Authors: Louis Tuchman and Peter Franklin
The $2.2 Trillion Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that was signed into law by President Trump on March 27, 2020 includes a number of tax provisions that are intended to provide relief to individuals and businesses affected by the Coronavirus. Other provisions included in the CARES Act, however, are more general in scope. One such provision is a technical correction to the bonus depreciation rules adopted by the Tax Cuts and Jobs Act of 2017 (the "TCJA"). This correction, which has retroactive effect, allows taxpayers to claim 100% bonus depreciation for “qualified improvement property” (“QI Property”).
Background
Before the enactment of the TCJA, bonus deprecation allowed taxpayers to deduct in the year incurred 50% of the costs of certain property. Bonus depreciation was available for outlays towards various types of property, including interior building improvements, if such improvements were (1) “qualified leasehold improvement property,” (2) “qualified restaurant property,” or (3) “qualified retail improvement property.” Each of these terms was defined in fairly restrictive terms.
The TCJA increased the bonus depreciation deduction to 100 percent, and was also intended to expand the types of outlays that would qualify for this bonus depreciation. Congress eliminated the pre-existing definitions for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, and replaced those definitions with one category called “qualified improvement property” ("QI Property"). QI property generally expands upon the types of improvements which are intended to qualify for the 100% tax deduction. However, due to drafting error, the TCJA failed to include QI property among the properties that would qualify for bonus depreciation. As a result, these costs were required to be deducted over 39 years, a rule that was not only less taxpayer-favorable than Congress intended, but was less favorable that the rule that existed under prior law.
The CARES ACT Fix
The CARES Act provides a technical correction to the TCJA, and specifically adds QI Property to list of items that qualify for the 100% bonus depreciation, applicable to property placed in service after December 31, 2017. Before the CARES ACT, many in the real estate, food service and retail industries (and their advisors) grappled with strategic decisions about investments in improvements; balancing their expectations that the “glitch” in the TCJA would ultimately be corrected, with the unwelcome fact that, until it was fixed, the were faced with the 39-years cost recovery period for these assets. The CARES Act correction alleviates this concern prospectively, but, despite being retroactive in effect, may not have fully remediated the effect of the “glitch.” For example, based on the state of the law before this correction, certain taxpayers may have elected to escape the limitations on deduction of business interest, as a result of which they were required to recover costs of their investment in capital assets under the longer time frames prescribed by the ADS depreciation system. While that decision might have made sense because bonus depreciation was not available, it appears to be irreversible because the election is irrevocable, and the technical correction does not provide an exception if the election would not have been made had the correction been part of the TCJA.
Please contact us if you would discuss the application of correction to you. Herrick’s tax team is eager to answer your question, and continues to provide uninterrupted service to our clients to monitoring all relevant developments, including those stemming from the coronavirus (COVID-19) pandemic.
