Tax Reform: Qualified Improvement Property, Bonus Depreciation and Section 179 Expensing

With the passage of the Tax Cuts and Jobs Act, there are now more tax benefits and simplification for lessees and building owners through changes to Qualified Improvement Property, bonus depreciation and Section 179 expensing.

Previous Law

Prior to the passing of the Tax Cuts and Jobs Act of 2017, the federal tax code established separate definitions and rules for qualified leasehold improvements, qualified restaurant property, qualified retail improvement property and qualified improvement property. The prior law also allowed for 50% bonus depreciation on new personal property and equipment purchased and placed in service in 2017 as well as a maximum Section 179 expense deduction of up to $510,000.

New Law

Qualified Improvement Property (QIP)

Beginning 1/1/2018 the Tax Cuts and Jobs Act simplifies and consolidates the various leasehold categories to one “Qualified Improvement Property” (QIP).

Due to a legislative omission, QIP was not added to the list of property with a 15-year depreciation period and is not eligible for bonus depreciation.  Corrective legislation is anticipated to fix this and treat QIP with a 15-year depreciation period rather than a 39-year depreciation period and be eligible for bonus depreciation.  Once this is corrected, lessees and building owners who improve qualifying business property will reap federal tax benefits of shorter depreciable lives, increase bonus depreciation deductions and Section 179 expensing.

QIP has been further simplified to apply to interior common areas of nonresidential buildings if the improvement is placed in service after the building was first placed in service, can be owner occupied and will not be subject to the three-year rule.

Bonus Depreciation

Qualified property acquired and placed in service after September 27, 2017 are eligible for 100% bonus depreciation, and applies to both new and used qualified property.

Section 179 Expensing

An alternative to bonus depreciation is Section 179 expensing. The Tax Cuts and Jobs Act has increased the expensing limit to $1 million, with a spending cap of $2.5 million of equipment purchases for tax years beginning in 2018. The definition of qualified real property now includes roofs, HVAC equipment, fire protection, alarm systems and security systems for nonresidential buildings.

Please contact an Anders advisor to discuss questions about your specific situation, or learn more about the Anders Real Estate and Construction Teams. Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business.