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February 22, 2018
2018-0394

Government will allow taxpayers to use bonus depreciation on qualified improvement property placed in service through December 31, 2017

Note: This Alert updates Tax Alert 2018-0012, which discusses qualified improvement property.

Speaking at the ABA Section of Taxation mid-year meeting in San Diego on February 9, 2018, government officials stated that they will allow taxpayers to use bonus depreciation on qualified improvement property (QIP) placed in service through December 31, 2017. This determination comes as a result of an effective date discrepancy in P.L. 115-97, commonly known by its pre-enactment title, the Tax Cuts and Jobs Act (the Act), related to the removal of QIP from the definition of qualified property for bonus depreciation purposes.

Background

As described in the Joint Explanatory Statement provided in tandem with the release of the Act, Congress intended to provide a 15-year recovery period for QIP placed in service after December 31, 2017. Due to an apparent oversight by the drafters of the legislation, however, Section 168(e)(3)(E), the provision generally describing the property to which a 15-year recovery period applies, was not amended to include QIP.

Additionally, Congress specifically removed QIP from the definition of qualified property for bonus depreciation purposes (i.e., it removed "old" Section 168(k)(2)(A)(IV)), apparently reasoning that QIP would be classified as 15-year property and qualify for bonus depreciation under the general "20-year recovery period or less" provision of Section 168(k)(2)(A)(i)(I). Per Section 13204 of the Act, the amendment to remove QIP from the definition of qualified property for bonus depreciation purposes is effective for property placed in service after December 31, 2017. However, certain provisions of Section 13201 of the Act (i.e., the 100% bonus section), which are effective for property acquired and placed in service after September 27, 2017, referenced and further amended the amendments made by Section 13204. These Section 13201 provisions appear to indicate an intent to remove QIP from the definition of qualified property and, in its place, add qualified film and television productions as defined in Section 181 (i.e., such provisions provide for "new" Section 168(k)(2)(A)(IV)).

As a result of the Section 13201 provisions, many practitioners had concerns that QIP was not bonus eligible to the extent acquired and placed in service after September 27, 2017. Said differently, practitioners were concerned that, by using a provision with a September 27, 2017, effective date to further amend a provision with a December 31, 2017, effective date, the earlier September 27, 2017 effective date controlled both provisions.

Government's response

Government officials at the ABA meeting recognized that there were discrepancies as to when QIP would be considered qualified property for bonus depreciation purposes as a result of the conflicting effective dates. In response to practitioners' concerns regarding whether QIP qualified for bonus depreciation, the government officials indicated that taxpayers will be allowed to treat QIP, placed in service on or before December 31, 2017, as qualified property for bonus depreciation purposes.

Implications

When analyzing the effect of the QIP omission from the definition of qualified property on their fixed asset portfolios, taxpayers should keep in mind that a 15-year recovery period for QIP is not available at this time, but QIP placed in service on or before December 31, 2017, is eligible for bonus depreciation. Additionally, the definitions for qualified leasehold improvement property (QLIP), qualified restaurant property (QRP) and qualified retail improvement property (QRIP) (all generally replaced by QIP under the Act) are effective until December 31, 2017, but are repealed for property placed in service after December 31, 2017. The recovery period for property that meets the definition of QLIP, QRP and QRIP is 15 years to the extent it is acquired and placed in service by December 31, 2017. QLIP and QRIP are bonus eligible, but QRP is only bonus eligible to the extent the QIP definition is also satisfied.

The following is an updated chart detailing the recovery period and bonus applicability to certain non-residential real property improvements, factoring in the latest information described in this Alert:

Acquired before 9/28/17 and placed in service after 9/27/17

Acquired after 9/27/17 and placed in service after such date, but on or before 12/31/17

Acquired after 9/27/17 and placed in service after 12/31/17

— Prior law applies.

— If improvements meet QIP definition, they will be eligible for bonus depreciation at the old percentages (50%, 40%, 30% or 0% depending on the placed in service year).

— Recovery period generally is 39 years, unless improvements meet either the QLIP, QRIP or QRP definitions and are placed in service on or before 12/31/17 (such definitions are repealed for property placed in service after 12/31/17).

— New bonus depreciation rules apply but old law with respect to QLIP, QRIP and QRP definitions is still in effect through 12/31/2017.

— QIP is subject to a 39-year recovery period, unless it meets the definition of QLIP, QRIP or QRP, at which point a 15-year recover period applies.

— QIP, QLIP, QRIP, and QRP (to the extent they meet the QIP definition) are all eligible to claim 100% bonus depreciation.

— New law applies in all respects.

— QLIP, QRIP and QRP definitions no longer apply.

— QIP is subject to a 39-year recovery period and not eligible for bonus depreciation.

— In short, all building improvements in this category are not bonus eligible and must be recovered over 39 years.

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Contact Information
For additional information concerning this Alert, please contact:
 
National Tax Quantitative Services
• Scott Mackay(202) 327-6069;
• Sam Weiler(614) 232-7105;
• Tim Powell(202) 327-7124;
 

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