Rev. Proc. 2020-25 (QIP Catch-Up)

The facts

CARES Act section 2307 retroactively fixed the TCJA drafting error that had left qualified improvement property (QIP) classified as 39-year nonresidential real property. This procedure tells taxpayers how to claim the corrected depreciation.

What it holds

Confirms QIP placed in service after December 31, 2017 is 15-year MACRS property (straight-line) with a 20-year ADS recovery period, and is bonus-eligible when the section 168(k) and Reg. 1.168(k)-2 requirements are met. For tax years ending in 2018, 2019, or 2020 it allowed the catch-up by amended return or AAR (time-limited window) or by automatic Form 3115 method change, and allowed late elections, revocations, or withdrawals under sections 168(g)(7), (k)(5), (k)(7), and (k)(10).

Background

The 2017 tax law meant to give interior improvements to nonresidential buildings, called QIP, a 15-year life and bonus eligibility. But the final text left QIP out of the 15-year list. That made it 39-year nonresidential real property and killed bonus on it. The mistake became known as the retail glitch.

CARES Act section 2307 fixed the error in 2020, retroactive to property placed in service after December 31, 2017. A retroactive statute creates a practical problem: thousands of returns had already been filed using 39 years. This procedure is the IRS's instruction manual for claiming the corrected depreciation.

What it established

First it confirms the corrected law: QIP placed in service after December 31, 2017 is 15-year MACRS property using straight-line, carries a 20-year ADS recovery period, and is bonus-eligible when the section 168(k) and Reg. 1.168(k)-2 requirements are met.

Then it opens the procedural paths for tax years ending in 2018, 2019, or 2020. Owners could amend the return (or file an AAR for partnerships) within a time-limited window, or file an automatic Form 3115 method change and take the catch-up in the current year. It also let taxpayers make, revoke, or withdraw certain depreciation elections late: the ADS election under 168(g)(7) and the bonus elections under 168(k)(5), (k)(7), and (k)(10).

How it shows up in a study

Any lookback study touching a 2018-or-later renovation of a commercial building checks for QIP that was booked at 39 years. The fix recovers two layers at once: the shorter 15-year life, and bonus depreciation on the QIP if the bonus requirements were met in the placed-in-service year.

Because the amended-return window this procedure opened has closed, the catch-up now runs through Form 3115. The study supplies the reclassification detail and the recomputed depreciation; the section 481(a) adjustment delivers the missed deductions on the current return. This procedure is the cited authority for why that change qualifies as automatic.

What it does not mean

QIP is a nonresidential concept. This procedure does not give 15-year treatment to interior improvements in residential rental buildings. And not every interior dollar is QIP: costs attributable to enlarging the building, to elevators or escalators, or to the internal structural framework are excluded by the statute.

It also is not an open amendment window today. The amended-return and AAR options were time-limited relief for 2018 through 2020 years. The live path now is the method change, with its own procedural requirements.

Category

Bonus depreciation & expensing

Applies to

Commercial, Office, Retail, Restaurant

Status

Vetted

This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.