The CARES Act expands allowable tax deduction for commercial property improvements
The $2 trillion CARES Act includes a tax law change that may benefit cash strapped commercial property owners and tenants and promote increased fit-up spending well after the COVID-19 pandemic runs its course. This change expands the allowable tax deduction for many kinds of commercial property improvements to 100% of their cost, with the deduction applicable right away.
Because the change is retroactively effective to January 1, 2018, businesses who have recently incurred costs for qualified improvement property (“QIP”) may consider amending earlier tax returns to take advantage of accelerated depreciation alternatives and receive refunds. This new tax change should also incentivize owners and commercial tenants to make property improvements while realizing after-tax savings.
The TCJA “Error”
Prior to the Tax Cuts and Jobs Act (the “TCJA”) enacted in 2018, many interior improvements to nonresidential buildings and certain business equipment were eligible for 50% bonus depreciation as QIP. The TCJA intended to enhance the tax benefit then in effect for QIP by upping the deduction from 50% of the cost of improvements to 100% and to expand the types of improvements covered. Rather, the TCJA unintentionally excluded QIP from any bonus depreciation eligibility.
Specifically, Congress intended the TCJA to change the depreciation period for QIP from 39 years to 15 years and to allow a 100% write-off for certain property acquired after Sept. 27, 2017, and placed in service before Jan. 1, 2023. However, the text of another provision of the TCJA omitted reference to nonresidential interior improvements in a way that made them ineligible for this intended treatment.
This textual error created two problems: (1) QIP had a longer-than-intended depreciation period, and (2) QIP was not eligible for the immediate expensing provided by the TCJA because that benefit was only available for assets with a depreciable life of 20 years or fewer.
The CARES Act “Cure”
Congress has now acted to correct its earlier TCJA error. Pursuant to the CARES Act businesses can now depreciate QIP over a 15-year period or immediately expense its cost if certain other requirements are met. Commercial property owners will benefit, but so may tenants who heavily invested in the fit-up of space.
There are two foreseeable benefits. First, because the CARES Act change is retroactive to January 1, 2018, businesses who previously made qualified interior improvements should consult with their tax advisors to amend prior tax returns and seek a refund. Since bonus depreciation of 100% of an asset’s cost is allowed in 2018 and 2019, this change can provide immediate cash saving opportunities. Second, over the longer term while the economy recovers, the change should help businesses realize after-tax savings and free-up cash flow incentivizing further property improvements.