The Emergency Economic Stabilization Act, QLI and the QRI Twins
 
Written by: Steven D. Beaucaire, MST
Director - Tax | Bedford Cost Segregation, LLC

Qualified Leasehold Improvement (QLI) recently made the news, as it was extended retroactively from December 31, 2007 to December 31, 2009, by the Emergency Economic Stabilization Act of 2008. Along with QLI are the QRI twins. Qualified Restaurant Improvement (Code Sec.168(e)(7)) is back again, and Qualified Retail Improvement (Code Sec.168(e)(8)) is brand new tax law. For that reason, it makes sense to take a look at what has changed and what has remained the same.

QLI refers to improvements made to the interior portion of a building that is nonresidential real property. Here the benefits remain the same as do the requirements. The improvement must be made pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service. It is not when the current owner purchased the building. Qualified leasehold improvement property does not include any improvement that is attributable to an addition to the building, an elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building.

As it was before, QLI applies to improvements on interior, nonstructural property. Some examples are electrical or plumbing systems (including a sprinkler system), permanently installed lighting fixtures, heating equipment, cooling equipment, air conditioners, and other air handling equipment, windows, ceilings and doors. Note that none of these assets are a part of the internal structural framework of a building, a term defined by the rehabilitation-credit Regulations (Reg. § 1.48-12(b)(3)(iii)) to include all load-bearing internal walls and any other internal structural supports, including the columns, girders, beams, trusses, spandrels, and all other members that are essential to the stability of the building.

As was for property placed in service after October 22, 2004 and before December 31, 2007, the tax treatment was changed to straight-line depreciation over 15-years. The taxpayer gets a shorter life but no bonus depreciation except for 2008. Unfortunately bonus depreciation has not yet been extended into 2009 or beyond.

The Emergency Economic Stabilization Act of 2008 also added a statutory 15-year recovery period for qualified restaurant property (QRI) placed in service after December 31, 2008 and before January 1, 2010 (Code Sec. 168(e)(3)(E)(v)), thus leaving a one year gap since it was last in place. QRI, which must be recovered using the straight-line method, is any improvement to a building if the improvement is placed in service more than three years after the date the building was first placed in service and more than 50% of the building's square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. The restrictions as to structural components are similar to the QLI rules and apply here as well. However, unlike the QLI, there is no requirement for there to be a lease so the more common situation of direct ownership would qualify for QRI.

The other QRI, Qualified Retail Improvements, is a new addition to the tax code. It too is similar to the QLI but only applies to nonresidential retail property, applies only to that portion accessible to the general public, and must be placed-in-service more than three years after the building was first placed-in-service. Similar to its brother, QRI for restaurant improvements, no lease is required. If the improvements are made by the owner of the property, then they shall receive QRI treatment only as long as they are owned by said owner. The QRI status is not transferable unless it is done in a tax free transaction. The Qualified Retail Improvements do not include an addition to the building, any elevator or escalator, or any structural component. QRI property is specifically excluded from bonus depreciation.

The Emergency Economic Stabilization Act of 2008 has revived some very beneficial tax law for the business community at a very critical time in America. With the exclusion of structural property improvements in all three tax laws, it is important that the taxpayer differentiate these costs. An engineering-based cost segregation study is the perfect tool to provide the detailed analysis required. This allows you to save your clients’ (or your) money even if you aren’t going to be a recipient of the bail-out billions.