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Leasehold Improvements Depreciation and Qualified Improvement Property

09.25.20

shopThe tax benefits arising from leasehold improvements have long been an important source of savings for businesses like restaurants and retail stores that invest significant dollars in outfitting the spaces they lease.

That all changed with the Tax Cuts and Jobs Act of 2017, however. While TCJA was in many ways a major windfall to businesses, not only putting the corporate income tax on par with that of other countries around the world, but also adding new tax benefits for small and big businesses alike, there were also a few, well… mistakes.

Some of the most glaring were the changes to the area of leasehold improvements. As a result of certain oversights, these changes entailed that qualified leasehold improvements were no longer eligible for bonus depreciation (a tax benefit that allows businesses to deduct all or a part of the cost of purchasing eligible assets in the first year, rather than gradually deducting it over time).

The troubles can be traced back to the Protecting Americans from Tax Hikes, or PATH, Act of 2015, which consolidated different types of property eligible for bonus depreciation, including leasehold improvements, under a single type of property: qualified improvement property, or “QIP.” This change in itself was not an issue; in fact, the PATH Act extended bonus depreciation for leasehold improvements (and all QIP), which were set to expire, for several years. However, when the TCJA was passed, it included a technical error that made all QIP — leasehold improvements included — ineligible for both bonus depreciation and accelerated depreciation. That meant that businesses that made any interior improvements to their leased spaces had to write off those costs over the standard period of 39 years.

So, does this mean leasehold improvements are no longer eligible for bonus depreciation? Thankfully, Congress quickly identified its error, and worked a fix back into the country’s next major economic stimulus bill: this year’s CARES Act. As BPM explained back in May, the CARES Act assigns QIP a 15-year recovery period, makes QIP eligible for first-year, 100% bonus depreciation, and allows businesses to take those deductions retroactively going back to 2018 (the first tax year when the TCJA changes would have been effective). The result is that leasehold improvements are in an even better place now than they were before the TCJA, as the first-year bonus depreciation amount is now 100% instead of 50%, as it was in 2017.

Business owners who think that they may have put leasehold improvements into service in 2018 or 2019 but have not yet received these tax benefits should get in touch with an experienced tax accountant immediately: They may be eligible to amend their 2018 and 2019 returns. At a time when restaurants and retailers in particular are increasingly facing cash flow shortages, an immediate tax benefit like bonus depreciation for past leasehold improvements can make a big difference.

For assistance obtaining the full leasehold improvement tax benefits due to your business, BPM’s tax professionals are standing by. Our fully licensed certified public accountants not only identify opportunities for tax relief like QIP, we also help you create well-thought out tax planning strategies in advance to ensure you pay the absolute minimum amount in taxes you are required to. To learn more about BPM can help your business, contact Duane Bulthuis.

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