Note: As of the passing of the 2018 Tax Cuts & Jobs Act, much of the content of this article is no longer applicable.
As part of the Protecting Americans from Tax Hikes (PATH) Act of 2015, there were many changes that affected taxpayers. Lost in the excitement resulting from the extension of bonus depreciation through 2015 (gradual reduction from 50% through 2017, to 40% in 2018, and 30% in 2019), was the advent of a new class of nonresidential real property, qualified improvement property, which is now eligible for bonus depreciation irrespective of its recovery period for assets placed in service after 2015. That means that, unlike before, bonus depreciation can now be taken on certain real property improvements with recovery periods of 39 years.
What is qualified improvement property?
The “qualified improvement property” category of nonresidential real property replaced “qualified leasehold improvement property” in Congress’s definition of property that qualified for bonus depreciation. The new definition is much broader than its older version. The biggest difference is it is irrespective of the recovery period, as mentioned above. The second difference is that bonus depreciation can now be taken on items previously limited under the older definition, most notably:
- The improvement does not need to be pursuant to a lease
- The improvement need not be made after the building is 3 years old
- Improvements to common areas of the building may qualify
What’s the catch?
No catch, but there are exceptions, notably that qualified improvement property does not include:
- Expenditures attributable to the enlargement of a building
- Any elevator or escalator
- Internal structure of the building
Did the PATH Act affect the rules around 15-year real property?
Yes, in fact it did. The PATH Act of 2015 also permanently extended the option to treat the following three categories of qualified improvement property with a 15-year recovery period:
- Qualified leasehold improvement property – in not so many words, an improvement to the internal portion of a building (not a common area) by a lessee or lessor made three years after the building was placed in service
- Qualified retail improvement property – the same as qualified leasehold improvement property above, but it does not matter if the improvement is made pursuant to a lease
- Qualified restaurant property – an improvement to a restaurant, where improvements to the internal or external structure may qualify, the improvement does not need to be made to a building that has been in service more than 3 years, and the improvement does not need to be made pursuant to a lease
Can I take the Sec. 179 deduction on these assets?
The PATH Act of 2015 also permanently extended the $500,000 annual cap on the Sec. 179 deduction. You can take the Sec. 179 deduction on the 15-year real property noted above.
In conclusion…
Congress expanded the definition of qualified leasehold improvement property to “qualified improvement property”, allowing taxpayers to claim bonus depreciation where bonus depreciation was previously limited. The new definition allows bonus depreciation for 39-year nonresidential real property, as long as the property was placed in service after the building was originally placed in service, is original use property, and is not one of the exceptions noted above, providing a broader definition than previously. The PATH Act of 2015 also permanently extended the option to depreciate certain qualified improvement property with a 15-year recovery period and permanently extended the $500,000 annual cap on the Sec. 179 deduction.