Bonus Depreciation in a Post-Tax Cuts and Jobs Act World

Updated following the 2020 CARES Act: The CARES Act corrected the technical glitch that had prevented QIP from being eligible for bonus depreciation. Following the CARES Act, QIP is eligible for 100% bonus depreciation.

Back in 2016 I published an article (this one) detailing changes to Qualified Improvement Property (QIP) and associated depreciation methods via the PATH Act. When the Tax Cuts and Jobs Act (“TCJA”) was signed into law, there were many changes that ensued. Among the biggest were the changes the TCJA made to depreciation.

Bonus Depreciation

The first big change was to Bonus Depreciation. Prior to the TCJA, the PATH Act allowed 50% bonus depreciation on eligible items. This allowed business owners to take a tax deduction for half of the cost they paid for certain equipment purchases in the year of purchase instead of having to spread the cost over the whole life of the asset. The TCJA increased bonus depreciation to 100% for eligible property placed in service between 9/28/17 and 12/31/22. After 2022, bonus rates will gradually decline. Additionally, the 100% deduction is now allowed for not just new property, but for used qualifying property as well.

9/28/17 is a critical date, as it is used to determine whether PATH rules or TCJA rules apply. Written binding contracts entered into – or substantial construction completed – before 9/28/17 follows PATH Act rules. Contracts entered into after 9/28/17 are subject to TCJA rules.

Qualified Improvement Property

Prior to the TCJA, Qualified Improvement Property (QIP) was split into three sub-categories (Qualified Leasehold Improvements, Qualified Restaurant Improvements, and Qualified Retail Improvements), with different rules for each. The TCJA replaces the sub-categories and redefines QIP as: any improvement to an interior portion of a building which isnonresidential real property, if the improvement is placed-in-service after the date the building was first placed-in-service by any taxpayer.

Are there improvements that are specifically not eligible under QIP?

As was the case with the PATH Act, the following improvements are not eligible under QIP:

1.      A building’s enlargement

2.      Any elevator or escalator

3.      Internal structure of the building

So… 100% Bonus, huh? Can I Bonus QIP?

As part of the PATH Act, QIP was considered 15-year property and was bonus-eligible if it fit into one of the three sub-categories noted above. QIP, under the TCJA, was intended to have a 15-year SL recovery period and be bonus eligible… but because of a drafting error, it wasn’t included in the law. As such, QIP placed-in-service after 12/31/17 is 39-year, and as such is not eligible for bonus depreciation. As of this time, there hasn’t been a technical correction made to fix this, but you can bet we’ll keep an eye on it. Note – This technical error was corrected in the 2020 CARES Act and as such, QIP is now eligible for bonus depreciation.

What effect did TCJA have on Section 179 Depreciation?

Effective 1/1/2018, the TCJA expanded the definition of qualified real property eligible for section 179 expensing to include:

  • QIP
  • Roofs
  • HVAC
  • Fire protection and alarm systems
  • Security systems

The TCJA also:

  • Doubled the $ limitation of Section 179 expense from $500k to $1 million
  • Increased the annual phase-out threshold from $2 million to $2.5 million
  • Eliminated the pesky exclusion of tangible personal property used in lodging facilities (e.g. furniture in a rental property)
  • Allowed for assets to be new or used

So, while QIP is no longer bonus eligible, it is now eligible for Section 179 deduction, which has been expanded under the new law. Also, if you’re filing a New York return, Section 179 actually provides benefits that bonus depreciation can’t, since New York State doesn’t recognize bonus depreciation. The flip side is that you must be profitable to take 179, a limitation which doesn’t apply to bonus depreciation.

In conclusion…

The TCJA impacted the tax landscape in many ways – including the possibility of 100% bonus, increased limits and broader usage of Section 179, and redefining qualified improvement property. If you’re not sure if this applies to you or you have any questions, give us a shout! We can help make sure you make the most out of the TCJA.