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PATH Act Expands Building Improvements Eligible for Bonus Depreciation


1/21/15

Synopsis
 
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law by President Obama on December 18, 2015, extends and modifies several key tax provisions, including extending bonus depreciation for five years and modifying it to include “qualified improvement property,” which can include certain improvements classified as 39-year property.
 
Bonus Depreciation
 
Pre-2016: For property placed in service in 2015 and prior years, a taxpayer may deduct additional first year depreciation (i.e. 50% bonus depreciation) related to qualified property. Qualifying property is defined as property that has a recovery period of less than 20 years, water utility property, computer software, or qualified leasehold improvements. Qualified leasehold improvement property is defined as any improvement to an interior portion of a building that was nonresidential real property if:

(1) the improvement was made under or pursuant to a lease
(2) the interior building portion was to be occupied exclusively by the lessee or sublessee
(3) the improvement was placed in service more than three years after the date the building was first placed in service
(4) the improvement was a structural component of the building

Qualified leasehold improvement property did not include expenses attributable to: (1) the enlargement of the building; (2) any elevator or escalator; (3) any structural component benefiting a common area; and (4) the internal structural framework of the building. Additionally, the underlying lease could not be between related parties. Qualified restaurant property and qualified retail improvement property were both ineligible for bonus depreciation.
 
New Law
 
The PATH Act changed the definition of “qualified property” for purposes of bonus depreciation. For improvements placed in service on or after January 1, 2016, the statute replaced, “qualified leasehold improvement property” with a new - broader – category of qualifying property called “qualified improvement property.”
 
Qualified improvement property is defined as 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. It does not include costs to enlarge a building, costs related to elevators and escalators, or internal structural framework. The PATH Act provision removes the requirement that the property be subject to a lease and that the improvement be placed in service more than three years after the date the building was first placed in service. Because “qualified improvement property” is defined broadly, there may be situations where property does not qualify as 15-year qualified leasehold improvement property (or qualified restaurant property or qualified retail improvement property) but is eligible for bonus depreciation as “qualified improvement property.” The statute, as amended by PATH, removed the language that previously made qualified restaurant property and qualified retail improvement property ineligible for bonus depreciation.
 
Under section 168 as amended by PATH, bonus depreciation is available for assets placed in service before January 1, 2020. A 50% bonus depreciation deduction is available for tax years from 2015-2017. For property placed in service in 2018, the bonus depreciation amount will be 40% and will be 30% for property placed in service in 2019.
 
What Does CohnReznick Think?
The definition of “qualified leasehold improvement property,” “qualified restaurant property,” and “qualified retail improvement property” remain unchanged. These definitions, apply for purposes of determining the proper recovery period of certain property. The fact that Congress removed the language excluding qualified restaurant property and qualified retail improvement property from bonus depreciation; and the fact that Congress added the new “qualified improvement property” definition will create new opportunities to take bonus depreciation for taxpayers that might not have been eligible previously. In particular, lessees moving into newer construction (less than three years old) will now have the ability to take bonus depreciation on qualifying improvements. Additionally, non-residential building owners will now have the ability to take bonus depreciation on interior improvements whether or not those interior improvements are made pursuant to a lease.

 

Contact
 
For more information, please contact Richard Shevak, Director, at richard.shevak@cohnreznick.com or 862-245-5029.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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