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Recent tax legislation makes some taxpayer-friendly modifications to depreciation of certain qualifying real property. Understanding the rules can help determine if real property improvements qualify for accelerated depreciation.

The two types of accelerated depreciation are bonus depreciation and the §179 expense election. Bonus depreciation is the immediate deduction of 50% of the cost of new property (as long as it meets certain requirements), with the remaining 50% depreciated over the regular depreciation period. In general, the §179 expense election allows taxpayers to “expense” up to $500,000 of the cost of qualifying property that is placed into service during the year, as long as certain requirements are met. In the case of qualified real property, the §179 limit is $250,000 in 2015, but increases to $500,000 in 2016 and forward.

There are four different types of real property improvements that could potentially qualify for bonus depreciation or the §179 expense election.

Qualified Leasehold Improvement Property (QLI)

A QLI is any improvement to an interior portion of a leased nonresidential real property building, as long as the following requirements are met:

  1. The improvement is under or pursuant to a lease by the lessee (or sublessee) or the lessor.
  2. The improvement is to the building or portion of the building that is exclusively occupied under the lease by the lessee.
  3. The improvement is placed into service at least three years after the date the building was initially placed into service.

The following improvements are excluded and do not qualify for the depreciation modifications:

  1. Increasing the size of the building.
  2. Improving an elevator or escalator.
  3. Improving any structural component benefitting a common area.
  4. Improving the internal structural framework of the building.

Leasehold improvements may not qualify if the lease is between related parties. Normal depreciation of this property is 15-year straight-line depreciation.

Qualified Retail Improvement Property (QRI)

A QRI is any improvement to an interior portion of a nonresidential real property building, as long as the following requirements are met:

  1. The interior portion with improvement is open to the general public, and is used in the retail trade or the business of selling tangible personal property to the general public.
  2. Such improvement is placed into service more than three years after the date the building was first placed into service.

Certain improvements are excluded and do not qualify for the depreciation modifications:

  1. Increasing the size of the building.
  2. Improving an elevator or escalator.
  3. Improving any structural component benefitting a common area.
  4. Improving the internal structural framework of the building.

Normal depreciation of this property is 15-year straight-line depreciation.

Qualified Restaurant Property (QRP)

A QRP is any real property building or improvement to a building, if more than 50% of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals. Normal depreciation of this property is 15-year straight-line depreciation.

Qualified Improvement Property (QIP)

A QIP is any improvement to an interior portion of a nonresidential real property building, if such improvement is placed into service after the date the building was first placed into service.

Certain improvements are excluded, including:

  1. Increasing the size of the building.
  2. Improving an elevator or escalator.
  3. Improving the internal structural framework of the building.

A QIP is applicable to tax years beginning in 2016 and forward. Normal depreciation of this property is 39-year straight-line depreciation.

Below is a chart that summarizes the timing for each property or improvement to be eligible for the two different accelerated depreciation methods.

2015 2016 and Beyond
Bonus Depr. §179 Bonus Depr. §179
QLI Qualifies Qualifies Qualifies Qualifies
QRI No Qualifies Qualifies Qualifies
QRP No Qualifies No Qualifies
QIP N/A N/A Qualifies Qualifies

By allowing taxpayers to take bonus depreciation or utilize the §179 expense election on the above properties or improvements, taxpayers are speeding up the expensing of property that is usually depreciated over 15 or 39 years. This acceleration of expenses can save tax dollars and assist in the financing of future projects.

Please call our office if you are considering a project and want to maximize your depreciation tax deductions, or simply have questions as to whether certain properties or improvements would qualify for bonus depreciation or the §179 expense election.

Nathan Sharp

Nathan Sharp works with a variety of firm clients, including individuals, family businesses, business owners, and various corporations. He earned his BS in accountancy, his master’s in accounting science, and his MST from Northern Illinois University.