Bridge West CannaBlog
“Tax Refund Opportunities for Qualified Improvement Property (QIP) Expenditures”
by Jim Marty, CEO, CVA, and Founder of Bridge West CPAs and Advisors to the Cannabis Industry and Corey Edmunds, Principal at Boeckermann Grafstrom & Mayer, CPAs and Advisors, and parent company of Bridge West.
In a series of sweeping legislative actions passed by Congress this spring in response to the COVID-19 pandemic, the 2020 Coronavirus Aid, Relief, and Economic Security Act (”CARES Act”) was signed into law on Mach 27, 2020, by President Trump. The CARES Act includes a provision that allows most businesses to claim 100% bonus depreciation for Qualified Improvement Property (QIP). This provision is retroactive, and it applies to any QIP placed in service after Dec. 31, 2017. QIP is defined as any improvement to an interior portion of a building that is nonresidential real property as long as the improvement is made after the building is first placed in service. However, improvements related to the enlargement of a building, an elevator or escalator, or the internal structural framework are outside of the definition of QIP.
When the 2017 Tax Cuts and Jobs Act (”TCJA”) was originally drafted, a general 15-year recovery period was intended for QIP so that these improvement costs would be eligible for 100% bonus depreciation. However, that specific recovery period was not reflected in the statutory language of the TCJA. Thus, under TCJA, QIP fell into the 39-year recovery period for nonresidential real property and was ineligible for 100% bonus depreciation. Under the CARES act, now QIP expenditures made for nonresidential building improvements can be written-off in the year the expenditures were made rather than over a 39-year period.
What does this mean for the cannabis industry?
For companies that grow and sell hemp, there is an immediate opportunity to claim additional bonus depreciation relating to QIP expenditures made in 2018 and 2019. Independent real estate lessors that lease space to cannabis companies should also be able to take advantage of immediate expensing of QIP expenditures. The present value of the net after-tax cash flows will be significant when taking 100% bonus in the current year compared to depreciating these expenditures over the next 39 years. Unfortunately, for companies that are subject to IRC Code Section 280E, the technical correction under the Cares Act does not result in an immediate tax savings as their expensing options are limited.
In any event, the bar is now raised for these lucrative expensing provisions and the cost of deferring these deductions over a 39-year period will result in the loss of immediate tax savings. We are hopeful to see a favorable court case or private letter ruling so that all cannabis companies can benefit from this great tax saving opportunity.
The IRS has provided several options to claim this benefit immediately so all qualifying businesses should review their 2018 and 2019 tax returns to see if there is an opportunity to expense these QIP expenditures and save tax dollars today.
In this ever-changing world of cannabis taxation, the Bridge West team understands the tax and accounting issues facing the industry. We are proud to provide the best possible solutions to our valued cannabis and hemp clients throughout the country.
If you have any questions and would like to learn more about any items in this article, please contact Jim Marty, CPA, CVA, the CEO and Founder of Bridge West at firstname.lastname@example.org or 303-651-0304 and Corey Edmunds, CPA, MBT, Principal of Boeckermann Grafstrom & Mayer, the parent company of Bridge West, at email@example.com or 651-287-6314. You can also contact us and schedule a call with a member of the Bridge West Leadership Team at your convenience.