Important Change to Bonus Depreciation Under the PATH Act

The Protecting Americans from Tax Hikes of 2015 Act (PATH Act) includes a substantial change in the 50% additional first-year depreciation rules for property placed in service after December 31, 2015. This should be welcomed by all businesses that are currently undertaking or plan to undertake capital expenditures in 2016.

Prior Law

Previously and in general, a 50% additional first-year depreciation deduction was allowed for certain qualified property acquired after December 31, 2007 and placed in service before January 1, 2016.

Qualified property consisted of brand new property which was included in one of several categories. One of these categories included qualified leasehold improvement property (“QLIP”) which was defined as any improvement made to the interior part of nonresidential real property, provided that 1) the improvement be made under a lease with the lessee exclusively occupying that part of the building and 2) the improvement be placed in service more than 3 years after the date the building was first placed in service. Leases between related persons were not eligible and expenditures attributable to the following were not eligible: 1) building enlargements, 2) elevators and escalators, 3) structural components benefiting a common area, and 4) the structural framework of a building.

QLIP was not only eligible for 50% bonus depreciation but also for a MACRS recovery period of 15 years in comparison to the general 39-year recovery period for improvements made to nonresidential real property.

Changes for 2016 included in the PATH Act

The PATH Act includes a qualifying property category of qualified improvement property (“QIP”) instead of QLIP for purposes of the additional first-year depreciation rules. This new category is defined as any improvement made to the interior part of nonresidential real property if the improvement is placed in service after the date the building was first placed in service. The following requirements have been eliminated from the new definition: 1) the requirement that the improvement be made under a lease and 2) the requirement that the improvement be placed in service more than 3 years after the building was first placed in service. Furthermore, the exclusion of expenditures attributable to structural components benefiting a common area has been removed. 

These changes result in a new 39-year category of property that is eligible for the 50% additional first-year depreciation allowance. It should be noted that property qualifying as QLIP also satisfies the requirements for QIP. QLIP will continue to have a MACRS recovery period of 15 years. 

Tax Impact

The ultimate result is that taxpayers making qualifying improvements will be eligible for an immediate 50% first-year depreciation deduction with the remaining balance being depreciated over 39 years. This is a substantial benefit when compared to the standard 39-year depreciation schedule which would only provide a maximum deduction of approximately 2.46% in the first year (assuming property placed in service in January).