The CARES Act fixed a portion of the tax code which may provide you budget from work we did in the past and save cost on work we do this year and next.
The CARES Act fixes an error in the Tax Cuts and Jobs Act of 2017. It includes Qualified Improvement Property (QIP) permanently as a 15-year property which has 100% bonus depreciation (immediate depreciation).
What qualifies as QIP?
Any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service.
Excluded from QIP:
- Enlargement of the building, elevators, escalators, and internal structural framework of the building
- HVAC systems/equipment on the roof or outside of the building, certain storefronts, building envelope improvements, roof decks, solar panels, and exterior signage
There is no limit on QIP or bonus depreciation. If you have replaced or expanded your fire life safety, access control, video surveillance, or any other non-excluded systems in the interior of your facility back to 1/1/2018 then you can take advantage of the CARES Act and create budget this year!
QIP Example
- You replaced your fire alarm system in the interior of an existing facility in 2018
- You depreciated at 39 years on 2018 tax return
- You can claim QIP via form 3115 change of accounting on your 2019 return
| Tax Consideration | Cost Benefit |
| Total Project Cost | $500,000 |
| Total Deduction Year 1 | $500,000 |
| Increased Cash Flow* | $180,000 |
| Net Present Value** | $115,000 |
| Effective Project Cost | $385,000 |
*Assumes 37% tax rate
**Assumes 37% tax rate and 8% discount rate
For more information, read this article from BRAYN Consulting, LLC.
Net Operating Loss (NOL) Changes for Refunds
NOLs from taxable years beginning after 12/31/2017 and before 1/1/2021 can be carried back to each of the 5 previous tax years and works in tandem with QIP placed in service in 2018-2020.
- Refund claims can be processed via forms 1139 & 1045
- 2018 calendar year refunds are due June 20, 2020 and tax year starts before 1/18/2018 and ending during 2018 are due July 27, 2020
Building owners can reclassify 39-year QIP to 1-year (expense) and generate large NOLs to carry back for immediate refunds.
NOL & QIP Example
- In 2019, you install upgraded fire alarms, smoke detectors and security system in an existing facility
- You owe minimal tax in 2019 due to NOLs
- You can now claim QIP to increase NOLs and carry back to offset tax paid during previous 5 years.
| Tax Consideration | Cost Benefit |
| Total Project Cost | $1,000,000 |
| Total Deduction Year 1 | $1,000,000 |
| Increased Cash Flow* | $360,000 |
| Net Present Value** | $230,000 |
| Effective Project Cost | $770,000 |
*Assumes 37% tax rate
**Assumes 37% tax rate and 8% discount rate
For more information, read this article from BRAYN Consulting, LLC.
