The Protecting Americans from Tax Hikes (PATH) Act passed last year and provided taxpayers with goodies in time for the holidays. This post will focus on a new tax provision that helps taxpayers who make improvements to commercial buildings by making expenditures for these improvements eligible for bonus depreciation.
Under prior law, qualified leasehold improvement property qualified for bonus depreciation. Generally, long lived assets have to be depreciated over a number of years. Leasehold improvement property is generally deducted over 39 years. Qualified leasehold improvement property can be deducted over 15 years. Additionally, since it qualified for bonus depreciation, 50% of the cost of the qualified leasehold improvements could be deducted in the year the improvements were placed in service.
Example: ABC Corp spends $200,000 to remodel its leased space. Before the favorable qualified leasehold improvement property rules took effect, the $200,000 would have to be deducted over 39 years ($5,128 each year for 39 years).
Under the favorable qualified leasehold improvement property rules, 50% of the $200,000 can be deducted in the year of service and the remaining $100,000 cost can be deducted over 15 years (or $6,666 per year). The total first year depreciation expense is $106,666 (substantially more than the $5,128 that would apply without these rules)
Qualified leasehold improvement property included any improvement to the interior of a commercial building if:
• The improvement was made pursuant to a lease
• The interior building portion was to be occupied by the lessee or sublessee
• The improvement was placed in service more than 3 years after the building itself was first placed in service by any person
• The improvement was a structural component of the building
Qualified leasehold improvement property did not include expenses for:
• An enlargement of a building
• Any elevator or escalator
• Any structural component of a common area
• The internal structural framework of the building
Unfortunately, the qualified leasehold improvement property rules did not apply if the building owner was related to the tenant.
The New Law
Beginning in 2016, qualified improvement property is eligible for bonus deprecation. Now, bonus depreciation applies to qualified improvements to commercial buildings regardless of whether the building is leased or owned.
The definition of qualified improvement property has also been expanded.
Qualified improvement property is any improvement to an interior portion of a commercial building if the improvement is placed in service after the date the building is first placed in service. The improvement no longer needs to be placed in service more than 3 years after the building was first placed in service.
The definition of qualified improvement property now also applies to structural components of a building that benefit a common area.
Unfortunately, qualified improvement property still does not include any improvement for which the expense is attributable to: the enlargement of the building; any elevator or escalator; or the internal structural framework of the building.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.