Corrections to Qualified Improvement Property Under the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act corrected the depreciable life of qualified improvement property, or QIP, to 15 years.

The Tax Cuts and Jobs Act (TCJA) inadvertently treated QIP as 39-year property, which made it ineligible for bonus depreciation.

On Friday, April 17, 2020, the IRS issued Revenue Procedure 2020-25, which explains how a taxpayer can retroactively correct previously-filed tax returns to claim bonus depreciation on property that was previously ineligible for it. The Revenue Procedure applies to QIP placed in service after December 31, 2017.

The Revenue Procedure describes two scenarios in which the depreciation changes are not applicable:

• QIP placed in service after December 31, 2017 where a late ”real property trade or business” election is being made or withdrawn as it relates to IRC Section 163(j). This is described in Revenue Procedure 2020-22, which requires an amended tax return to be filed.

• QIP which was previously deducted as an expense. Examples are fixed asset deductions allowed under the rules of IRC Section 179, or expensing allowed under the tangible property regulations.

Updating previously depreciated QIP under this Revenue Procedure is considered changing from an impermissible method of accounting to a permissible method of accounting. This also applies to the missed opportunity to take bonus depreciation previously. As such, the Revenue Procedure describes two ways a taxpayer can make this change:

1. File an amended 2018 or 2019 tax return, or an administrative adjustment request (AAR), by October 15, 2021. BBA partnerships that are subject to the centralized partnership audit regime and choose to amend their return as described under Revenue Procedure 2020-23 must file their amended tax return by September 30, 2020, or
2. File a Form 3115, Application for Change in Accounting Method, to claim an adjustment on the current year’s tax filing.

Form 3115 is commonly used to make an impermissible to permissible change to previously deducted depreciation or amortization. The IRS has a listing of automatic changes that can be used when completing Form 3115. The latest listing of designated automatic accounting method change numbers, or DCNs, can be found in Revenue Procedure 2019-43. As of this date of this writing, any DCN related to automatic changes in depreciation is located in Section 6 of that Revenue Procedure.

Revenue Procedure 2020-25 issues a new DCN to use on Form 3115 when requesting to change depreciation for previously placed-in-service QIP. That DCN is “244.”

Author: Andrew Murray, CPA | amurray@withum.com