Tucked among the very personal and broad elements of the Coronavirus Stimulus Bill from March 27, 2020, is a small but crucial tax change (a Glitch fix) for all customers who have recently completed a retrofit, are undergoing a retrofit now, or are considering a retrofit.
What benefit does this change provide a business?
- Qualified Improvement Property (QIP) is now considered 15-year property and is eligible for 100% bonus depreciation.
- This 100% deduction on QIP is available to qualifying taxpayers on expenditures incurred through December 31, 2026.
- QIP is broadly defined to apply to almost any improvement to the interior of leased or owned spaces, including most lighting and controls.
- The change is retroactive to 2018. Businesses may investigate filing amended tax returns to capture the benefit.
- An example: A $100 improvement may now be looked at as effectively generating an income tax deduction of 100% of the expenditure ($100) on the business’ federal tax return, whereas in the last 2 years, effectively only $2.56 would have been tax deductible.
Who does this benefit?
- Almost all business can benefit.
- It was particularly targeted at Retail and Hospitality industries.
- Important Note: Because of the negative impacts of the glitch (more below), it is believed that many large projects were placed on hold over the last 2 years.
How can a glitch be such a big deal?
- This tax change was originally included in the Tax Cuts and Jobs Act of 2017 (TCJA), but a critical definition was left out.
- This omission virtually eliminated meaningful depreciation on improvement projects made over the last 2 years. Prior to the TCJA, improvement projects allowed a 50% bonus depreciation on 15-year property, but the glitch meant that there was no bonus depreciation available on QIP, and the property would have a 39-year recovery period.
- Building on the above example, that $100 improvement would have generated an income tax deduction of $5.12 for each of the last 2 years, or an income tax deduction of $50 before TCJA. Businesses delayed planned projects to avoid this penalty. Now with the fix, all of the $100 would be deductible in the first year.
We’re expecting that this fix will have a positive impact on the ROI for many customers. A licensed tax professional should always be consulted to provide individual financial guidance.
Feel free to contact your Current sales representative for more details or clarifications on your upcoming projects.