Bonus Depreciation Opportunity for Qualifying Improvement Property Placed in Service Before December 31, 2017

The 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA), eliminated classifications for qualified leasehold improvement property (QLIP), qualified retail improvement property (QRIP), and qualified restaurant property (QRP). It also retained the classification for qualified improvement property (QIP) with the apparent intention of reducing the recovery period for QIP from 39 years to 15 years—the recovery period used by the eliminated classifications.

At the same time, Congress removed QIP from the definition of qualified property for bonus depreciation purposes under the notion that it would retain its eligibility because of the intended 15-year recovery period. However, the end result doesn’t match the intention as described. Therefore, as of January 1, 2018, QIP is no longer eligible for bonus depreciation and still has a 39-year recovery period.

Organizations with improvements placed into service before December 31, 2017, still have a window of opportunity to claim bonus depreciation for QIP, though. The rate of bonus depreciation will depend on whether or not a binding contract was in place before September 28, 2017.


The changes to QIP are the result of an apparent oversight by the law’s drafters in translating the congressional intent as described in the Conference Agreement accompanying the TCJA into the final statute. The Conference Agreement proposed that the newly consolidated QIP would be classified as 15-year property under Section 168(e) and, therefore, would qualify for bonus depreciation under Section 168(k) because it would satisfy the requirement of having a 20-year recovery period or less.

However, the final statute didn’t define QIP as 15-year property, so it defaults to the standard treatment for nonresidential real property requiring a 39-year recovery period. Because it was intended to be classified as 15-year property, the drafters eliminated the specific provision in Section 168(k) that previously granted QIP eligibility for bonus depreciation as part of their changes to that section of the tax law.

There’s a possibility this could be revisited in the future in the form of a technical correction to the statute, but, as of now, QIP continues to be 39-year property and is ineligible for bonus depreciation if placed in service after December 31, 2017.

Improvement Property Placed in Service Before 2018

While the changes to bonus depreciation are effective retroactively for property acquired and placed in service after September 27, 2017, the changes impacting the classification of QIP as well as the elimination of QLIP, QRP, and QRIP come into play for property placed in service after December 31, 2017.

Because the effective dates are different, it’s been unclear how the bonus depreciation provisions for the properties previously eligible for bonus depreciation—QLIP, QRIP, and QIP—were impacted for property placed in service after September 27, 2017, but before January 1, 2018.

On February 9, 2018, government officials spoke at the American Bar Association’s Section of Taxation and stated that taxpayers will be allowed to apply bonus depreciation on QIP, QLIP, and QRIP placed into service on or before December 31, 2017, because the classifications remain in existence through year-end.

Binding Contract Considerations

The rate of depreciation—specifically, if property placed in service after September 27, 2017, will be eligible for the increased 100% bonus depreciation provision—will depend on when the binding contract was established. Careful consideration needs to be taken to determine if a binding contract for such property was in place as of September 28, 2017.

A binding contract is determined to be in place when physical work of a significant nature begins. The establishment of a binding contract at September 28, 2017, may result in applying 50% bonus depreciation permitted under pre-TCJA law rather than the expanded 100% bonus depreciation provision allowed by the TCJA.

However, there’s a safe harbor that will allow the taxpayer to use the TCJA’s new bonus depreciation rules of 100% if less than 10% of the hard constructions costs were incurred prior to September 28, 2017.


Here’s a quick overview of the rules for qualifying improvement property:

  • Absent action by Congress to change the final statute, QIP retains its 39-year recovery period and QIP property placed into service after December 31, 2017, is no longer eligible for bonus depreciation.
  • QIP that’s placed in service on or before December 31, 2017, and also meets the requirements for QLIP, QRIP, or QRP is eligible for the 15-year recovery period permitted for such classifications.
  • The prior PATH Act bonus depreciation rate of 50% may still apply to QIP, QLIP, and QRIP acquired before September 28, 2017, and placed in service after September 27, 2017, but before January 1, 2018, if a binding contract is in place as of September 28, 2017.
  • If no binding contract is in place prior to September 28, 2017, an eligible improvement may qualify for 100% bonus depreciation under the TCJA.

We’re Here to Help

For more information on how the new tax law could affect you and your business or if you’d like help examining your organization’s binding contracts, contact your Moss Adams professional or email You can also visit our tangible asset incentive services page and our dedicated tax reform page to learn more.

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