Qualified Improvement Property has had a tumultuous time these past few years. The Tax Cuts and Jobs Act of 2017 sent QIPs back a few steps via an accidental technicality, and it has taken years for this to be rectified. These solutions came at the heels of a concerted effort by commercial real estate organizations to fix it, and the technical trouble that plagued people’s taxes were closed in the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
Qualified Improvement Properties are a classification of property defined by improvements made to the interior of a nonresidential property after the building has been put into service. They allow for the taxpayer to deduct the cost of any tax code section 179 property (such as business machinery and computers) the year it was put into service.
These improvements can be deducted from taxes during depreciation to help offset the cost of improvement. This encourages upgrading systems and enables increased efficiency as better technologies become available. The deduction applies to everything from HVAC and fire protection systems to roof, alarm, security, and lighting upgrades.
There are exclusions to this, such as building enlargements, elevators, escalators, and structural framework. The deduction only applies to improvements put into service after September 27th, 2017 and prior to January 1st, 2023.
Under prior tax codes, a purchase was depreciated over 39-years. This period was viewed by the United States government as the lifespan for the object, but many technologies change significantly over the course of 39-years.
The CARES Act changed the depreciation time from 39 to 15-years. As always, there are exceptions; computers depreciate fully after 3-years, and products with an advanced depreciation schedule may be depreciated over 10-years instead of 15. These objects can also be depreciated under an accelerated depreciation schedule, wherein a large percentage of the cost is deducted in the first year, then smaller amounts in the following years, such as 40-percent the first year then 10-percent the following three years.
HVAC Chillers and lighting systems are prime examples of this, both have made great strides in efficiency and environmental impact the past few years, but the cost to upgrade these systems can be staggering. With QIP, especially under an accelerated schedule, an upgrade in lighting or chillers can be deducted from your taxes at a much higher rate, up to 100-percent for the first year in some cases.
Commercial real estate organization like the Real Estate Roundtable and the Building Owners and Managers Association (BOMA) pushed hard for a legislative fix to the accidental rollback from 15-years to 39-years that occurred in the 2017 Tax Cuts and Jobs Act.
There were social media campaigns, constituents sent letters and made calls to their elected officials. Leaders in the CRE industry even met with legislators directly to rectify the changes made in 2017. All of these actions cumulated into the successful passage and adoption of legislation fixing the issue and improving QIP incentives.
These efforts will continue as there are still improvements to be made. The Energy Efficient Qualified Improvement Property Act of 2021 (E-QUIP Act) and improvements to the 179D tax deduction are promising incentives for upgrading to sustainable systems. The changes to leasehold depreciation help significantly in incentivizing efficient and more cost-effective upgrades, but there is always room for improvement.
To stay up to date on news and resources such as this and other topics of importance to the real estate industry, subscribe to the free CRE Insight Journal Newsletter using this link.
Don Davis Esq., Vice President of Government Affairs, Building Owners and Managers Association International
New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act | Internal Revenue Service (irs.gov)
Get the latest content delivered straight to your inbox.