PATH Act Brings 50% Bonus Depreciation and 15 Year Lives to Common Commercial Real Estate Improvements
As a business person who deals or has dealt in commercial property, we wanted to inform you of new tax breaks under the Protecting Americans from Tax Hikes (PATH) Act.
As a general
rule prior to PATH
Act, the cost of commercial real estate improvements is
recovered over 39 years
through straight line
depreciation. For 2016 and beyond, for a broadly defined
category of realty
improvements, taxpayers may be entitled to accelerated
depreciation referred to
as expensing under Code Section 179 of part of the cost of the
50% bonus first-year depreciation deductions of the portion of
the cost that is
not or cannot be expensed; and a shorter 15-year recovery period
of the cost
that is not expensed or recovered via bonus first-year
For those improving commercial real estate, this is a significant tax change with material tax reduction benefits.
CODE SECTION 168(k) - FIRST YEAR 50% BONUS DEPRECIATION
qualified leasehold improvement property is still included under
the PATH Act,
the act added a more expansive category called "Qualified
Qualified improvement property is any improvement
to an interior
portion of a commercial building that is real property if the
placed in service after the date the building was first placed
service. Thus, it excludes improvements that are part of a
building construction project.
Qualified improvement property does not include any improvement for which the expense is attributable to:
improvements are now
eligible for bonus depreciation regardless of whether the
property subject to a lease and the improvement need not be
placed in service
more than three years after the date the building was first
placed in service.
Phase down of bonus
in service before December 31, 2017, the bonus first-year
depreciation is 50%
of the cost.
depreciation is 40%, for property placed in service in calendar
year 2018 (or
in calendar year 2019 for certain long-production-period
property) and 30%, for
property placed in service in calendar year 2019 (or in calendar
year 2020 for
certain long-production-period property). After December 31,
depreciation will not be available at all for qualified improvement property placed in service.
CODE SECTION 179 - EXPENSING:
Under the PATH
Section 179, up to $500,000 of expense per year, for up to
Section 179 qualified additions was made permanent with an index
for inflation. So
for 2016, the $500,000 expense remains the
same, with the phaseout increased to $2,010,000.
Also under the
special treatment for qualified
property elected to be treated as Section 179 property,
extended and they removed the annual limitation of $250,000,
annual limitation to $500,000.
Qualified real property is property that is classified as:
In order to be qualified real property,
must be depreciable, acquired by purchase for use in the active
conduct of a
trade or business, and must be used within the
Even with these
of the PATH Act, in order to qualify for Section 179, the
needs to meet the definition of qualified
real property. Also not all businesses can qualify for
expensing, either because the business has a loss or the
the $2,010,000 threshold. This is where the first year bonus
the 15-year recovery period come into play.
As you may know,
also new for
2016, as long as you have a capitalization policy in place, you
items up to $2,500 per item or per invoice.
If you have any
regarding any of this information, please feel free to contact
planning expert at (603) 524-0507.
Date: 19 March 2016
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