The Tax Cuts and Jobs Act (TCJA) created a new category of tenant improvements called “qualified improvement property” (QIP) which replaced the old tenant improvement classifications. The TCJA defined QIP as “any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service” and QIP excludes, “any improvement for which the expenditure is attributable to (i) the enlargement of the building, (ii) any elevator or escalator, or (iii) the internal structural framework of the building.”
The TCJA inadvertently failed to include QIP as 15-year property, resulting in a 39-year property classification. Since QIP was classified as more than 20-year property, it was not eligible for an additional first year depreciation deduction (bonus depreciation). Since 2018, the real estate industry has been waiting for Congress to address this error with a technical correction.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) fixes this error by amending QIP property from 39-year to 15-year property. This amendment is effective beginning in 2018 and allows QIP to be depreciated over a shorter class life and allows for bonus depreciation. Taxpayers in the real estate industry should consider filing an amended 2018 tax return or filing an automatic accounting method change with Form 3115 with their 2019 tax return to take advantage of this additional depreciation for QIP purchased in 2018 or 2019.