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Real Estate Journal — Fall Preview — September 29 - October 12, 2017 — 13C
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By Bruce A. Johnson, MBA, CEM, Capstan Tax Strategies Timing is Everything: New Rev. Proc. clarifies timeline regarding QIP eligibility Q ualified I mprovement P roperty
Q
ualified Improvement Property (QIP) has been the buzzword of
and qualify for QIP. Rev. Proc. 2017-33 confirms that this is indeed the case. Example 2 on page 14 of the Rev. Proc states as follows: In 2015, C, a corporation and manufacturer, enters into a written contract with X for X to construct a new building for use by C in its trade or business. The building will house a man- ufacturing operation and office space. The initial construction plans did not include a private restroom for the owner of C. During the construction of the building, C enters into a writ- ten contract with Y to construct a private restroom in the new
building for the owner of C. On May 27, 2016, C places in service the building, except for the private restroom. On May 28, 2016, the private restroom in the building for the owner of C is placed in service. Because the building is first placed in service on May 27, 2016, and the private restroom is placed in service on May 28, 2016, the assets in the private restroom that are § 1250 property are qualified improvement prop- erty, assuming all other re- quirements in § 168(k)(3) and § 1.168(k)-1(c), taking into account section 4.02(3) of this revenue procedure, are met.
This clarification of the “one day after” in-service position should remove any uncertainty in practice that practitioners are “playing fast and loose” with the rules. The Rev. Proc. then goes on to indicate that an improve- ment made under an amend- ment to the existing contract may be QIP-eligible as long as it is placed-in-service at least one day after the building was placed-in-service. In short, it doesn’t matter if the improve- ment was performed under a separate contract with a third party, or if there was an amend- ment to the existing construc-
tion contract with the building’s contractor – as long as there is at least one day between the improvement in question be- ing placed-in-service and the building having been placed- in-service, QIP is on the table, and the implications could be significant. Bruce A. Johnson, MBA, CEM is a co-founder and partner at Capstan Tax Strategies. Bruce works closely with commercial real estate owners and ac- counting firms to provide practical, creative, and cus- tomized engineering-based tax solutions. n
the season in the com- mercial real estate indus- try. This new classification of building i m p r o v e - ments is the key to lucra-
BruceA. Johnson
tive bonus depreciation, and doesn’t have to be made subject to a lease like Qualified Lease- hold Improvements. Plus, the definition of QIP is quite broad — almost any improvement to an interior portion of a build- ing which is nonresidential real property can be considered QIP, as long as the improve- ment was placed-in-service after the date the building was first placed-in-service. The timing is admittedly, a bit unclear. The PATH Act stressed that QIP isn’t sub- ject to the “three-year rule” that constricts several other property types. As such, we know that the building does not need to have been placed- in-service at least three years before the improvement. But what kind of “waiting period” is required then? In order for an improvement to qualify as QIP, precisely how long does the building have to be in- service before the improvement is placed-in-service? The IRS recently released Rev. Proc. 2017-33 which clari- fies this matter. Since the exclusion of a holding period seemed purposeful, many sur- mised that there simply was no holding period – that an item could be placed-in-service as soon as one day after the building was placed-in-service A complete risk management program includes determining digital assets such as NPI on clients, analyzing the threats represented by each, develop- ing an appropriate security program for each threat within the company size and ability, monitoring and reporting. Implementing a comprehen- sive risk management program takes a considerable amount of time and resources. To reduce your vulnerability immedi- ately, consider taking these measures: • Teach staff how to spot continued from page 9C continued on page 20C MatthewCohen, Esq.
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