The Internal Revenue Service (IRS) provides a tax code section, 168(k), regarding the depreciation of qualified improvement property (QIP). Understanding this provision is essential for businesses to optimize their tax planning strategies. Let's delve into the intricacies of QIP and its depreciation rules according to IRS.gov.
Qualified improvement property, as defined by the IRS, refers to any improvement made by the taxpayer to an interior portion of a building which is non-residential and placed in service after the date the building was first placed in service. However, it's crucial to note that certain improvements, like elevators or escalators, are not considered QIP.
Qualified Improvement Property (QIP) Depreciation
Under the Tax Cuts and Jobs Act (TCJA), QIP must be depreciated over 15 years using the general depreciation system. This is a change from prior law, which treated QIP as 39-year personal property.
Despite the 15-year period, special rules may apply. If the property is used predominantly outside the United States, it's depreciated over 20 years. Furthermore, if the QIP is installed on a building with an expected economic usefulness of 40 years or less, it is depreciated over 15 years.
Ensuring QIP Status
To qualify for the 15-year depreciation period, an improvement must satisfy three tests: it must be made to an interior portion of a non-residential building, it must be made under the original plan for the building, and it must not be deemed personal property.
For instance, a business that constructs an office building and later adds partitions and improvements for tenant offices would generally qualify for 15-year depreciation. However, if the landlord constructs the office building to tenant specifications from the outset, the improvements likely won't qualify as QIP.
Retroactive Implications
The change in law is retrospective, meaning it applies to improvements made after December 31, 2017. Importantly, property owners can claim refunds for taxes paid on QIP previously depreciated under the 39-year schedule. This provision offers significant tax savings for qualifying businesses.
Businesses should consult with a tax professional to determine their eligibility and to optimize their approach to claiming these benefit. It's crucial to note the deadline for filing these claims, which is generally the statute of limitations for the tax return in question.
IRS Guidance and Examples
The IRS periodically releases guidance, such as Revenue Rulings and Regulations, to help taxpayers understand and apply the QIP rules. These include examples illustrating how to determine whether an improvement qualifies as QIP.
For example, Revenue Ruling 2019-11 provides a retail store example where a landlord constructs a building to tenant specifications, including interior improvements. The ruling clarifies that the improvements aren't QIP because they were made under the tenant's original plans.
Understanding and maximizing benefits from the QIP IRS rules can yield substantial tax savings for businesses. However, the complexities involved underscore the importance of staying informed and consulting with a tax professional. Moving forward, businesses should incorporating this understanding into their long-term financial planning strategies.
