In 2015, the PATH Act (Protecting Americans from Tax Hikes Act) was passed. Starting in 2016, the PATH Act was enacted which extended additional benefits to business owners. Modifications to prior tax laws are summarized below.
- Section 179
- Starting in tax year 2017 the dollar limitations were increased from $500,000 to $510,000 and the starting point for reduction in the allowed Section 179 expense related to purchases of property increased from $2,000,000 to $2,030,000
- This is scheduled to be continually adjusted for inflation changes going forward
- Qualified improvement property (QIP) - New type of bonus eligible property. Before 2016, QIP was depreciated over 39 years without eligibility to take 50 percent bonus depreciation or Section 179. The definition of QIP is any improvement to an internal portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service.
Example 1: Qualified improvement property: Company A places a building in service in 2010. Company B purchases the building from Company A in 2016. Company B begins improvements to the interior of the building in 2016. This WOULD qualify for bonus depreciation. Why? These improvements are considered QIP since the building was placed in service for the first time by Company B and is used for trade or business.
- The building must be "first placed in service" for the first time by any person
- Exclusions: improvements attributable to the enlargement of the property, any elevator or escalator, or the internal structural framework of the building
- Starting in 2016, QIP is eligible for bonus depreciation (but still not eligible for 179)
- Examples of eligible improvements: lighting and electrical, plumbing, ventilation, floor coverings, doors, security/fire alarm systems, signs, heating and cooling, ceiling or woodwork that is not improving structural purposes
- Qualified restaurant property - Can qualify for additional bonus depreciation if it meets the definition of qualified restaurant property AND qualified improvement property
Example 2: Qualified/unqualified improvement property: Company A constructs and places a new restaurant in service. It meets the definition of qualified restaurant property and QIP (see bullet point 4, below). It is eligible for bonus depreciation. However, if it met only the definition of qualified restaurant property but not QIP, bonus depreciation would not be allowable.
Example 3: Qualified improvement property: Company A decides to hire Company B to construct a building placed in service on May 27, 2016. Originally, the new building construction plans did not include a private restroom. In 2016, during the building construction, Company A decides to hire Company C to construct a private restroom and that restroom is placed in service in on May 28, 2016. The restroom is considered to be used for trade or business and is eligible for additional bonus depreciation.
- Bonus depreciation limitation percentages are changing - extended through 2019
- 2017: 50 percent
- 2018: 40 percent
- 2019: 30 percent
- Qualified real property includes:
- Qualified leasehold improvement property which is improvement to an interior part of a building that is nonresidential real property if it meets the following requirements:
- Made according to a lease by the lessee or the lessor of that part of the building
- Occupied exclusively by the lessee
- Placed in service more than three years after the date the building was first placed in service
- Is used in a trade or business
- Expenses are not for the enlargement of the building, elevator or escalator, structural components, or internal structural framework of the building.
- Qualified restaurant property is property used in a trade or business that is a building or an improvement to a building placed in service during the tax year, whereby more than 50 percent of the square footage must be devoted to meal preparation and seating for on-premise consumption of meals
- Qualified retail improvement property is any improvement to an interior portion of nonresidential real property if it meets the following requirements:
- Open to the general public and is used in the trade or business of selling tangible property
- Placed in service more than three years after the date the building was placed in service
- Expenses are not for the enlargement of the building, elevator or escalator, structural components, or internal structural framework of the building
For more information on the PATH Act or to discuss how to take advantage of the opportunities presented by it, contact your local UHY LLP professional.