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Tax Planning in the Wake of COVID-19 | Part Six: QIP Change Can Bring Emergency Cash Relief

By Dustin M. Grizzle, CPA

In response to the economic crisis triggered by the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748), which was subsequently signed into law by President Trump. The $2 trillion stimulus package offers financial support to companies and individuals through tax breaks and deferrals, and loan programs.

Of the long list of relief efforts, one of the most significant changes for businesses small and large was not something new, but rather a correction to the Tax Cuts and Jobs Act (TCJA) of 2018 regarding qualified improvement property (QIP). Here’s why that minor fix could have a major impact by providing much-needed liquidity in the midst of a pandemic.

Understanding the “Retail Glitch”

As the TCJA came together, Congress added language that renewed 100% bonus depreciation for QIP that was acquired after September 23, 2018, and began being used by January 1, 2023. This is depreciation that included properties that had a life of up to 20 years. During the whirlwind drafting sessions that took place before the bill was finalized, drafters failed to include an amendment that included a 15-year recovery period for QIP, even though it was clear they had intended to do so. The omission, known as the “Retail Glitch,” meant that QIP was subject to a 39-year recovery period rather than the intended 15, and that businesses would not be able to write it off.

Fixing the glitch

The CARES Act addressed the error in the TCJA by including QIP as a 15-year MACRS asset and 20-year ADS asset, allowing businesses in hard-hit industries like hospitality, retail, and restaurants, to retroactively write-off any investments they have made into their spaces dating back to the enactment of the TCJA on December 22, 2017. The impact of this is significant, as fixing the error allows leaseholders and building owners to immediately retrieve the costs of improvement-related investments they have made in their property since December 2017, which are now classified as bonus depreciation under the CARES Act.

Why QIP changes are critical

This provision of the CARES Act is so important because it is an immediate injection of cash to thousands of businesses who are likely experiencing severe cash flow issues. The QIP classification includes any renovation to the interior of a non-domicile property that was made after the building began business use and applies mostly to industries that often revamp their facilities. Additionally, because the bill is retroactive, it is likely that many businesses will be able to access liquidity from several past projects, allowing them to potentially further ease financial burdens.

Getting the cash

As with any major piece of legislation, specifics on how to access the depreciation that the CARES Act entitles business owners to is scarce. However, industry professionals have found several methods to file for the money, the simplest of which is to work with your tax services provider to file amended returns for tax years 2018 and 2019. Other options exist as well, including filing superseding returns or filing a Form 3115, which is an application for change in accounting method. Because the QIP change will have widespread effects, it is anticipated that when the IRS issues formal guidance they will automatically allow the change to be made.

Small businesses and corporate America alike are struggling at this moment, and the future is uncertain. Taking advantage of the QIP amendment to the tax code is strategically imperative for any business that needs a boost in financial health in the short and long term.

For guidance applying the new QIP changes or filing amended tax returns, please reach out to schedule a consultation.