Congress enacted changes to qualified improvement property (QIP) and bonus depreciation in the 2017 tax reform, also known as the Tax Cuts and Jobs Act (P.L. 115-97). Due to a drafting error, QIP was not included in the list of property with a 15-year life. As such, despite the legislative intent, QIP has a 39-year life and is not bonus eligible for property acquired and placed in service on or after January 1, 2018. Bipartisan legislation was introduced in the Senate on March 14, 2019, that would correct this drafting error and make it effective as if it had been part of the original 2017 tax reform act. This proposed legislation is welcome news for taxpayers. Taxpayers may wish to extend tax returns before filing so that a superseding return could then be filed should this legislation pass prior to the extended due date of the return. If the provision is effective retroactively and a return has been filed, Treasury will issue guidance on what steps need to be taken. This is a positive first step in addressing and correcting the drafting error that has impacted many taxpayers.
Highlights of the Tax Reform Provisions
Prior to the tax reform of 2017, the Internal Revenue Code had separate definitions for qualified leasehold property, qualified restaurant property, qualified retail improvement property – all 15-year properties. In addition, the PATH Act of 2015 created a new category of real property, QIP, that was bonus eligible. In an effort to simplify the code, the 2017 tax reform consolidated these separate categories into a newly expanded definition of QIP. The definition of QIP was located in Section of the code that was removed during drafting. Because QIP was supposed to be 15-year property, QIP was also removed from the bonus depreciation section of the code. As such, QIP was not included in the list of properties with a 15-year life.
Tax reform also revised the eligibility requirements for bonus depreciation, including expanding the definition to include used property if the requirements of the code section are met. Further bonus depreciation was increased to 100 percent for assets acquired and placed in service after September 27, 2017. Because of this drafting error, the newly defined QIP does not qualify for the additional first year depreciation deduction if acquired and placed in service after January 1, 2018. As a result, this drafting error has created uncertainty for taxpayers and likely an increase in the 2018 taxable income.
Despite the intent of Congress, Treasury stated that a technical correction bill was required by Congress to correct this error. Senators Pat Toomey (R-PA) and Doug Jones (D – AL) introduced new legislation, “Restoring Investment in Improvements Act” on March 14, 2019. The bill would provide that QIP has a 15-year life for regular tax purposes, making it bonus eligible. Further, the Alternative Depreciation System life would be 20 years for QIP under the corrections bill. This is very important for taxpayers making the “real property trade or business” election for purposes of Internal Revenue Code Section 163(j). The Alternative Depreciation System life for QIP is currently 40 years. For those making the election, this is also welcome relief. Last, the provisions would be retroactive, having an effective date the same as that of the 2017 tax reform (P.L. 115-97).