Tax reform is now law and, in the world of real estate and construction, there are major implications to CPAs, finance professionals, property owners, and real estate developers. The new law, titled the Tax Cuts and Jobs Act, made changes that significantly affect building construction and renovation projects, as well as property acquisitions.
Qualified Improvement Property
The new law eliminates depreciation classifications for qualified leasehold improvements (QLI), qualified restaurant property (QRP), and qualified retail improvement property (QRIP) and replaces them with qualified improvement property (QIP). QIP has traditionally included any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service, with certain exclusions.
In a huge win for property owners and real estate developers, QIP placed in service after December 31, 2017 is now depreciated over 15 years and eligible for bonus depreciation. At least, that was the intent of Congress through the Conference Committee’s Joint Explanatory Statement. In their haste, the drafters of the legislation did not properly amend Section 168 to provide a 15-year life or bonus depreciation for QIP, but this error is expected to be addressed in future technical corrections.
Bonus Depreciation Considerations
Bonus depreciation has been increased from 50 percent to 100 percent for property placed in service after September 27, 2017 through 2022. That means the aforementioned qualified improvement property projects will likely be eligible for full expensing of most costs associated with renovations over the next 5 years.
Perhaps more importantly, bonus depreciation is now available for used property. This means 15%-40% of costs associated with the acquisition of property after September 27, 2017 can potentially be immediately expensed. There are some exclusions for properties that were leased prior to purchase as well as some auto dealers.
Additional consideration should be given to changes to Section 179 expensing, which was increased and now includes roofs, HVAC, fire protection, alarm systems, and security systems, providing these improvements are placed in service after the building was first placed in service.
Additional deductions can be claimed for energy efficient property through Section 179D, the Energy Efficient Commercial Building Deduction. This incentive is a federal tax deduction of up to $1.80 per square foot for the construction or renovation of energy efficient buildings and was recently extended to include properties placed in service from 2006 – 2017.
For more information on how to maximize the tax benefits available to you or your clients, contact BRAYN Consulting at firstname.lastname@example.org or 888-773-8356.