If you’re renovating a home, you’re probably wondering if the work qualifies as a qualified improvement property. If it does, that means you get to deduct bonus depreciation and other tax deductions on your taxes.
But what does that mean? And is roofing work considered a qualified improvement to a property?
Let’s find out!
What is a qualified improvement property (QIP)?
Qualified Improvement Property (QIP) is a tax classification that was created under the Tax Cuts and Jobs Act (TCJA) of 2017.
It refers to improvements made to the interior of nonresidential real property, such as a commercial building, that were made after the building was first placed in service.
Examples of QIP may include improvements to lighting, heating, air conditioning, security systems, or other building systems.
The QIP was originally intended to have a 15-year depreciation period, which would have made it eligible for bonus depreciation under the TCJA.
But because of a mistake in the writing, QIP was given a 39-year depreciation period, which meant it couldn’t get bonus depreciation.
This error was corrected by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, which retroactively assigned the QIP a 15-year depreciation period, making it eligible for bonus depreciation.
As a result, businesses that have made QIP investments since 2018 can now take advantage of the 100% bonus depreciation provisions of the TCJA.
What are the benefits of reroofing as a qualified improvement property?
Roofing improvements might qualify as Qualified Improvement Property (QIP), which would allow them to be depreciated 100% faster.
This means that the cost of the roofing improvement can be fully deducted in the first year it is placed in service, rather than depreciating over a longer period of time.
Before the Tax Cuts and Jobs Act (TCJA), roofing improvements would have fallen under the Qualified Retail Improvement Property (QRIP) or Qualified Leasehold Improvement (QLHI) categories, which allowed for a 15-year recovery period and 100-percent bonus depreciation.
However, the TCJA simplified these categories and moved them under the QIP umbrella.
Unfortunately, due to a drafting error, QIP was not included in the list of assets eligible for a 15-year recovery period and 100-percent Bonus Depreciation.
However, there is a possibility that Congress could pass a technical correction to fix this error in the future.
What are the steps on how to claim roofing as a QIP?
- Determine the total cost of the roofing project that you wish to claim as Qualified Improvement Property (QIP). This cost should only include the portion of the roofing that is considered an improvement to the building, such as the installation of a new roof, and not routine maintenance or repairs.
- Fill out Form 4562, Depreciation and Amortization, which is used to report the depreciation deduction for QIP.
- Deduct the total amount of the cost of the roofing project up to the maximum Section 179 deduction limit for the year. For tax year 2023, the maximum deduction limit is $1,160,000.
- Any cost of the roofing project that exceeds the Section 179 deduction limit can be depreciated over the useful life of the property.
- Include the total depreciation deduction for the roofing project on your business tax return, such as Form 1120 or Form 1065.
- Keep records of the cost of the roofing project and depreciation deduction taken for the useful life of the property.
How can I tell if my roof qualifies for bonus depreciation?
To determine if your roof qualifies for bonus depreciation, you will need to consider the type of expense incurred. Unfortunately, bonus depreciation only applies to assets with a useful life of 20 years or less, such as appliances.
Since a new roof expense on a rental property does not qualify for bonus depreciation, you will need to look at other tax deductions available.
However, roofs may still qualify for other types of tax deductions. According to the IRS, roofs are considered improvements to the building’s interior and can be claimed as Qualified Improvement Property (QIP) if they meet certain criteria.
QIP refers to any improvement made to a building’s interior, including its roofing, HVAC systems, fire protection systems, alarm systems, and security systems.
But improvements don’t count if they have to do with the building getting bigger, an elevator or escalator, or the building’s internal structure.
If the roofing expenses meet the QIP criteria, you may be eligible to deduct the costs over a period of time.
The Section 179 deduction allows businesses to deduct the full cost of qualifying property or assets in the year they were purchased, up to a certain limit.
What tax breaks are available for qualified real estate improvements?
For qualified improvement property, there are a few tax deductions available:
- Section 179 deduction: Under Section 179 of the tax code, businesses can deduct the full cost of qualified improvement property (including roofing) in the year it is placed in service. For tax year 2023, the maximum amount that can be expensed under Section 179 is $1,160,000.
- Bonus depreciation: While bonus depreciation does not apply to roofing qualified improvement property, it does apply to other types of qualified improvement property. If the improvement is eligible for bonus depreciation, businesses can deduct up to 100% of the cost of the improvement in the year it is placed in service.
- Depreciation: If the improvement does not qualify for Section 179 or bonus depreciation, it can be depreciated over a period of 27.5 years for residential roofs and 39 years for commercial roofs using the straight-line method.
What states allow for bonus depreciation of a roof?
Bonus depreciation is a federal tax provision, meaning it is available to taxpayers in all states that pay federal taxes.
However, some states do not conform to the federal tax code, which means they may not allow bonus depreciation or may have different rules for bonus depreciation.
It is important to check with your specific state’s tax code or consult with a tax professional to determine the availability and specific rules of bonus depreciation for roofing in your state.
How does bonus depreciation affect my state depreciation?
The treatment of bonus depreciation for state tax purposes varies by state. Some states conform to the federal tax code and adopt the bonus depreciation provisions, while others may decouple from it and have their own set of rules.
In states that conform to the federal tax code, bonus depreciation is generally allowed at the state level as well. This means that businesses can typically take advantage of the bonus depreciation deduction on their state tax returns in the same manner as they do on their federal tax returns.
However, in states that do not conform to the federal tax code or decouple from bonus depreciation, businesses may not be able to claim bonus depreciation on their state tax returns or may need to make adjustments to their state depreciation schedules.
It’s important to consult with a tax professional or review your state’s tax laws to determine how bonus depreciation may affect your state depreciation.
How do I calculate my depreciation deduction for Qualified Improvement Property that has a roof?
For residential property
- Determine the cost of the improvement, which includes the cost of labor, materials, and any additional expenses directly related to the improvement.
- Determine the recovery period of the property, which is 27.5 years for residential rental property.
- Use the straight-line depreciation method to calculate the annual depreciation deduction. To do this, divide the cost of the improvement by the recovery period.
For commercial property
- Determine the cost of the improvement, which includes the cost of labor, materials, and any additional expenses directly related to the improvement.
- Determine the recovery period of the property, which is 39 years for nonresidential real property.
- Use the Modified Accelerated Cost Recovery System (MACRS) to calculate the annual depreciation deduction. This method allows for greater depreciation deductions in the earlier years of ownership.
- Consult IRS Publication 946 for more detailed instructions and tables for calculating MACRS depreciation.
Can I use bonus depreciation for roof repairs or only for roof replacement?
Bonus depreciation can only be used for the improvement or replacement of a roof that meets the requirements for Qualified Improvement Property (QIP).
It is a tax provision that enables property owners to write off the cost of a capital improvement right away.
The Tax Cuts and Jobs Act of 2017 brought significant changes to depreciation rules, allowing real estate investors to expense 100% of specific capital improvement costs in the tax year they incurred.
Bonus depreciation can lower tax liability in the first year and even create a net loss for income tax purposes.
Nonetheless, it applies only to assets with a useful life of 20 years or less, including appliances.
Moreover, some improvements, such as a new roof, do not qualify for bonus depreciation because they have the same recovery period as the property itself, which is greater than 20 years.
What types of roofing materials qualify for bonus depreciation?
The type of roofing material does not determine whether it qualifies for bonus depreciation. What matters is whether the roofing expense meets the requirements of Qualified Improvement Property (QIP) as set by the IRS.
QIP refers to changes made to the inside of a commercial building, including the roof, that are not related to the building’s size, any elevators or escalators, or the building’s internal structure.
As long as the roofing expense meets these requirements and has a depreciable life of 20 years or less, it may be eligible for bonus depreciation.
What part of a roof is not part of a qualified improvement property?
According to the tax code, any improvements that enlarge the building, any improvements to the internal structural framework of the building, or any elevators or escalators installed in the building do not qualify as Qualified Improvement Property (QIP).
Therefore, any roofing improvements that are attributable to these factors would not be considered part of the QIP and would not be eligible for bonus depreciation.
Don’t forget about tax deductions for energy efficiency roofs
The tax deduction is called the Energy Efficient Commercial Building Deduction, also known as the Section 179D deduction.
To qualify for the deduction, the roofing material must meet certain energy efficiency standards set by the Department of Energy. These standards are based on the roof’s ability to reduce heat gain and improve energy efficiency.
Most of the time, the roof material must have a Solar Reflectance Index (SRI) of at least 70 for the deduction to apply.
The amount of the deduction is based on the energy savings achieved by the roofing material. The maximum deduction is $1.88 per square foot of the building’s gross floor area for improvements to the building envelope, including the roof.
Fortunately, bonus depreciation is being phased out
The clock is ticking for real estate investors looking to take advantage of the 100% bonus depreciation benefit.
While the Tax Cuts and Jobs Act of 2017 provided a generous tax break allowing immediate write-offs for capital improvements with a useful life of 20 years or less, this benefit is only effective until the end of the 2022 tax year.
After that, bonus depreciation will be gradually phased out over the next five years, with only 20% remaining by 2026 and none by 2027 and beyond.
As a result, investors who make improvements to their rental properties this year can deduct 100% of the cost. However, delaying these improvements could mean losing out on this valuable tax break.
So, it’s essential for property owners to act quickly to take advantage of the full bonus depreciation before it’s too late.
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