Qualified Improvement Property (QIP) placed in service after December 31, 2017 now has a GDS life of 15 years and an ADS life of 20 years. Perhaps even more importantly, QIP is now eligible for 100% bonus depreciation per current law.
Changes to Qualified Improvement Property are included in the Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act) legislation. The CARES Act, signed into law on March 27, 2020, provides financial support to individuals and businesses across the United States affected by the outbreak of the Covid-19 virus. At first glance, it may seem unusual that the changes to the QIP rules are included in this type of legislation. But when taking a step back, it’s easy to see how shortening the life of Qualified Improvement Property to 15 years and making it eligible for bonus depreciation can benefit businesses of all sizes – small, medium, and large.
Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), there was Qualified Retail Property, Qualified Restaurant Property, and Qualified Leasehold Improvements all of which had a GDS life of 15 years and were eligible for bonus depreciation as long as certain requirements were met. In the TCJA, QIP replaced the other types of qualified property. Due to a technicality, the GDS life was 39 years, thus making it ineligible for bonus depreciation. The CARES Act fixes this technical error.
What does this mean for me?
You are now able to reclassify any Qualified Improvement Property as 15-year property and apply the 100% Bonus depreciation, if desired. The table below shows the financial impact.
This table compares a $100,000 QIP asset placed in service on January 1, 2019 under the TCJA rules to two options available with the technical correction under the CARES Act.
|
Description |
Bonus Taken? |
Depr Meth |
Depr Conv |
First Year Depr Exp |
Std Corp Tax Rate |
Potential Offset to Taxable Income |
Potential Tax Savings vs. 39- year Asset |
|
39-year asset |
N |
MF100 |
MM |
$ 2,457.27 |
21% |
$ 516.03 |
N/A |
|
15-year asset |
N |
MF100 |
HY |
$ 3,333.33* |
21% |
$ 700.00 |
$ 183.97 |
|
15-year asset |
Y |
MA100 |
HY |
$100,000.00 |
21% |
$ 21,000.00 |
$20,483.97 |
*This amount doubles for the 2nd through 14th year, due to the half-year convention.
By reviewing the table, it is easy to see the significant financial advantage of classifying a QIP asset as a 15-year asset and applying the 100% bonus. Even if the bonus were only 50%, the benefit is substantial.
Be sure to review the depreciation expense, elections out of bonus, and Section 179 deductions taken on previously filed tax returns that may be affected by changing the life of your QIP assets. Also, be sure to consider how any changes in your overall tax depreciation may also impact your tax asset, tax liability, and tax expense reported on your financial statements.
What do I need to do to my company’s QIP assets in Sage Fixed Assets – Depreciation?
You can immediately update your Qualified Improvement Property assets to an Estimated Life of 15 years, using the appropriate depreciation method. Updates to related Help topics and the IRS table in Sage Fixed Assets will be made in a future release.
Follow the guidelines below to change your QIP assets to the shorter life.
- Backup Your Company: Always be sure you have a backup of your company before changing existing information.
- Modify Asset: Match your asset entries to those in the table based on your original input.
|
Current Method |
Enter New Method |
Current Life |
Enter New Life |
Comments |
|
MF100 |
MA100 |
39 |
15 |
Use MA100 to take bonus. |
|
MF100 |
MF1001 |
39 |
15 |
Use MF100 if you have elected or intend to elect out of bonus for this class of property. |
|
AD |
AA |
40 |
20 |
Use AA to take bonus. |
|
AD |
RH2 |
40 |
20 |
Method RH uses the HY convention. Use this method if you have elected or intend to elect out of bonus for this class of property. |
1No change in method. 2 When the ADS message appears on entry, click OK, and continue.
- Critical Change: After making an edit to a QIP asset, you will have to accept the Critical Depreciation Change and select Placed-in-Service date.
- Bulk Edit: If you have several Qualified Improvement Property assets, they can be updated with the Bulk Edit
- New Assets: For new asset entry just follow the Enter New Method and Enter New Life columns in the table above.
- Depreciate: Run depreciation for the changed assets and re-run any reports as needed such as the Depreciation Expense report.
- Disposals and Transfers: You will have to delete your disposal or transfer, update the asset with the current information, then redo the disposal or transfer using the original information. Tip: Select Print Detail on the Transactions tab of an asset, then select the type of transactions to print – disposal or transfer – to ensure you have a record of the original information.
Summary
It has been a long wait and for the technical correction to the QIP rules. And while the idea of amending returns or financial statements may sound like a lot of work, Sage Fixed Assets – Depreciation makes it easy for you to revise the Estimated Life and Depreciation Method of your QIP assets. See the Knowledge Base article links below to give you a head start on realizing the financial benefits of this new tax law.
Resources
KB ID: 16722 How to change critical depreciation fields
KB ID: 95694 How to perform Bulk Edit of Critical Depreciation Fields
KB ID: 17001 How to cancel a disposal?
KB ID: 17528 How to undo transfer