March 10, 2016
Fixed-asset rules have been in flux for several years. There is now some degree of permanency that will help dealers plan for the future.
Internal Revenue Code Section 179, which covers expensing of qualifying property, has been made permanent by the Protecting Americans From Tax Hikes Act of 2015 (PATH Act). The expense limit is extended permanently at $500,000, with a reduction of the expense amount beginning when Section 179 property placed in service during the taxable year exceeds $2 million. Under the PATH Act, both of these thresholds will be increased for inflation in future years.
Bonus depreciation will continue to apply from 2015 through 2019. A 50 percent bonus depreciation applies to property placed in service in 2015, 2016, or 2017. Forty percent bonus depreciation applies to property placed in service in 2018, and 30 percent bonus depreciation applies to property placed in service in 2019.
A favorable provision for dealers in the PATH Act is the expansion in the type of building improvement property that is eligible for bonus depreciation. The provision replaces qualified leasehold improvement property (QLIP) with qualified improvement property (QIP) as a class of property eligible for bonus depreciation effective for property placed in service starting in 2016. This change significantly expands the opportunity dealers have to take advantage of bonus depreciation on the costs of image program projects and other dealership renovations.
The new QIP includes 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. However, QIP does not include any improvement for which the expenditure is attributable to 1) the enlargement of the building, 2) any elevator or escalator, or 3) the internal structural framework of the building.
Unlike QLIP, the new QIP is eligible for bonus depreciation regardless of whether the improvements are subject to a third-party lease. Furthermore, the new rule removes the requirement that qualifying property be placed in service more than three years after the date a building was first placed in service.
Keep in mind that the PATH Act also makes qualified retail property (QRP) a permanent class of property for purposes of the 15-year recovery period. All QRP will be eligible for bonus depreciation as QIP, but not all QIP will be QRP (for example, service, parts, and office area improvements). As a result, dealers should expect some costs in a remodel to be eligible for bonus depreciation and have a 15-year recovery period, while other costs will be eligible for bonus depreciation and have a 39-year recovery period. Navigating these differences might require a cost segregation approach for renovations and image projects.
The expanded bonus depreciation eligibility is effective for property placed in service after Dec. 31, 2015. Dealers need to closely consider projects that are going into service around the 2015 year-end period. The same property that may not be eligible for bonus depreciation if placed in service in 2015 could be eligible for bonus depreciation if placed in service in 2016.