Congress made some notable changes to the (then-expired) bonus depreciation provisions when it passed the Protecting Americans From Tax Hikes (PATH) Act of 2015, part of the Consolidated Appropriations Act, 2016, P.L. 114-113, in December. First, it retroactively extended bonus depreciation through 2019, which is the change that got all the attention. But the act also introduced a new concept, "qualified improvement property," which expands the availability of bonus depreciation.
Under the PATH Act, Sec. 168(k) provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service for property placed in service in 2015, 2016, or 2017. The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019.
"Qualified improvement property" is a new class of nonresidential real property that is eligible for bonus depreciation, starting with improvements placed in service in 2016. It replaces the former class of qualified leasehold improvement property. Qualified improvement property is defined in Sec. 168(k)(3) as improvements to the interior of any nonresidential real property placed in service after the date the building was first placed in service. However, qualified improvement property does not include expenditures to enlarge a building, for any elevator or escalator, or for the internal structural framework of the building.
Taxpayers will have to determine separately if real property improvements are eligible for bonus depreciation and what their applicable recovery period is (generally 15 or 39 years for nonresidential real property). Not all nonresidential real property is eligible to be classified as qualified improvement property for bonus depreciation purposes.
Property eligible for bonus depreciation must be original-use property, placed in service in the applicable time frame, and qualified property under Sec. 168(k)(2). Additional criteria also must be satisfied for noncommercial aircraft and long-term production property.
The expanded definition of bonus depreciation applicable to qualifying improvement property allows taxpayers to claim bonus depreciation starting in 2016 where bonus depreciation was previously limited to qualified leasehold improvements requiring the building to be at least 3 years old and the improvements be made subject to a lease.
Other notable changes to bonus depreciation rules made by the PATH Act include (1) allowing farmers to claim a 50% deduction (phased down after 2017) in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for specified plants planted or grafted after 2015 but before 2020, (2) adjusting the amount of bonus depreciation for automobiles, (3) extending long-term accounting method relief for bonus depreciation claimed on property placed in service in 2015 through 2019, and (4) striking outdated rules for property placed in service before 2008.
For a detailed discussion of the issues in this area, see "Bonus Depreciation After the PATH Act," by Nathan P. Clark, CPA, in the May 2016 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief, The Tax Adviser
Also in the May issue:
- A discussion of personal goodwill and the net investment income tax.
- An analysis of earnings stripping and repatriation of earnings.
- A look at ethical and penalty issues in the context of Schedule UTP.
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
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