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 added qualified improvement property as a new category of property eligible for bonus depreciation.

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UNDERSTANDING REGULATIONS REGARDING 100% BONUS DEPRECIATION FOR QUALIFIED PROPERTY

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Qualified Leasehold Improvements

Qualified leasehold improvement property includes any improvement to an interior portion of a building that is nonresidential real property provided that:

1. The improvement is made pursuant to a lease of that interior building portion
2. The interior building portion was to be occupied exclusively by the lessee or sublessee, and
3. 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 property does not include any improvement for which the expenditure is attributable to:

1. Enlargement of the building
2. Any elevators or escalators
3. Any structural component benefiting a common area
4. 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.