Rules Eased for Bonus Depreciation, Code Sec 179 Expensing and Regular Depreciation

Bonus depreciation is a method of accelerated depreciation that allows businesses to deduct the cost of an eligible property in the first-year of service. Depreciable business assets with a recovery period of 20 years or less and other types of property are generally eligible. For example, machinery, equipment, computers, appliances, and furniture generally qualify. Either amending 2019 tax returns if already filed or claiming bonus depreciation now as 2019 tax returns are filed could result in similar benefits. For tax years beginning after 2017, if a taxpayer in a real property trade or business “elects out” of the TCJA’s limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under the ADS. New 100% bonus depreciation rules under the Tax Cuts and Jobs Act will benefit many, but a drafting error has left businesses wondering if certain building improvements will qualify for the accelerated deduction.

Qualified improvement property specifically excludes expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building. Originally this property was assigned a recovery period of 39 years under the TCJA. Before the TCJA, section 179 property included most tangible personal property as well non-customized (“off-the-shelf”) computer software.

Understanding Qualified Improvement Property Depreciation Changes

These provisions of the tax law allow businesses to immediately expense an asset in the year it’s placed in service. The addition of significant leasehold improvements can affect the term of the lease if, when the option to extend or terminate the lease becomes exercisable, it makes the exercise of a renewal option reasonably certain to be executed. GAAP requires that, if a renewal option becomes reasonably certain to be exercised, the term of the lease should be reassessed. The assets would then be subject to amortization over the new remaining life of the lease term. Other factors which could affect the assurance of the exercise of a renewal option are penalties in the contract for termination and optional bargain buyouts after the next lease period. The addition of a leasehold improvement could make any penalty economically detrimental for the lessee to incur because of the increased value the improvement provides. It could also make the buyout at the end of the lease more attractive since the leased property is already customized for the entity’s business purposes.

For these entities, business interest is still limited at 30% of ATI for 2019 with the calculation changing to 50% of ATI beginning in the 2020 tax year. However, any business interest limit incurred by a partnership in 2019 and passed through to its partners as excess business interest expense, will also be 50% deductible by those partners in 2020.

CARES Act QIP change requires action

BDO Center for Accounting and SEC Matters Your one stop for accounting guidance, financial reporting insights, and regulatory hot topics. For assistance leveraging QIP and other strategies for depreciable property to create cash flow, contact your Moss Adams professional. The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor. The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.

• But, the new law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.
• Qualified Improvement Property is a term found in the Internal Revenue Code, Section 168, and encompasses any improvements made to the interior of a commercial real property.
• So you may need to generate more business taxable income to take full advantage of the Sec. 179 deduction privilege.
• ABC Company can now file an automatic accounting method change request with its 2019 tax return, to change the depreciable life of the property to 15 years and to claim 100% bonus depreciation.
• Massachusettsadopts the changes to QIP allowing a 15-year depreciable life, but it does not allowIRC Sec. 168bonus depreciation.
• Companies may consider cost segregation, to identify property costs that can be depreciated over five years or deducted as repair and maintenance expenses to offset more state income tax.

Investment advisory offered through Moss Adams Wealth Advisors LLC. Services from India provided by Moss Adams LLP. The new law also adds an exclusion for any property used in a trade or business that has had floor-plan financing indebtedness if the floor-plan financing interest was taken into account under section 163. Floor-plan financing indebtedness is secured by motor vehicle inventory that in a business that sells or leases motor vehicles to retail customers. The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.

IRS Announces 2017 Automobile Depreciation Deduction Limits and Inclusion Amounts

The 2022 Payroll Update report provides insight on remote workforce tax issues, pandemic payroll issues and employer credits, and worker classification issues in the gig economy. The main goal of ASC 606 was to create a similar revenue recognition policy and calculation across all industries. The construction industry, which has historically had its own guidance and industry practices, is no exception. Please contact your Smith Schafer professional to help you consider if Understanding Qualified Improvement Property Depreciation Changes this change is beneficial for your business. Updated in line with the Tax Cuts and Jobs Act, the Quickfinder Small Business Handbook is the tax reference no small business or accountant should be without. Tax, accounting, workflow, and firm management solutions to help your firm succeed, with the research tools you need to stay informed. Wolters Kluwer is by your side to help you stay up-to-date with tax and compliance changes and support your ability to work remotely.

To help stimulate the real estate sector after September 11, 2001, Congress put in place various provisions that allowed certain qualified real property to be depreciated over 15 years instead of 39 years. Furthermore, certain real property also qualified for bonus deprecation, which allowed businesses to fully depreciate such property in the placed-in-service year. Retail space), whether the improvements can qualify as QIP depends on the building’s use in the year the improvements are placed in service (Richman, “Current Use Is Key to QIP Bonus Depreciation Deductions,” 168 Tax Notes Federal 721 ).

Tax Implications and Action Items

The CARES Act fix is retroactive and applies to QIP placed in service after December 31, 2017. Businesses can now treat QIP placed in service after December 31, 2017, as 15-year property. It is eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets that are being depreciated over 39 years under the previous law. The CARES Act retroactively changed the recovery period of QIP to 15 years beginning September 27, 2017. This means that any QIP placed in service after this date is eligible for bonus depreciation under Section 168 and may qualify for 100% expensing. It is worth noting that for any QIP depreciated under the Alternative Depreciation System , the recovery period is changed from 40 to 20 years and does not qualify for accelerated bonus depreciation. Additionally, the CARES Act modified the definition of QIP so that only improvements “made by the taxpayer” qualified.

For partnerships seeking to amend a prior year return, it will be necessary to consider whether the partnership is subject to the Centralized Partnership Audit Regime . If a partnership validly elects out of the CPAR, the partnership may amend its Schedules K-1 after the due date of the partnership return to which the statements relate. The partners would then file amended income tax returns to claim the additional depreciation deductions. The CARES Act also addresses the so-called “retail glitch” embodied in the 2017 Tax Cuts and Jobs Act that failed to assign a 15-year recovery period to QIP, making it 39-year property and ineligible for 100% bonus depreciation.

Eligible property has also been expanded to include used property, which is a significant and favorable change from previous bonus depreciation rules. Additionally, the TCJA eliminates the requirement that the original use of the qualified property must begin with the current taxpayer. This means that businesses can take bonus depreciation on assets that are acquired from a previous user, as long as the current taxpayer did not previously use the acquired property and the property was not acquired from a related party. The TCJA also added qualified film, television, and live theatrical productions as types of qualified property that are eligible for 100% bonus depreciation.

From in-depth research and analysis to timesaving practice aids, Bloomberg Tax has the resources you need to provide informed advice. Office renovations made to a recently purchased property for your business’s use. The Top 20 Firm is https://accounting-services.net/ now offering a suite of services including cybersecurity assessments, breach response and disaster recover plans, staff augmentation and more. As always, we will continue to monitor and communicate any future legislative updates.

Crisis Response Resource Center BDO is here to help your business – and you – persevere through crises, prepare for recovery, and once again thrive. EisnerAmper provides some federal and state resources that are providing coronavirus-related assistance.