CARES Act §2307 — QIP Technical Correction

Where this comes from

The Tax Cuts and Jobs Act of 2017 was designed to create a favorable 15-year classification for qualified improvement property. QIP is interior improvements to a nonresidential building made after the building was placed in service. Interior renovations to restaurants, retail stores, hotels, and offices were all supposed to write off in 15 years with 100 percent bonus.

But the bill had a drafting error. The provision that would have added QIP to the 15-year list in Section 168(e)(3)(E) was left out of the final text. When the law took effect for 2018, QIP defaulted to 39-year property. No bonus. No 15-year life. Just the slow, straight-line schedule.

Congress knew the fix was needed almost immediately. The CARES Act, signed March 27, 2020, included the correction as Section 2307.

What it established

Section 2307 amends three code sections. It adds qualified improvement property to the list of 15-year property in Section 168(e)(3)(E). It defines qualified improvement property in Section 168(e)(6) as any improvement to the interior of a nonresidential building made by the taxpayer after the building was first placed in service, excluding enlargements, elevators or escalators, and the internal structural framework. It also sets a 20-year ADS life in Section 168(g)(3)(B) for the alternative depreciation system.

The correction is retroactive. It applies to property placed in service after December 31, 2017. That means 2018 and 2019 improvements that were depreciated at 39 years under the broken rule are now eligible for the 15-year, bonus treatment.

How it shows up in a study

A cost segregation study on any commercial building where interior improvements were made after 2017 has three main fast-write-off categories to identify. Personal property under Section 1245 goes in the 5 or 7-year class. Land improvements go in the 15-year class. And qualified improvement property also goes in the 15-year class.

Section 2307 is the foundation for that third category. Without this statute, interior improvements that do not meet the stricter personal property test would default to 39 years. With it, those improvements have a meaningful fast path. At 15 years with 100 percent bonus, the full cost can be deducted in year one.

For improvements placed in service in 2018, 2019, or early 2020 that were treated as 39-year property before the fix, Revenue Procedure 2020-25 provides the procedure to correct the method and capture the catch-up depreciation.

What it does not mean

QIP does not include every interior improvement. The definition excludes enlargements of the building, elevators and escalators, and the internal structural framework. Work that expands the footprint or replaces structural elements does not qualify.

The section also does not guarantee 100 percent bonus on every improvement going forward. The bonus rate depends on the acquisition date and the applicable bonus rules in effect for that year. The CARES Act correction made QIP eligible, but the actual bonus percentage still tracks the rules in Section 168(k) for the year the property was placed in service.