Sometimes Congress makes mistakes. Case in point: Drafting errors in the Tax Cuts and Jobs Act of 2017 caused qualified improvement property (QIP) to have a 39-year depreciation recovery period. The legislative history shows Congress meant for QIP to be given a 15-year recovery period, according to Richard Shevak, a principal in CohnReznick's national tax office.

The 15-year recovery period would have permitted taxpayers to take a bonus depreciation, allowing full deduction for the improvement expense in the year the asset was placed into service. Bonus depreciation is not available in connection with 39-year assets.

As it was intended, the legislation would have been a valuable benefit. Any company improving its property — an office reconfiguring its space, a restaurant updating its dining area, a store modernizing its lighting — could get much more favorable tax treatment for its investment. 

But the statute had a drafting error; consequently, QIP was stuck with a 39-year recovery period, meaning taxpayers could not take the bonus depreciation and lost the economic boost Congress intended. 

Congress fixed the error earlier this year when it passed the CARES Act — the massive stimulus law in response to the pandemic — by qualifying QIP for the 15-year treatment and the relief was applied retroactively. 

"Folks can now apply that treatment all the way back to 2018,” Shevak said. “QIP that they placed in service in 2018 or 2019 is now given a 15-year recovery period, which would allow them to elect to take that 100% bonus depreciation."

That means you can go back into those previous filings and potentially get a refund.

Awareness of the correction varies. The original drafting mistake was nicknamed the "retail glitch," which may have led non-retail CFOs to downplay or overlook the subsequent change, Sharon Kay, partner, accounting methods and periods leader with Grant Thornton, said.

The correction applies much more broadly across all industries with real property and make qualifying improvements. "So, I think there's probably a lot of industries out there where they may not be aware that there is an opportunity to get this more favorable treatment for those qualifying improvements," Kay said. 

Ignoring change 'not an option'

The IRS has followed up on the revised legislation with guidance, most importantly Revenue Procedure 2020-25. 

Caleb Cordonnier, senior manager with Grant Thornton, said the procedure shows taxpayers can generally file amended returns or they can file a Form 3115 and change their accounting method to take advantage of the benefit.

Given the widespread pandemic-induced financial and operating disruptions, the accounting and tax staff at many organizations are likely to be running flat out already. If the amount of QIP an organization placed in service after 2017 is relatively small, a CFO might be tempted to ignore the new treatment.

Ignoring the correction, Cordonnier said, will likely result in a higher tax compliance burden. 

"It will be a favorable change whether you amend or you file," he said. "And the IRS has been very clear both in the formal procedure and in public speaking engagements that they don't believe doing nothing is an appropriate method of how to handle or not handle the change."

A potentially complex decision

The amend or file decision is more complex than it might appear. 

Connie Cheng Cunningham, tax managing director at BDO, says some firms will face fairly straightforward decisions. Others are still grappling with the interaction of this change with some of the other changes that were made as part of the CARES Act, such as the net operating loss (NOL) carryback and interest expense rules.

"We're seeing a ripple impact," Cunningham said, citing a hypothetical case in which a company made $400,000 worth of QIP investment during 2018. They already filed the 2018 return and treated the QIP as intended i.e., as 39-year property ineligible for immediate write-off.

"Now I'm in the middle of preparing my 2019 tax return," she said. "Should I try to correct what happened in 2018 with my 2019 return, or should I go back and amend my old 2018 return? Those decisions should be made in consideration of all the other provisions adjusted as part of CARES Act."

Cunningham doesn't see a one-size-fits-all answer for clients. Instead, she is advising clients to file return extensions to buy more time for analysis, and to model each option’s potential impact across the affected areas. “If I took option A versus option B, what does it do to all the other provisions that are touched by a depreciation of qualified improvement property and which gives the best outcome?” she asked.

Kay also cautions against making isolated QIP-treatment decisions, because claiming additional depreciation can impact numerous other tax provisions including local, state and international filings. Organizations with multiple locations and substantial QIP expenses could be dealing with large changes in depreciation costs that could potentially wipe out other favorable provisions. 

"You don't want to do that analysis in a vacuum or you could end up with some unintended consequences in other areas of tax," she says.