Businesses may now be eligible for greater tax deductions related to improvements made to commercial or rental properties, thanks to one of the many provisions included in the Protecting Americans from Tax Hikes (PATH) Act of December 2015. We’ve talked about various aspects of the PATH Act over the past year on Working Capital, but today we take a closer look at the legislation’s impact on bonus depreciation and cost recovery.
Recovery period threshold lowered
Previously, the cost of buildings and various improvements could only be recovered over 39 years. This prevented companies from receiving bonus depreciation on newer properties. Legislation in 2004 provided for use of a lower, 15-year depreciation threshold, for qualified leasehold improvements made to the interior portion of non-residential real property. The use of this shorter depreciable life was on a year-to-year basis, subject to annual extender legislation typically passed right at the last possible moment by Congress.
Like so many other annually renewed provisions, the PATH Act made the shorter, 15-year recovery period permanent. Now businesses can reliably use this depreciation schedule for long-term tax planning, and more improvements can qualify sooner. The permanent 15-year recovery period applies to Qualified Leasehold Improvements (QLI), Qualified Retail Improvements (QRI) and Qualified Restaurant Property (QRP).
New recovery category
In addition to making the 15-year recovery period permanent for QLI, QRI and QRP, the PATH Act also created a new recovery category: Qualified Improvement Property (QIP). This new category allows companies to use bonus depreciation for qualifying non-residential interior improvements with a 39-year life. This allows companies greater flexibility in recovering costs for non-residential building improvements.
QIP went into effect on December 31, 2015, so 2016 marks the first year companies can use this category. QIP is considered any improvement to an interior portion of a non-residential building as long as the construction or installation takes place after the building is in use. It is similar to QLI, minus the requirements that the building must be in service at least three years before the expenditure, minus the expenditures must be made in accordance with a lease agreement, and plus the expanded eligibility to common area interior improvements.
Examples of QIP-eligible improvements include:
- Tenant improvements made during the first three years of a building’s life
- Interior components such as common area improvements to stairways, hallways and lobbies
The IRS continues to explicitly exclude three improvements from this category: the enlargement of a building, the installation of elevators or escalators or alterations to the internal structural framework of a building.
Extended Bonus Depreciation
The PATH Act also extended bonus depreciation through 2019 and introduced a gradual reduction as provided below:
- 2015 – 2017 = 50%
- 2018 = 40%
- 2019 = 30%
- 2020 to later = currently set to expire
Recovering costs earlier in the life of a building can result in significant tax savings for businesses. Your RKL advisor is available to explain these changes and examine how they might apply to a specific situation. Contact one of our local offices today to get started.
Contributed by Samuel E. Gantz, a supervisor in RKL’s Tax Services Group. Sam provides tax planning and compliance services to corporations, businesses and individuals, specializing in multi-state compliance and pass-through entity taxation. He works with clients in a variety of industries including manufacturing and distribution, construction and real estate. Sam is also active in RKL’s various training initiatives.