06 Jan 2021 Error Fixed for Bonus Depreciation for Qualified Improvement Property
Bonus Depreciation for Qualified Improvement Property – Technical Error Fixed
Due to a technical error in the December 2017 tax act, qualified improvement property placed in service after December 31, 2017, was subject to 39-year straight-line depreciation and thus, not eligible for the special depreciation allowance.
New legislation fixed this error by retroactively classifying qualified improvement property as 15-year property under MACRS (20-year property for ADS). Qualified improvement property placed in service after December 31, 2017 is eligible for special depreciation. As a result, a taxpayer must change his or her depreciation method for qualified improvement property placed in service after December 31, 2017, for tax years ending in 2018, 2019, and 2020.
Example: On February 28, 2018, Joe placed in service improvements made to his warehouse that are considered under the new law as qualified improvement property. Since Joe properly treated the improvements as 39-year property under MACRS on his 2018 tax return, and the improvements are now classified as 15-year property under MACRS with 100% special depreciation as the default method, Joe must do one of the following.
- Elect out of special depreciation and change to the 15-year depreciation method.
- Amend his 2018 return to use special depreciation in that year, or File Form 3115, Application for Change in Accounting Method, to correct improper prior year depreciation on the next tax return that he files.
- Under no circumstances can Joe ignore the new law and continue to depreciate his 2018 improvements as 39-year property. Revenue Procedure 2020-25 provides more information about how a taxpayer may change his or her depreciation method, make a late election, or revoke or withdraw an election for qualified improvement property by filing an amended return or Form 3115.
The Final Rules and Regulations have not been issued. These are our interpretations based on assumptions. The IRS will not only issue Rules and Regulations but will also issue FAQ’s to better understand the Legislation. We will keep you informed as the Government Agencies clarify the details of the legislation.