Understanding Qualified Improvement Property (QIP)

Qualified Improvement Property (QIP) refers to any improvements made to the interior of a nonresidential building after the building is placed in service. These improvements must exclude enlargements of the building, elevators and escalators, and changes to the internal structural framework. This classification, introduced by the PATH Act of 2015 and further modified by the Tax Cuts and Jobs Act (TCJA) of 2017, was intended to streamline tax benefits related to property improvements.

Key Aspects of QIP:

Definition and Eligibility:

QIP includes improvements such as drywall, interior doors, lighting, flooring, ceilings, fire protection, and plumbing.
To qualify, improvements must be made to a building that is already in service and should not be part of the building’s initial construction.

2. Depreciation and Bonus Depreciation:

QIP is generally eligible for bonus depreciation, which allows for a significant portion of the improvement costs to be deducted in the first year.
Following the TCJA, QIP was intended to have a 15-year Modified Accelerated Cost Recovery System (MACRS) recovery period, making it eligible for 100% bonus depreciation. However, due to a drafting error in the TCJA, this was not immediately realized, leading QIP to default to a 39-year recovery period initially. This error was corrected retroactively by the CARES Act, reinstating the 15-year recovery period and making QIP eligible for 100% bonus depreciation from 2018 onwards.

3. Impact of the CARES Act:

The CARES Act corrected the TCJA drafting error, allowing QIP placed in service after December 31, 2017, to qualify for a 15-year recovery period and making it eligible for 100% bonus depreciation. This correction was crucial for business owners looking to maximize their tax deductions on property improvements.

4. Phase-out of Bonus Depreciation:

Starting from tax years beginning after December 31, 2022, the 100% bonus depreciation rate will phase out, decreasing by 20% each year until it is completely phased out by 2027. Thus, for assets placed in service in 2023, the bonus depreciation rate will be 80%, decreasing further in subsequent years.

Practical Considerations for Businesses:

Tax Planning: Businesses should strategically plan their property improvements to take full advantage of the current bonus depreciation rates before they decrease.
Cost Segregation Studies: These studies can help businesses identify and reclassify QIP to maximize depreciation benefits.
Consultation with Tax Professionals: Given the complexities and frequent changes in tax laws, businesses should work closely with tax professionals to ensure they are optimizing their tax positions and complying with current regulations.