New Qualified Improvement Property Eligible for Bonus Depreciation

The Protecting Americans from Tax Hikes (PATH) Act of 2015 modified, extended and made permanent several provisions relating to bonus depreciation. One change that seems to have gone relatively unnoticed is a new category of building improvements — Qualified Improvement Property (“QIP”) — available for improvements to non-residential property placed in service after December 31, 2015.

The new QIP category is broader than the existing QLHI (Qualified Leasehold Improvement) category, thereby expanding the type of real property improvements that qualify for bonus depreciation.

The existing QLHI category is only available for improvements made by lessees, sub-lessees and lessors meeting the following requirements:

  • Improvements must be made under or pursuant to a lease not between related persons;
  • Improvements must be made to the interior portion of the building occupied exclusively by the lessee or sub-lessee (cannot be a common area); and
  • Improvements must be made more than three years after the date the building was first placed in service.

QIP does not have all these restrictions, thereby allowing a broader range of taxpayers to qualify for bonus depreciation. The non-residential building can be owner-occupied, and there is no three-year waiting period. QIP can also apply to structural components of a building that benefit a common area (which is excluded from the definition of QLHI’s).

Like QLHI, QIP property is limited to improvements made to the interior portion of a non-residential building.

The following types of improvements are specifically excluded from the definition of QLHI and QIP, and must be depreciated using the 39-year Modified Accelerated Cost Recovery System (MACRS) and are ineligible for bonus depreciation and Section 179:

  • Any enlargement of building
  • All elevators and escalators
  • Any internal structural framework of building

Other Important Differences between QIP and QLHI

While both QLHI’s and QIP’s are eligible for bonus depreciation, QLHI’s qualify for a 15-year vs 39-year depreciable life and Section 179 expensing up to $500k (subject to applicable thresholds). However, the 15-year life and Section 179 are not currently extended to QIP’s unless the improvement meets the more restrictive QLHI requirements.

Plan Now to Maximize Bonus Depreciation Benefit

Although the PATH Act extends bonus depreciation for QLHI and QIP, the immediate write-off from bonus depreciation is only available through 2019. Under the PATH Act, the available bonus depreciation for qualified property will phase out as follows:

  • Property placed in service during 2015 through 2017 — 50%
  • During 2018 — 40%
  • During 2019 — 30%
  • After 2019 — 0%

Taxpayers planning to make improvements to their non-residential buildings should consider jump starting this work as soon as possible to get the most benefit out of these depreciation-friendly provisions.

Please contact Michael A. Mongelli, CPA, Real Estate Practice Leader, at (973) 472-6250 or [email protected] to learn more about the new QIP provisions and the tax savings it can provide.

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