The COVID-19 crisis currently coloring all aspects of our lives has even led to considerations related to the tax deductibility of fixed asset transactions. Here are some planning opportunities to consider that can provide businesses with financial benefit.
The 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. In part, the CARES Act corrects the 2017 Tax Cuts and Jobs Act drafting error related to the depreciation of qualified improvement property or QIP. The original act, with the drafting error, required QIP to be deducted over 39 years. With the correction, most businesses are now allowed to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. Additionally, the correction is retroactive, and reaches back to apply to any QIP placed in service after December 31, 2017.
Qualified improvement property is defined as any building improvement to an interior portion of nonresidential real property, if such improvement is placed in service after the building was initially placed in service. QIP specifically excludes expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
The retroactive effect of the CARES Act even presents opportunities for qualifying expenditures from past years. Large expenditures made in 2018 and/or 2019 may now be eligible for bonus depreciation.
COVID-19 may cause your business to incur significant expenditures to comply with various health orders and best practices to keep employees safe. These expenditures may be deductible immediately and may not need to be capitalized. Keeping a separate general ledger account for COVID-19 compliant expenditures may be advisable in order to quantify and track the amounts as non-recurring.
The changes to facilities required to be COVID-19 compliant may render existing facilities obsolete or no longer suitable for the new business environment. Some or all of these facilities may be retired with a deduction available for any remaining net book value.
As always, please reach out to us in order to determine your best course of action.