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It may have taken a pandemic, but think twice before treating a cost as QIP

The CARE Act, enacted on March 27, 2020 included, among other Congressional wish list items, the technical correction to the drafting error associated with the 15-year recovery period for Qualified Improvement Property (QIP) in the TCJA. This technical correction restores the 15-year recovery period and the qualification for bonus depreciation retroactively to January 1, 2018. While certainly a benefit, non-corporate taxpayers and pass-throughs should review the tangible property regulations and determine whether the expenditures even need to be capitalized before treating a cost as QIP.

With bonus depreciation presently at 100% there is an inclination to forgo the analysis required by the “repair” regulations. However, on a sale of real property, a non-corporate taxpayer will recapture the QIP depreciation as unrecaptured section 1250 gain – there is no recapture for repair deductions. The difference, 5% of the QIP depreciation, can amount to a significant tax difference when you consider the magnitude of costs during the life of the property that qualify as repairs. For lessors of real property, those costs may include tenant fit outs and interior remodeling. And exterior costs like roofing which may be a repair are excluded from QIP.


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