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Bonus depreciation extended and expanded by new legislation

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Tax Hot Topics: Bonus depreciation extended, expandedCongress recently extended the bonus depreciation provision for five years and expanded the definition of property eligible for bonus depreciation to include certain improvements classified as 39-year recovery property. The changes were included in the recent Protecting Americans from Tax Hikes (PATH) Act of 2015 enacted in mid-December. For a broad overview of the legislation, please see our Tax Legislative Update.

The PATH Act extends bonus depreciation at the 50% rate for 2015, 2016 and 2017, with a phase-out rate of 40% for 2018 and 30% for 2019. This extension applies to all qualified property placed in service on or after Jan. 1, 2015. Because the 2015 extension is retroactive, taxpayers should determine whether their fixed asset system is properly computing bonus depreciation by the time the tax return is filed.  

For fiscal year taxpayers who prior to the enactment have already filed tax returns that include months after Jan. 1, 2015, it is likely that the IRS will issue additional guidance that provides procedures for catching up the “missed” bonus depreciation. Such guidance would likely be similar to previous guidance in this area, such as Rev. Proc. 2015-48, which provided taxpayers with the option to amend the return or file an accounting method change to catch up the missed bonus depreciation.

The legislation also expands property eligible for bonus depreciation to include “qualified improvement property,” rather than “qualified leasehold improvement property” for improvements placed in service on or after Jan. 1, 2016. Qualified improvement property is broadly defined as any improvement to an interior portion of a nonresidential building that is placed in service after the date the original building was placed in service. Qualified improvement property does not include expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework.  

Solely for purposes of bonus depreciation, the PATH Act removes the old requirements that the improvements be made pursuant to a lease and that the improvements be placed in service more than three years after the original building is placed in service.  This is significant, as it means improvements to the interior that are recovered over a 39-year period are now eligible for bonus depreciation, which historically has not been allowed. In particular, taxpayers with fiscal year-ends early in 2016 need to be aware of this expanded definition and plan implementation into their depreciation systems so that this accelerated recovery isn’t missed for improvements placed in service after Jan. 1, 2016.

It should be noted that qualified leasehold improvement property does still exist for purposes of determining an improvement’s recovery period. The definition remains unchanged from the prior version, which includes the requirement that the property be subject to a lease and placed in service more than three years after the original building. Property meeting the additional requirements in the definition of qualified leasehold improvement property will be eligible for a 15-year recovery period, which was made permanent by the PATH Act, in addition to bonus depreciation.

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