The Protecting Americans from Tax Hikes (PATH) Act of 2015, enacted into law on December 18, 2015, made permanent over 20 taxpayer friendly tax provisions, and extended many other provisions for either 2 years or 5 years.
Bonus depreciation, which had expired for property placed in service after December 31, 2014, was one of the provisions extended for 5 years through 2019 (through 2020 for certain longer-lived and transportation property). Bonus depreciation provides an additional depreciation deduction of 50% of the cost of eligible new property. The cost remaining after deducting bonus depreciation is depreciated over the qualified life of the property. In addition, the Act added qualified improvement property as a new category of property eligible for bonus depreciation.
Qualified Leasehold Improvements and Qualified Improvement Property
Qualified Leasehold Improvement Property: Established prior to the PATH Act, one of the categories of property eligible for bonus depreciation is qualified leasehold improvement property. In general, qualified leasehold improvement property includes any improvement to an interior portion of a building that is nonresidential real property, provided that:
- The improvement was made pursuant to a lease of that interior building portion;
- The interior building portion was to be occupied exclusively by the lessee or sublessee; and
- The improvement was placed in service more than 3 years after the date the building was first placed in service;
Qualified leasehold improvement property was, and continues to be under the PATH Act, eligible for bonus depreciation and depreciable over 15 years on a straight-line basis. However, under the PATH Act, qualified leasehold improvements are now a subset of a new category eligible for bonus depreciation called qualified improvement property.
Qualified Improvement Property: Applicable to improvements placed in service starting in 2016, qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service (Section 168(k)(3)(A)). Qualified improvement property does not include any improvement for which the expenditure is attributable to (1) the enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.
The definition of qualified improvement property is broader than that of qualified leasehold improvement property. Qualified improvement property treats building improvements as qualified property regardless of whether the improvements are property subject to a lease, and removes the requirement that the improvement be placed in service more than three years after the date the building was first placed in service. Further, qualified improvement property can be placed in service by the owner of the building and be eligible for bonus depreciation, even if the improvement is not subject to a lease or if the improvements are placed in service by a tenant. Qualified improvement property includes otherwise qualified property even if subject to a related party lease. Improvements under a related party lease still do not qualify as qualified leasehold improvement property.
Qualified improvement property is eligible for bonus depreciation, but is depreciated over 39 years on a straight-line basis. In order to be depreciated over 15 years, the qualified improvement property must also meet the more restrictive definition of qualified leasehold improvement property.
The provision of qualified improvement property can be a significant benefit to building owners and tenants. Please contact us to further discuss the impact of this provision for your property.
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