qualifying improvement as QIP regardless of whether it was made under a lease. As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Congress added §168. As a result of this Act, certain 50% qualified property that is acquired after September 8, 2010, and before January 1, 2012, and which is placed in service by the taxpayer before January 1, is eligible for the 100% first-year depreciation allowance.
Then, under the Tax Cuts & Jobs Act of 2017, QIP was intended to be classified as 15-year property; however, due to a drafting error, QIP was not assigned a recovery period of 15-years. As a result, QIP placed-in-service after December 31, 2017, was assigned a recovery period of 39-years and was not eligible for bonus depreciation. Retail space), whether the improvements can qualify as QIP depends on the building’s use in the year the improvements are placed in service (Richman, “Current Use Is Key to QIP Bonus Depreciation Deductions,” 168 Tax Notes Federal 721 ). For example, if the retail space is placed in service before the rental space and an improvement is made during a year that the building is nonresidential real property, the improvement could qualify as QIP. However, improvements made during a year that the building is residential real property are not QIP.
What are some possible tax savings eligible with the replacement of existing property?
Excluded from the definition are improvements to internal structural framework, enlargements to the building, and elevators or escalators. However, the 2020 Coronavirus Aid, Relief and Economic Security Act made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation. Source Advisors reclassified 9% or $2,013,000 into Qualified Leasehold Improvement Property 3% or $605,000 to 15-year land improvements and 20% or $4,421,000 as 7 and 5-year tangible personal property.
The TCJA, CARES Act, and IRA will continue to have significant impact on real estate owners in the coming years. Having a sound cost segregation study performed on any renovation, new construction, or acquisition will allow the owner of real estate to fully take advantage of bonus depreciation. In addition, it cannot be overstated that seeking advice from CPAs well versed in real estate matters qualified improvement property examples is more important than ever. Partnering with qualified advisors will ensure that the real estate owner is fully aware of the role of bonus depreciation and related as incentives as part of a comprehensive overall tax strategy. In general, we advise that taxpayers first leverage the TPRs, and expense what they can using BAR and materiality testing, or one of the TPR’s safe harbors.