Congress passed a tax simplification provision in the Tax Cuts and Jobs Act of 2017 to consolidate the eligibility of certain real estate improvements for tax favored treatment. Specifically, Qualified Improvement Property is defined as an improvement to an interior portion of a building that is nonresidential real property provided the improvement is placed in service after the date that the building was first placed in service. Improvements related to the enlargement of the building, an elevator or escalator, or the internal structureal framework of the building are not qualified improvement property.
Congress intended to a assign a 15-year depreciable life to Qualified Improvement Property, which would have qualified it for 100% bonus depreciation. (Effective for property acquired and placed in service after September 27, 2017 and before January 1, 2023. The rate phases down thereafter.) In its hurry to pass the legislation, the 15-year life provision was missed. That means, unless Congress passes a technical correction, Qualified Improvement Property has a 39-year depreciable life and doesn’t qualify for bonus depreciation.
Taxpayers who plan to use bonus depreciation for Qualified Improvement Property for 2018 should consider extending the due date for their income tax returns. Consult with a tax professional about alternative ways to deal with the situation. It’s likely, but not certain, that Congress will eventually pass a technical correction and permit amended income tax returns to claim bonus depreciation on tax returns where it should have been available.
Alternatively, taxpayers can claim the Section 179 expense election for Qualified Improvement Property. The maximum amount that a taxpayer may elect to expense for 2018 is $1 million. The maximum deduction is reduced when the taxpayer places more than $2.5 million of property qualifying for the Section 179 election in service during 2018. The thresholds are indexed for inflation after 2018. The Section 179 deduction also can’t reduce taxable income below zero. Any excess is carried forward.