Even before the new tax Act was passed in late 2017, depreciation in the Federal Tax Code had undergone a number of changes. Before the turn of the century, after making an improvement to a nonresidential rental property, the leasehold improvement had to be depreciated over the full 39-year life of the underlying building. Despite the fact that some buildings might not be around that long, the depreciation period remained the same.
However, since the turn of the century, various incentives addenda have been made to the code to speed up the depreciation process, with the result that three classes of leasehold improvements had an abbreviated, 15-year depreciation period. These three classes include qualified leasehold improvements, qualified retail improvement property, and qualified restaurant property.
In late 2015, a fourth category, qualified improvement property, was added to the Code. Yet, qualified improvement property that fails to meet the criteria for a qualified leasehold, retail, or restaurant improvement is not guaranteed the same reduced depreciation period. Instead it falls into the same category as all the other improvements with a 39-year life. However, it was eligible for 50% bonus depreciation under Section 168(k)(2)(A)(iv) of the pre-2018 version of the tax Code.
The new tax Act made an attempt to streamline the depreciation of leasehold improvements by getting rid of all categories except qualified improvement property, eliminating all references to qualified leasehold, restaurant, and retail improvements and moving the definition of qualified improvement property from Section 168(k) to 168(e)(6).
While the intention of this change was to ultimately amend Section 168 to give a 15-year depreciation life to this new, condensed set of categories, due to the rushed nature of the creation of the new Act, there is no section in the Code that explicitly gives qualified improvement property a 15-year life. This may likely prove troublesome for many, and will likely need to be corrected in the future.
The new Act has also changed the “alternative depreciation system,” or ADS, from a life of 39 years to 30 and 40 years for residential and non-residential properties, respectively.
According to many economists and tax preparers, one of the most impactful changes to the tax Code is to provide for 100% expensing of certain assets. Beginning with assets purchased after September 17, 2017, the bonus depreciation percentage becomes 100% under Section 168(k). However, several important changes have been made to the type of assets qualifying for this type of deduction.
- The reference to qualified improvement property has been removed
- the 100% deduction is now available for a “qualified film or television production”
- bonus depreciation will not be available to any business that has floor-plan financing or for assets acquired in the furnishing or sale of electrical energy, water, or other such services
- and assets no longer have to be new to be eligible, meaning that used property will now qualify as long as it is the taxpayer’s first use of the property.
Finally, under Section 179, taxpayers are allowed to elect to expense the cost of an asset without capitalizing it at all. Under the new Act, the Section 179 exception has been increased to $1,000,000 for tax years beginning after 2017.
In summary, there are several notable changes to tax depreciation under the new tax Act. For help navigating this and other aspects of tax reform we at Sousa & Weber are always here to help. Contact us with your questions.