Bonus Depreciation for Commercial Real Estate Improvements

With the passage of the CARES Act, interior improvements to non-residential property are now eligible for bonus depreciation. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020, included an important revision to depreciation rules enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) that will correct a prior error that many have referred to as the “retail glitch.”

This change allows for bonus depreciation on “qualified improvement property” (QIP). QIP is defined as any improvement made by the taxpayer to an interior portion of a building that is non-residential real property if such an improvement is placed in service after the date such building was first placed in service (specifically excludes the enlargement of a building, any elevator or escalator, or the internal structural framework).

The TCJA expanded depreciation rules to allow for 100% bonus depreciation for property acquired after September 27, 2017 and placed into service before January 1, 2023. Prior to the TCJA, many interior improvements to non-residential properties were eligible for bonus depreciation. Congress intended QIP to be eligible for bonus depreciation as part of the TCJA. However, due to an apparent drafting error, legislators unintentionally excluded it from bonus depreciation eligibility.

Section 2307 of the CARES Act included technical correction classifying QIP as property eligible for bonus depreciation, as originally intended by the TCJA. These changes are effective as if they had been a part of the TCJA. In order to qualify for QIP treatment, the improvements must have been made by the taxpayer.

Taxpayers may now claim bonus depreciation for QIP retroactively to when the TCJA was enacted into law. Taxpayers who have claimed depreciation deductions for QIP on post-TCJA tax returns using a 39-year life, and no bonus depreciation, may still be able to benefit from the change by filing amended returns for affected prior years or filing a Form 3115, Application for Change in Accounting Method to catch up on depreciation deductions that should have been captured in prior years.

In order to qualify, QIP property must satisfy the following:

  • Qualified property must have been acquired and placed in service after Sept. 27, 2017.
  • The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
  • The taxpayer didn’t acquire the property from a related party.
  • The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
  • The taxpayer’s basis of used property is not figured under the provision for deciding basis of property acquired from a decedent.

Note that there is an exclusion for any property used in a trade or business that has had floor-plan financing indebtedness if the floor-plan financing interest was taken into account under section 163(j)(1)(C).

For more information, please contact a below member of Glaser Weil’s Tax Department.