OUR THOUGHTS ON:

Significant Changes to the Use of Bonus Depreciation on Nonresidential Real Property Beginning in 2016

Construction|Real Estate|Tax

By Mark DiPietrantonio

Bonus depreciation, which was scheduled to expire after 2014, was extended through 2019 by the PATH Act.  Under the PATH Act, 50 % bonus depreciation applies to qualified property placed in service in 2015, 2016 and 2017.  The rate is reduced to 40 % for qualified property placed in service in in 2018 and 30 % for qualified property placed in service in 2019.  Unless additional legislation is enacted, bonus depreciation is scheduled to expire after 2019.

Effective for property placed in service after January 1, 2016, the PATH Act allows bonus depreciation to be taken on a class of property referred to as “qualified improvement property”.  For bonus depreciation purposes, “qualified improvement property” replaces the class of property known as “qualified leasehold 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.  Qualified improvement property does not include expenditures attributable to the enlargement of a building, an elevator or escalator, or the internal structural framework of the building.

Qualified Leasehold Improvement Property

Qualified leasehold improvement property (which qualifies for bonus depreciation if placed in service before 2016) was defined similarly to qualified improvement property, except that the following conditions applied:

  • The improvements were required to be by the lessor or lessee pursuant to a lease;
  • The improvements were required to be placed in service more than three years after the building was placed in service; and
  • Improvements that were structural components benefiting a common area of the building did not qualify.

Qualified Improvement Property

Qualified improvement property is defined much more broadly than qualified leasehold improvement property because the improvement to the property does not need to be made pursuant to a lease, and improvements to common areas also qualify.

While beyond the scope of this article, it is important to note that qualified improvement property does not qualify for a 15-year recovery period unless the qualified improvement property is:

  • 15-year leasehold improvement property;
  • 15-year retail improvement property; or
  • 15-year restaurant improvement property

Qualified improvement property that does not qualify for a 15-year recovery property is depreciated over 39 years as nonresidential real property using a mid-month convention.

Please contact us if you have questions regarding qualified improvement property or your ability to utilize bonus depreciation and visit our Construction and Real Estate pages to see a full listing of our service offerings.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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