After the Tax Cuts and Jobs Act (TCJA) of 2017 brought some unintended consequences to the tax treatment of qualified improvement property, a long-awaited change has come that could provide an immediate cash flow opportunity for restaurants, bars and the hospitality industry as a whole. Businesses that have made any qualified improvements such as ceilings, installation of drywall, interior doors, electrical or plumbing during the last two years can benefit from a technical correction made by the Coronavirus Aid, Relief and Economic Security (CARES) Act.
While the pandemic has had a particularly difficult effect on those in the restaurant and hospitality industry, this new tax savings opportunity could go a long way in helping those within the industry recoup some of the income lost during this time.
Bonus Depreciation Eligibility
Before COVID-19, many restaurants, breweries and bars made improvements to their nonresidential buildings during the last couple of years, such as updating a lobby, kitchen, or distillery. Whether these improvements were remodels, new signage or drive thru windows, these large expenditures were most likely then met with a much higher tax liability than anticipated for 2018 and 2019. The CARES Act provided a technical correction that most have been waiting for since the end of 2017. The CARES Act treats Qualified Improvement Property (QIP) as 15-year property, resulting in taxpayers being eligible to take 100% bonus depreciation on QIP rather than the previously stated depreciation over 39 years. This change is retroactive to January 2018.
Taking Advantage of the New QIP Rules and Retroactive Benefits
It’s important for restaurants and all businesses who have yet to file their 2019 return to re-evaluate all potential QIP for this tax saving opportunity.
Taxpayers who have filed their 2018 and/or 2019 tax returns, and had placed QIP in service, may consider amending their 2018/2019 return to treat any QIP as 15-year property and eligible for bonus depreciation. Another option to filing an amended return, taxpayers may consider filing Form 3115, Application for Change in Accounting Method, with their 2019 tax return (if not yet filed) or their 2020 tax return and claim the previously missed depreciation as a 481(a) adjustment. This change in accounting method will allow taxpayers to “catch up” all missed QIP depreciation from the beginning of 2018 to current.
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