Final Regulations on Bonus Depreciation

The IRS issued final regulations providing additional guidance on bonus depreciation under IRC section 168(k).  One of the notable guidance included in the regulations relates to the definition of qualified improvement property (QIP) eligible for the bonus depreciation.

Before the enactment of the CARES Act, QIP placed in service after December 31, 2017 was depreciated over 39 years and the property was not eligible for an immediate deduction.  However, the CARES Act retroactively changed the recovery period for QIP from 39 to 15 years, which made QIP eligible for bonus depreciation through 2026.

The regulations define QIP as any improvement to a building’s interior that are made by the taxpayer. An improvement is made by the taxpayer if the taxpayer makes, manufactures, constructs, or produces the improvement for itself or if the improvement is made, manufactured, constructed, or produced for the taxpayer by another person under a written contact.  However, improvements do not qualify for bonus depreciation if they are attributable to the enlargement of the buildings, any elevator or escalator or the internal structural framework of the building.

The regulations provide a helpful tool to manage cash tax obligations for many of the taxpayers struggling to survive through the Pandemic.