The PATH Act (Protecting Americans from Tax Hikes Act) of 2015 included a notable change starting in 2016 for bonus depreciation, or possibly the Section 179 expensing election, on a new class of property. Congress created a new category called “Qualified Improvement Property” which consists of types of property that is nonresidential real property that is typically subject to a 39 year recovery period.
There are 2 main requirements for something to be considered Qualified Improvement Property. The property has to be placed into service after 2015 and the improvements are to the interior of any nonresidential real property placed in service after the date the building was first placed in service.
If you enlarge the building, incur expenses for any elevator or escalator, or do any internal structural framework in the building, those expenses do not qualify for this new class of property.
Take note, this is a new class different from what we previously had expanded for Qualified Leasehold Improvements. For Qualified Leasehold Improvements, the expenses had to be incurred to a building that had been in service for more than 3 years, and must have been subject to a third-party lease agreement.
Both the Qualified Leasehold Improvements and the new Qualified Improvement Property allow for 50% bonus deduction meaning that you get the expense in an earlier year, but over time you receive the same write off. Of course, the tax benefits of writing off over half your improvement in the first year likely can help fund these types of construction projects. Definitely it is still something to capitalize on.
This is an exciting new option for anyone who is making improvements to a commercial building which saw little fan-fare when the PATH Act was published. If you think this may apply to a project you are contemplating give us a call and we can help.