Qualified improvement property, and why inherited schedules disagree about it

An inherited fixed asset schedule lists an interior build-out placed in service in 2018, carrying a 39-year life.

Two doors down on the same schedule, a nearly identical build-out from 2021 carries 15 years.

Neither is a typing mistake. Both were correct statements of the law at some point, and whether the first one is still correct depends on something that is not printed anywhere on the page.

What qualified improvement property is

QIP is an improvement made by the taxpayer to an interior portion of a nonresidential building, placed in service after the date the building itself was first placed in service.

Three things are carved out of that definition, and they are the reason a build-out is often part QIP and part something else:

• enlargement of the building
• any elevator or escalator
• the internal structural framework of the building

So a project that adds square footage, touches the frame, or includes lift work splits: the qualifying interior work is QIP, the rest is not. That split happens at classification time, on somebody's working papers, and the depreciation schedule records only the result.

QIP replaced an older set of categories — qualified leasehold improvement, qualified restaurant and qualified retail improvement property — which is why schedules that span enough years carry descriptions using vocabulary that no longer corresponds to anything current.

The life that changed after the fact

The 2017 legislation was written to give QIP a 15-year recovery period, which would also have made it eligible for the special depreciation allowance. The enacted text did not assign the period. Without an assignment, QIP fell to 39 years as nonresidential real property, and 39-year property is not bonus-eligible.

The gap was widely understood to be a drafting error, and it stood for over two years. Returns were filed on the law as written.

The CARES Act corrected it in March 2020, retroactively to property placed in service after 31 December 2017 — QIP is 15-year property under GDS, 20-year under ADS, and eligible for bonus.

That retroactivity is the whole problem for anyone reading an old schedule. Assets placed in service in 2018 and 2019 were originally set up at 39 years correctly, became 15-year property by later legislation, and were then corrected by some firms and not others.

Why two schedules for similar assets can both look right

The correction was not automatic and it was not universal. A firm had to notice, decide, and act, and the routes available differed by year and by entity.

The practical result is that a schedule prepared today can contain any of the following, all sitting in the same asset list:

A 2018 improvement at 39 years, never revisited. The original treatment, left in place.

A 2018 improvement at 15 years, with prior depreciation reflecting the correction. Corrected, with the catch-up already in the history.

A 2018 improvement at 15 years with prior depreciation that still reflects 39-year amounts. A life changed in the software without the accumulated figure being reconciled to it — internally inconsistent, and it foots against the schedule's own totals regardless.

A 2020 or later improvement at 15 years. Never in doubt.

Only the third of those is unambiguously wrong on its face, and it is the one a tie-out cannot catch, because the printed subtotals were computed from the same figures. Reading the life against the in-service date and against the accumulated amount is a separate act from checking the arithmetic.

Whether an asset that was never corrected should be is a determination about that client's facts and filing history, and the routes for changing it run through a method change and a §481(a) adjustment rather than through editing the life and carrying on.

What the 15-year answer brings with it

Bonus eligibility, and a consequence at disposal. QIP became bonus-eligible with the correction, and bonus is depreciation allowed. Claiming it on a 15-year improvement puts total depreciation above what straight line would have produced, which creates additional depreciation — and QIP is §1250 property, so that excess is recaptured as ordinary income on disposal. The usual comfort that §1250 recapture is zero for post-1986 real property does not hold for a QIP asset with bonus on it.

An ADS branch. A real property trade or business that elected out of the interest limitation under §163(j) must use ADS for its QIP, which is a 20-year life and not bonus-eligible. An election made years ago by a different firm is therefore a fact that explains a life you might otherwise read as an error.

That second point is worth holding before concluding anything about a schedule that shows 20-year improvement assets.

Reading an inherited schedule for it

Compare life against in-service date. Improvement assets from 2018 and 2019 are where the divergence lives. Assets from 2020 onwards were set up under the corrected law.

Read the description vocabulary. Suites and preparers name these assets inconsistently — QIP, leasehold improvements, tenant improvements, build-out — and older files carry the retired qualified-leasehold and qualified-restaurant categories. The name does not settle the classification; it only tells you what somebody called it.

Check the accumulated figure against the life. An asset showing a 15-year life with prior depreciation that corresponds to 39-year amounts is the inconsistency worth finding, and it is invisible to a totals check.

Note what the page does not say. Whether bonus was claimed on a QIP asset determines the §1250 position on disposal, and a schedule that prints one combined prior depreciation figure without separating the special depreciation allowance does not answer it. That component has to come from the prior firm's file or from the year's Form 4562.

What we do with it

The conversion transcribes what the schedule printed. A 39-year life on a 2018 improvement is carried across as 39 years, because that is what the document says, and correcting it is a determination the tool has no business making.

What the tool does instead is refuse to invent. A field the page does not print — a convention, a bonus component, a state treatment — comes back empty and flagged rather than filled, and the flag blocks the download until a preparer resolves it. The totals must tie before any of it is downloadable, so the figures you go on to question are the figures the prior firm actually recorded.

Inconsistencies of the kind above are exactly why the reconciliation screen shows every row rather than a summary: the arithmetic can be right while a life is wrong, and only a person can see the second. Getting there is the prior year depreciation schedule for a new client.

FAQ

What is qualified improvement property?

An improvement made by the taxpayer to an interior portion of a nonresidential building, placed in service after the building was first placed in service. Enlargements, elevators and escalators, and the internal structural framework are excluded.

Why do some 2018 improvements show a 39-year life?

The 2017 legislation did not assign QIP a recovery period, so it defaulted to 39 years as nonresidential real property and was not bonus-eligible. The CARES Act assigned 15 years retroactively in March 2020, but returns filed before then reflected the law as enacted.

Is QIP eligible for bonus depreciation?

Under GDS at 15 years, yes, following the retroactive correction. QIP depreciated under ADS at 20 years — required where a real property trade or business elected out of the §163(j) interest limitation — is not.

Does bonus on QIP create §1250 recapture?

It can. Bonus is depreciation allowed, so claiming it puts total depreciation above the straight-line amount, and that excess is additional depreciation recaptured as ordinary income on disposal of §1250 property.

How do I tell whether an inherited QIP asset was ever corrected?

Compare the life against the in-service date, then compare the accumulated depreciation against both. A 15-year life carrying accumulated amounts consistent with 39-year depreciation indicates a life edited without the history being reconciled.

Can the life just be changed going forward?

Changing a recovery period that has been used on two or more consecutively filed returns is a change in method of accounting rather than an edit, and it carries a §481(a) adjustment for the cumulative difference.