As we all welcome a new year, we are revisiting two prior points from the Tax Cuts and Jobs Act of 2017 (TCJA), one which is still being discussed and one not yet discussed.
As part of the TCJA, Qualified Improvement Property was redefined as any improvement to an interior portion of a commercial building if the improvement is placed in service after the date the building was first placed in service. Exceptions to this definition include improvements such as elevators, escalators or internal structure framework of the building. The intent was to redefine these properties as having a 15- year life recovery period and make them eligible for bonus depreciation expense (which is 100% from 2018 through 2022), in contrast to the current 39-year life recovery period, with no bonus depreciation.
Due to a drafting error, this change to the 15-year life recovery period was omitted from the final TCJA language. Although the intent was to make this tax favorable change, it did not happen in the final Tax Act. The Treasury Department and the IRS have repeatedly commented that Congress must make a technical correction, as these agencies do not have the authority to administratively amend the “clear language in the statute.” Until Congress takes action on this error, the depreciable lives of these improvement properties will remain at a 39-year life recovery period, instead of the intended 15-year life recovery with 100% depreciation expense in the year placed in service.
On the bright-side, the TCJA did expand the definition of Qualified Improvement Properties – as defined under IRC 168(e)(6), that can now be treated as qualified real property under section 179 (which allows full depreciation expense, up to $1 million and starts being phased out after $2.5 million of qualified additions) This list includes roofs, HVAC systems, fire protection and alarm systems, and security systems. These improvements are typically completed during remodels but can be done at any time. These improvements are not subject to section 179 if already there on the initial date of service (purchase date, for example). As noted above, historically, these properties have been depreciated over a 39-year life recovery, so this could represent significant tax savings in the year these are placed in service.
Please contact our office to obtain more information on the potential tax benefits of your property improvements.