by Anthony J. Constantine, CPA, Partner, Ciuni & Panichi, Inc.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended, and in a few cases made permanent, many favorable tax provisions for capital intensive businesses, real estate companies, and construction contractors.
The obvious change that we are thankful for is the now permanently enhanced Section 179 expensing. This provision allows a trade or business to immediately expense up to $500,000 of equipment per year. There are a couple limitations, most notably you must have taxable income and you are limited if you have over $2,000,000 in acquisitions during the year. This provision has been extended each December for the past few years making planning an expensive gamble. Now the provision is permanent. CFO’s can look ahead and plan capital expenditures more prudently.
Over the past fifteen years, in addition to Section 179, taxpayers have been able to take advantage of a provision under Section 168(k) known as bonus depreciation that allows taxpayers to immediately expense a portion of their capital purchases in the first year. The IRS extended the provision at 50 percent through 2017, 40 percent in 2018, and 30 percent in 2019. The provision goes away in 2020. Bonus depreciation is different from Sec 179 expensing in that:
- No taxable income limitation
- Not limited to tangible personal property
- No investment limitation
- Original use must begin with the taxpayer
Real estate lessors and lessees will benefit from the bonus depreciation available for property improvements considered Qualified Tenant Improvements. Under the provision the depreciable life for property improvements are reduced to 15 years, much more favorable than the previous 39 years. In order to be considered “qualifying” the improvement must meet the following criteria:
- Made under or pursuant to a lease (related party leases do not count)
- Made to a building that has been in service for at least three years
- Does not include enlargements, elevators, escalators, and internal structural framework
The PATH Act modified the definition of qualifying improvement for purposes of bonus depreciation, effective for tax years beginning in 2016. The modified category, Qualified Improvement Property, expands the property eligible for bonus depreciation. Now these new rules provide that any improvement to an interior portion of a building which is nonresidential real property and placed in service after the date the building was first placed in service will qualify for bonus depreciation. Exceptions include enlargements, elevators/escalators, and internal structural framework.
Basically, the provision allows for bonus depreciation on any interior improvement (subject to a few restrictions). This means that even if the property doesn’t qualify for a 15 year life, it still may be eligible for bonus depreciation if purchased and placed in service in 2016 or later.
Example: A manufacturer decides to renovate the interior of his plant. The renovations will qualify for bonus depreciation as long as they are interior improvements that are not enlargements, elevators/escalators, and internal structural framework. The remaining basis will be depreciated over 39 years.
Tax rules are complicated. Your CPA is your best resource to take full advantage of tax benefits impacting your business. Ciuni & Panichi, Inc. welcomes the opportunity to help your business prosper. To learn more, contact Tony Constantine, CPA, Partner in the Real Estate and Construction Group at 216-765-6925 or tconstantine@cp-advisors.com.
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