Can I Bonus That? A Lesser Known Change to Bonus Depreciation from the PATH Act

Protecting Americans from Tax Hikes Act of 2015

The PATH Act (Protecting Americans from Tax Hikes) made several changes to bonus depreciation, most notably extending it through 2019 for most types of assets. However, another change slipped through with much less fanfare that can still lead to significant tax savings for business owners. Before we go into more detail, a quick review is in order…

 

What is bonus depreciation?

Bonus depreciation is additional depreciation allowed (on certain assets) in the year of purchase. It was originally introduced to stimulate the economy by allowing 100% of a purchased asset to be depreciated (i.e. written off, meaning you get a tax deduction for it in the current year), and it has since been lowered to allow a 50% upfront deduction (followed by standard depreciation over the life of the asset).

 

But we digress… The PATH Act introduced a new concept, qualified improvement property. This may sound familiar, and it should, because we already had the concept of qualified leasehold improvements, but this is a little different, and therein lies the opportunity for new and improved (wink) tax savings.

 

What is Qualified Improvement Property?

It is defined as improvements to the interior of any nonresidential real property placed in service after the date the building was first placed in service.

 

What does that mean in English?

It means an:

  • Improvement (not enlarging a building, work on an elevator or escalator, or work on the internal structural framework of the building)
  • To the interior of the building (meaning not a new roof)
  • To a nonresidential building (no apartment renovations, sorry)
  • Placed in service after the building was placed in service (so, not part of the original construction)

 

How does this help me save on taxes?

In one sentence – Expenditures on items that are Qualified Improvement Property can be taken as tax deductions sooner than improvements that don’t qualify for this treatment.

 

Who should care about this?

Anyone who owns non-residential property, such as:

  • Companies who own their office space
  • Manufacturers that own their factory
  • Retailers who own their store
  • Building owners that lease out non-residential (i.e. commercial) real estate

 

This might apply to me, what do I do now?

Give us a call, we can help analyze your purchases and make sure you’re capitalizing (wink again) on any tax breaks that apply to you.