It is important to be aware of an unexpected consequence of The Tax Cuts and Jobs Act - qualified improvement property (“QIP”) is now included as a 39-year lived asset, and is not eligible for bonus depreciation.
The new tax bill did eliminate the separate code sections defining qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, effectively merging these categories into a redefined QIP class. QIP was originally introduced in 2016 bearing a 39-year life and being bonus eligible.
Initial indications through the joint committee bill were that this newly redefined QIP category would have a 15-year life and be bonus eligible (bonus depreciation is defined as being applicable to assets bearing a 20-year life or less). However, with the release of the Tax Cuts and Jobs Act, QIP is actually in the 39-year life category and is excluded from bonus depreciation. While the issue has been acknowledged, real estate and tax professionals will have to stay conscious of this going forward given the uncertainty of a technical amendment to rectify the issue.
In the interim, we recommend separately identifying QIP costs from real property in the event a technical amendment is issued and the QIP could therefore become bonus eligible. Alternatively, in the absence of rectification, the result may be heightened sensitivity to qualify for immediate expensing under the repair regulations, where applicable.
Immediate write-offs are not exactly new, as 100 percent bonus depreciation was in effect for the entirety of 2011 and the last quarter of 2010. The basic rules of bonus still apply, and the tax bill does not change the general Section 168(k)(2)(A)(i) requirements of qualified property, meaning assets must have a life of 20 years or less. Section 1250 property — or buildings — are still excluded from this benefit. Section 1245 property, which is usually depreciated over 5, 7 or 15 years, will be the primary beneficiary of this provision.