Cost Segregation Studies Now Crucial to Take Full Advantage of Additional Bonus Depreciation Benefits

When the CARES act was passed in March of 2020, the benefit of a cost segregation study increased significantly.

Prior to the passage of the CARES Act, improvements to the interior portion of a nonresidential building (known as qualified improvement property) were required to be depreciated over 39 years.
Under the new law, businesses may take advantage of bonus depreciation on property acquired and placed in service after September 27, 2017 and before January 1, 2023. Previously, only owners and investors who constructed or purchased new property were able to benefit from bonus depreciation. This is a significant and favorable benefit for owners/purchasers of used property.
Qualified property, also known as Section 1245 property, is defined as tangible personal property with a recovery period of 20 years or less and includes property that is commonly depreciated over a period of 5, 7 or 15 years. Properties with components that fall into this category will be greatest beneficiaries of the new law.
However, because of the now well know “retail glitch” the TCJA did not specify a useful life for QIP placed in service after December 31, 2017. As a result, following the enactment of the TCJA, QIP was classified as nonresidential real property with a useful life of 39 years, and not eligible for bonus depreciation.
The CARES Act corrected TCJA glitch by including QIP as 15-year property retroactive to the enactment of the TCJA. This allows taxpayers to depreciate QIP over 15 years instead of 39 years. Not only does that provide a much shorter depreciation period, it allows the improvements to qualify for 100% bonus depreciation if placed in service by the Taxpayer after December 31, 2017.

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