Qualified Improvement Property Eases the Pain of 39 Year Depreciable Life

by Billy Litz, CPA

The Protecting Americans from Tax Hikes (PATH) Act of 2015 brought numerous tax breaks to taxpayers, some old and some new. One of the lesser known of these new tax breaks is a new class of property eligible for bonus depreciation which could be very beneficial to commercial real estate owners.

The PATH Act extended the use of bonus depreciation, which allowed a depreciation deduction of 50% in the first year for qualifying property placed in service in 2015, 2016 and 2017. This percentage is reduced to 40% and 30% for qualifying property placed in service in 2018 and 2019, respectively. The use of bonus depreciation for commercial real estate owners is primarily used for Qualified Leasehold, Retail and Restaurant Improvement property which allows taxpayers to depreciate certain improvements over a preferable 15 year life and also allows these improvements to be eligible for bonus depreciation. Consequently, if the improvement to the building does not meet one of these qualifications, the cost must be depreciated under a less favorable 39 year life.

The PATH Act brought a new class of property called Qualified Improvement Property, which will expand the use of bonus depreciation to certain 39 year property beginning with the 2016 tax year. The improvement must be original-use property (new, not used) and made to the interior of a nonresidential building after the date the building was first placed in service. However, Qualified Improvement Property does not include improvements made to enlarge a building, improvements for an elevator or escalator, or improvements made to the internal structural framework of a building.

Qualified Improvement Property will allow commercial real estate owners to use bonus depreciation on more improvements to their building by not having to meet the Qualified Leasehold Improvement standards which required the building to be at least 3 years old and the improvements be made subject to a lease. This will help reduce the tax burden in the year building owners expend money to make costly improvements to their property.