Restaurant Tax Update: Qualified Improvement Property (QIP) Changes under TCJA
posted Jun 25, 2019 by Leigea Landry, CPA, MST in the Restaurateur Blog
As we mention in our blog, Bonus Depreciation: How Building Improvements Fell through the Cracks improvements placed in service in 2018 must be depreciated over a 39 year life without bonus depreciation, due to a drafting error in the Tax Cuts and Jobs Act (TCJA). If this has increased your tax bill, there are workarounds that can help mitigate the impact going forward.
What exactly is qualified improvement property tax treatment?
Let’s say that your restaurant has endured significant wear and tear over the years, and needs physical improvements to bolster business. There is something called qualified improvement property (QIP) tax treatment which allows businesses to immediately write off investments to interior improvements.
QIP includes any improvement to a building’s interior.
Improvements do not qualify for QIP tax treatment if they are attributable to:
- The enlargement of the building
- Any elevator or escalator
- The structural framework of the building
- Under prior guidance, improvements to qualified leasehold property, qualified restaurant property and qualified retail property qualified for a 15 year cost recovery period and 50% bonus depreciation.
More about the TCJA drafting error
Through the TCJA, Congress intended to consolidate the various forms of improvement property into one comprehensive QIP category with a 15 year recovery period, with such property being eligible for 100% bonus depreciation. Due to a drafting error, interior improvements placed in service in 2018 must be depreciated over a 39 year life without bonus depreciation. Congress has yet to tackle this “retail glitch” which has had a significant impact on retailers and restaurants.
In late March, the House of Representatives introduced the Restoring Investment in Improvements Act to address the glitch, but it did not receive bipartisan support.
How can restaurants cope with this setback?
Cost Segregation Study
Restaurant owners who’ve invested in qualified improvement property might consider a cost segregation study to address the setback. Cost segregation reclassifies assets to maximize personal property and optimize depreciation deductions. With restaurants, a cost seg study can analyze construction costs to identify portions that can be written off quickly for tax purposes. When you separate QIP from other types of property, you can still qualify for some bonus depreciation.
Remodel-refresh safe harbor
Another alternative is the remodel-refresh safe harbor method. Under IRS Revenue Procedure 2015-56, 75% of improvements costs can be immediately expensed, with the remaining 25% depreciated over 39 years. Luckily, restaurants do not have to spend time determining whether a cost is a repair (eligible for immediate tax expense) or a capitalized asset (depreciated over 39 years) since this is a safe harbor. 75% of costs can be immediately deducted regardless.
When do you have to adopt the safe harbor?
Restaurants who extended their 2018 tax returns have until the extended due date to adopt the safe harbor method for this tax year (September 16th for pass-through entities and October 15th for corporations). Restaurants must have audited financial statements to adopt the safe harbor.
What can be done for businesses without audited financial statements?
For smaller restaurants with unaudited financial statements, an election to expense interior work may still be an option. Unfortunately, exterior work does not qualify as QIP-eligible for this election.
Need help assessing your options? Our Hospitality Services Team can help—contact us today.