Protecting Americans from Tax Hikes Act of 2015 (The PATH Act) has given taxpayers new opportunities to accelerate their depreciation and the expenses they incur in qualifying real property. Kevin Thompson, CPA says “who names these bills? I can assure you that there have already been 10 other bills that did not protect us from tax hikes.”

Generally, the cost of commercial real-estate improvements is recovered over 39 years using the straight-line depreciation method with three exceptions: qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.  Together, these exceptions are known as “qualified real property.”

Qualified real property allows a quicker recovery period of 15 years when using the straight-line method. However, before the PATH act, this was a temporary allowance that was extended periodically. Having most recently expired for property placed in service until after Dec 14, 2014. Thompson says “this is HUGE. Being able to recapture the cost of investments and match it against current income is one of the great advantages to business and property owners. And being able to recapture 24 years sooner is a boon to that sector.”

Property is considered qualified leasehold improvement property if the improvement is made pursuant to a lease, is Sec 1250 property (structural), not the result of a lease between related parties, the interior of the building or portion of it was occupied exclusively by the lessee or sublessee, and it was placed into service more than 3 years after the building was.

Not included is the enlargement of the building, elevators and escalators, structural components that benefit a common area and internal structural framework.

If 50% of a Sec. 1250 restaurant property building’s square footage is devoted to the preparation of meals and has seating for on-premises consumption, it is considered to be qualified.

Retail improvements that are qualified include improvements to inside portions of a nonresidential building open to the public and used in retail trade or the business of selling tangible personal property to the public. Improvements must be placed in service for more than three years after the building has been placed in service.

The PATH act makes the 15-year recovery period permanent. However, this is not elective. If a taxpayer fails to properly depreciate qualified real property over 15 years it puts other 15-year property at risk for reclassification and longer recovery periods. It’s a complicated matter best left to a tax professional. Thompson says “there is no such thing as a permanent tax law. Every administration and every newly seated Congress can write NEW laws that make permanent laws irrelevant. So take advantage while you can. Seldom are tax laws retroactive so use these accelerations to your advantage while you can.”

PATH allows a taxpayer to treat qualified real property as Sec 179 property

The aggregate cost of the qualified real property that a taxpayer can elect to expense was subject to an annual limit of $250,000.  Under the PATH Act, the treatment of qualified real property is extended as Sec. 179 property, applicable retroactively to 2015. Beginning after Dec. 31, 2015, it also removes the annual $250,000 limitation for a qualified real property with a dollar-for-dollar phase-out threshold of $2,030,000 (2017) which continues to apply.

Extension of the Bonus Depreciation

To be eligible for bonus depreciation, an asset must be qualified property. (recovery period of 20 years or less, depreciable software other than Sec. 197 software and water utility property.)

Starting in 2016, the PATH Act substituted for qualified leasehold improvement property a new category of assets called “qualified improvement property.” This is any improvement to the interior part of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service.

This does not include improvements that enlarge a building, any elevator, escalator, or the internal structure of a building.

Quality improvement property is more taxpayer friendly in the larger description of the types of properties that don’t qualify. Qualified improvement property doesn’t require that the improvement be subject to a lease. Any interior improvements made by the owners or an owner-occupied building that meets the other requirements for qualified improvement property will qualify for bonus depreciation.

Removing the lease requirement means that any improvement made to a property in a situation involving a related-party lease could qualify for bonus depreciation.  Improvements made under a related-party lease may not qualify for the 15-year recovery period but may qualify for bonus depreciation. Also, there is no longer a three-year waiting period.

Under the PATH Act, the improvement is eligible for bonus depreciation any time after the building is first placed in service and there is no common area restriction.

For taxpayers who are in the restaurant industry, retail or with business leasehold improvements, PATH Act provisions may be advantageous new ways to claim real property assets or accelerate depreciation. “If you are not having this discussion with your CPA, then have that conversation with this CPA,” says Thompson. “I’m always in the market for smart, new clients keeping up with the times.”

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