Nonresidential real estate owners should be aware of recent tax law changes that could increase depreciation deductions significantly. The 2015 PATH Act modified Sec. 168(k) to create a new category of property called Qualified Improvement Property, or QIP, which qualifies for the taxpayer-friendly accelerated bonus depreciation. QIP property is any improvement to an interior portion of a nonresidential building after the building was originally placed in service. Amounts paid for an enlargement, elevators, escalators, or the internal structural framework of the building are not included as QIP.
It is important to note that the restrictions of qualified leasehold improvements under Sec. 168(e)(6), which require that the improvements be made pursuant to a lease and to a building more than three years after placed in service, are not present in the QIP definition. Therefore, QIP which would generally be depreciated over 39 years will now qualify for 50% bonus depreciation for QIP placed in service in 2016.
In addition, if the QIP also meets the definition of qualified leasehold improvement property under Sec. 168(e)(6), the QIP can be classified as 15-year property which would be eligible for bonus and/or Sec. 179.
Example: A nonresidential building is constructed and placed into service in July 2014. A tenant moves into the space in July 2016 and spends $100,000 on qualified improvements to the interior of the building. The improvements do not meet the requirements under 168(e)(6) for qualified leasehold improvements because the building has not been in service for at least three years. The improvements will therefore be depreciated over 39 years rather than 15 years. Under the prior rules, 2016 depreciation would be $1,175 ($100,000 / 39 x 5.5/12). However, under the new provisions of the PATH Act, the qualified improvement property now yields a 2016 depreciation deduction of $50,588 ([$100,000 x 50%] + [100,000 x 50% / 39 x 5.5/12]), a significant increase.
While the facts and circumstances of your expenditures may vary, it is important to consult with your tax professional to determine the most beneficial treatment. Please contact Jon Watts in the Cleveland office, firstname.lastname@example.org or Scott Fraker in the Delaware office, email@example.com with any questions.