Expanded Bonus Depreciation for Qualified Building Improvements

| 2/18/2016

Bonus depreciation was extended temporarily through 2019 by the Protecting Americans From Tax Hikes Act of 2015 (PATH Act). Fifty percent bonus depreciation is available for property placed in service in 2015, 2016, or 2017. Bonus deprecation drops to 40 percent for property placed in service in 2018 and to 30 percent for property placed in service in 2019.

In addition to the temporary extension of bonus depreciation, the PATH Act expanded the definition of real property eligible for bonus depreciation. Prior to the PATH Act, real property was eligible for bonus depreciation only if it was qualified leasehold improvement property (QLIP). QLIP includes improvements made to the interior portion of leased nonresidential real property exclusively occupied by the lessee or any sublessee. QLIP does not include improvements attributable to: 1) an enlargement of the building, 2) any elevator or escalator, 3) any structural component benefitting a common area, or 4) the internal structural framework of the building. The lessor or the lessee may make the improvement, but any improvement must be placed in service more than three years after the date the building was first placed in service. Notably, similar improvements to owner-occupied real estate were not eligible for bonus depreciation.

Beginning in 2016, QLIP is replaced by qualified improvement property (QIP) when determining if property is eligible for bonus depreciation. QIP is similar to QLIP, but there are three significant differences:

  1. Improvements related to all nonresidential buildings, not just leased buildings, qualify for bonus depreciation.
  2. Any qualifying improvement to nonresidential buildings made after the property is placed in service qualifies for bonus depreciation. The three-year holding period is eliminated.
  3. The exclusion for improvements to structural components benefitting a common area is removed.

Only QLIP placed in service during 2015 will qualify for bonus depreciation. QIP is not eligible for bonus depreciation until 2016. Taxpayers will need to identify when improvements are made to determine if they can take advantage of the law change.

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