Due to a drafting error in the new tax law, the cost recovery for interior building improvements placed in service in 2018 is currently 39-years with no bonus depreciation, rather than the intended 15-year treatment with bonus depreciation eligibility. This may change later this year.
Under previous tax law, there have been multiple categories of property related to interior building improvements including Qualified Leasehold Improvement Property (“QLIP”), Qualified Restaurant Improvements (“QRP”), Qualified Retail Improvement Property (“QRIP”), and Qualified Improvement Property (“QIP”). These categories generally enjoyed a favorable shortened 15-year cost recovery period and 50% bonus depreciation for interior improvements to existing buildings.
The Tax Cut and Jobs Act, passed in December 2017, consolidated these various categories into only one category of Qualified Improvement Property (QIP). The QIP category mostly includes non-structural and non-shell interior improvements to existing buildings. Clearly the lawmakers’ intention has been to assign QIP a recovery period of 15 years so as to make it eligible for the new 100% bonus depreciation provision. This would have generally allowed for immediate expensing of all QIP property.
Unfortunately, the final wordings of the legislation as passed has failed to specifically assign QIP a 15-year life which would have qualified for 100% bonus depreciation. What this means for QIP is that without an assigned recovery period and without explicit IRS guidance saying otherwise, QIP will in most cases be treated as nonresidential real property with a 39-year recovery period, thus making QIP ineligible for the 100% bonus depreciation. This apparent legislative oversight has gained attention from various business groups including retailers, rental real estate owners and developers etc. Those stakeholders have started to lobby Congress to include a “fix” for the drafting error in upcoming legislation.
At this point, it is unclear if Congress will issue any technical corrections in 2018 to fix this QIP oversight. So far, the IRS has not committed to provide any guidance on this issue either. A “wait and see” approach would be advisable for most clients during the remainder of 2018. For those clients who typically spend substantially on interior improvements to leased or owned space, in the worst-case scenario that Congress would fail to fix this QIP error, a cost segregation study or analysis may still be a viable strategy to help accelerate depreciation for interior improvements.
Louis Plung & Company professionals would be happy to assist with any questions.