TAX CHANGES: QUALIFIED IMPROVEMENTS
The Protecting Americans from Tax Hikes Act (PATH) passed by Congress and signed on December 18, 2015, made several changes that will impact landlords and tenants of commercial property. One significant change is it expanded the definition of “qualified property” eligible for bonus depreciation by adding a new category for “qualified improvement property”. The term qualified improvement property means any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service, excluding 1) enlargements, 2) elevators and escalators, and 3) internal structural framework. The improvements do not need to be made pursuant to a lease. Qualified improvement property is still considered improvements to commercial real property thus the depreciable life is 39 years, but in the year placed in service these improvements are now eligible for bonus depreciation.
Before PATH, the type of property on which a commercial landlord or tenant could elect to receive bonus depreciation treatment was known as “qualified leasehold improvements”. There are three key differences between qualified improvement property and qualified leasehold improvements. First, qualified improvement property are improvements placed in service after the date the building is placed in service while qualified leasehold improvement property are improvements placed in service in a building that is at least three years old. Second, qualified improvement property does not need to be made in accordance with a lease while qualified leasehold improvements must be made in accordance with a lease. Third, qualified improvement property is depreciated straight line over 39 years and qualified leasehold improvement property is depreciated straight line over 15 years.
Bonus depreciation had previously expired at the end of 2015 and the PATH Act extended bonus depreciation on all eligible assets to 2019. For property placed in service in 2015, 2016 and 2017, the amount of bonus depreciation that can be recognized is 50%. The amount is currently scheduled to phase out at 40% in 2018, 30% in 2019 and completely phased out after 2019. While bonus depreciation is scheduled to phase out, the PATH act also permanently extended the provision that allows qualified leasehold improvements to be depreciated over 15 years.
For more information on this or any other tax topic, contact our office.Back To List