Highlights of the Protecting Americans from Tax Hikes (PATH) Act
The Protecting Americans from Tax Hikes (PATH) Act of 2015, enacted into law on December 18, 2015, extended bonus depreciation for 5 years through 2019. Bonus depreciation provides an additional depreciation deduction of cost of eligible new property -50% in 2016, 40% in 2017 and 2018, and 30% in 2019.In addition, the Act addedqualified improvement propertyas a new category of property eligible for bonus depreciation.
Qualified leasehold improvements
Qualified leasehold improvement property includes any improvement to an interior portion of a building that is nonresidential real property provided that:
The improvement is made pursuant to a lease of that interior building portion
The interior building portion was to be occupied exclusively by the lessee or sublessee, and
The improvement was placed in service more than 3 years after the date the building was first placed in service.
Under the PATH Act, qualified leasehold improvement property was and continues to be eligible for bonus depreciation and depreciable over 15 years on a straight-line basis. However, under the PATH Act, qualified leasehold improvements are now a subset of a new category eligible for bonus depreciation called qualified improvement property.
Qualified improvement property
Qualified improvement property is any improvement placed in service starting in 2016 to an interior portion of a building that is nonresidential real property and is placed in service after the date the building was first placed in service. Qualified improvement propertydoes not includeany improvement for which the expenditure is attributable to:
Enlargement of the building
Any elevators or escalators
Any structural component benefiting a common area
Any internal structural framework of the building
As noted above, the definition of qualified improvement property is broader than that of qualified leasehold improvement property. Building improvements are qualified improvement property regardless of whether the improvements are subject to lease. Additionally, the requirement that the improvements be placed in service more than three years after the date the building was placed in service are removed. Qualified improvement property includes otherwise qualified property even if subject to a related party lease. Improvements under a related party lease still do not qualify as qualified leasehold improvement property.
Qualified improvement property is eligible for bonus depreciation and is depreciated over 39 years on a straight line basis. Qualified improvement property can only be depreciated over 15 years if it meets the restrictive requirements of qualified leasehold improvement property.
If you have questions, contact us for assistance.
Biz Tip Topic Expert: Sheri Springer
Sheri is a Senior Manager with SVA Certified Public Accountants. In her role, she oversees and performs audits for owners of affordable multifamily housing units receiving Section 42 Low-Income Housing Tax Credits.