With the signing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) late last month, the “retail glitch” from the 2017 Tax Cuts and Jobs Act (TCJA) was fixed. This correction affects many different industries and sectors but can have very significant benefits for restaurants and retail establishments—two of the industries that have suffered the most as a result of the COVID-19 coronavirus pandemic.
The fix changes the depreciation schedule available for “qualified improvement properties,” or QIP. Under the TCJA, QIP was still 39-year property and thus ineligible for bonus depreciation, but with the CARES Act fix, now QIP is 15-year property that is bonus depreciation eligible. The fix was necessary because the U.S Treasury Department and IRS consistently held that they did not have the authority to correct the retail glitch without action from Congress. This correction was made retroactively to Jan. 1, 2018, meaning that taxpayers with QIP can and should amend their previous tax returns to take advantage of the correction.
What is QIP and Does My Business Have Any?
QIP includes any improvements a taxpayer makes to the interior portion of an already-existing, nonresidential building. This includes interior renovations and remodeling, such as replacing and installing drywall, plumbing or electrical wiring in commercial businesses. Improvements to internal structural framework, building additions and elevators or escalators or any improvements to residential properties are not QIP.
Some businesses, however, may not be eligible to claim the bonus depreciation available for QIP under the CARES Act. The QIP must still comply with Section 168(k)’s specified requirements.
What Does It Mean If My Business Has Qualified Improvement Properties?
The restaurant and retail industries are arguably the two industries most affected by the numerous government measures and shutdown orders put in place to reduce the spread of COVID-19. They are also most likely to be poised to capitalize on the retail glitch fix, especially considering the large amounts of renovations and improvements in these industries. Businesses with recent improvements, renovations and remodeling should review the plans associated with those projects to determine if QIP exists. If QIP does exist, a business may want to amend its recent tax filing to reduce its taxable income.
Because QIP was not included as 15-year property under the TCJA, businesses who placed QIP in service in 2018 and 2019 were required to depreciate those costs over 39 years, significantly limiting amounts that could be deducted and disallowing any deduction for the year the property was placed in service. With the fix in the CARES Act, QIP can now either be:
- Fully deducted in the year that the property is placed in service, which is useful in the event that businesses have taxable income to offset that deduction or can carry back any resulting losses; OR
- Deducted over a 15 year period
Why Is QIP Beneficial for My Business?
Reducing a business’s taxable income will, of course, increase a business’s potential tax refund or create net operating losses that can either be carried back or forward. It’s important to note that the TCJA restrictions on carrying back net operating losses was also temporarily suspended under the CARES Act.
The correction is retroactive to Jan. 1, 2018, so businesses that had QIP in 2018 or 2019 should consider amending their 2018 or 2019 tax filings to take advantage of the correction. If your business is eligible for a refund, this cash can provide much needed relief and flexibility in your cash management strategy, and allow you to remain liquid enough to adapt to the changing economic landscape.
If you have any questions about the retail glitch or other beneficial tax provisions in the CARES Act, please contact KJK Tax Chair Kevin T. O’Connor at firstname.lastname@example.org or 216. 736.7213 or Demetrius Robinson at email@example.com or 614.427.5749 or one of our Tax professionals.