The Bonus Depreciation Issue. The bonus depreciation issue was created when the TCJA eliminated the three categories (qualified leasehold improvements, qualified restaurant property and qualified retail improvement property) of qualified real property and replaced them with a general category called QIP.
Bonus depreciation is a provision that allows taxpayers to deduct a specified percentage of depreciation on the qualifying property in the year it is placed in service. This depreciation can be 30%, 50%, or 100% according to the life and eligibility of the equipment. Bonus depreciation can be claimed along with Section 179 deduction.
Bonus Depreciation. PATH extends bonus depreciation for property acquired and placed in service through 2019. The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016, and 2017, but then phases down to 40 percent in 2018 and 30 percent in 2019. Qualified Leasehold Improvement Property(QLHI).Real estate owners, as well as restaurant and retail businesses, who previously would have qualified for the 50% bonus depreciation provisions, would now potentially qualify for the 100% bonus depreciation for qualified improvement.In addition, the 100% bonus depreciation was disallowed as the property was no longer eligible for bonus depreciation and required businesses to capitalize the improvements, depreciating the improvement costs over 39-years as non-residential real property.
Bonus eligible property must have a depreciable life of 20 years or less. Qualified Leasehold Improvements, Qualified Retail Improvements, and Qualified Restaurant Property are all replaced with Qualified Improvement Property (QIP), which has a 15-year recovery period and is eligible for 100% bonus (restaurants now have a class life of 39 years).
The CARES Act amends the TCJA to reduce the depreciable life of QIP from 39 years to 15 years, thereby making QIP eligible for 100 percent of the expanded bonus depreciation provisions in the TCJA. The amendment is retroactive to January 1, 2018.
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.
Bonus depreciation on and section 179 expensing of qualified leasehold improvement property There is another benefit related to QLHI, it is eligible for bonus depreciation under IRS code section 168(k)(2)(A)(i)(II), whereas the asset would be ineligible for bonus under its former 39-year life (except for special carve outs such as Liberty Zone or Gulf Opportunity Zone expenditures).
A leasehold improvement is a change made to a rental property to customize it for the particular needs of a tenant. The IRS does not allow deductions for leasehold improvements. But because.
A leasehold improvement is created when a lessee pays for enhancements to building space, such as carpeting and interior walls. The depreciation of these improvements only occurs if the amount expended is more than the lessee's capitalization limit.If the amount expended is less than the capitalization limit, the amount is charged to expense as incurred.
The bonus depreciation percentage is 100% for qualified property placed in service, or specified plants planted or grafted, before Jan. 1, 2023 (or before Jan. 1, 2024, for LPPP).
The expanded definition of bonus depreciation applicable to qualifying improvement property allows taxpayers to claim bonus depreciation starting in 2016 where bonus depreciation was previously limited to qualified leasehold improvements requiring the building to be at least 3 years old and the improvements to be made subject to a lease.
The CARES Act treats qualified improvement property (QIP) as 15-year property and thus, allows taxpayers to apply 100% bonus depreciation to eligible QIP. The Act also changes the ADS recovery period for QIP to 20 years and provides that the taxpayer must make the improvements. The changes apply retroactively to property placed in service in 2018.
Changes Under the CARES Act Under the CARES Act, QIP is now classified as 15-year property and eligible for 100% bonus depreciation through 2022, as it was originally intended. Additionally, QIP will be subject to a 20-year life under the Alternative Depreciation System (ADS).
Taxpayers who made qualifying improvements in 2018 can now go back and claim 15-year depreciation or 100 percent first-year bonus depreciation in 2018. Taxpayers who had already filed 2019 tax returns prior to enactment of the CARES Act can do the same for 2019.