The good and not-so-good news about qualified improvement property

If you made improvements to your commercial property last year or are planning to this coming year, there’s good news and not-so-good news.

The good news is, some of the restrictions for taking the depreciation on those improvements have been eliminated under the 2017 Tax Cuts and Jobs Act.

Prior to the new tax law, taxpayers could be eligible for 15-year depreciation on nonstructural improvements to the interior of a building that met certain conditions. This was known as qualified leasehold improvements. Some of those conditions included the requirement that:

  • The improvements were subject to a lease between unrelated entities;
  • The improvements were to a leased space; and
  • The improvements are to the interior of a building older than three years.

Now, under the Tax Cuts and Jobs Act, qualified leasehold improvements have been replaced by qualified improvement property (QIP).  QIP property is not eligible for bonus depreciation but the Tax Cuts and Jobs Act did ease some other restrictions. QIP eliminates:

  • The requirement that a lease be between unrelated entities; and
  • The three-year requirement. The definition of QIP states that qualifying improvements must be done “after the building is originally placed in service.”

Now for the not-so-good news.

Just as with the previous qualified leasehold improvements, QIP was supposed to be eligible for 15-year deprecation with the possibility for bonus depreciation. Due to drafting errors in the Tax Cuts and Jobs Act, however, QIP is considered 39-year property, but is eligible for Section 179 deduction.

Section 179 is the ability to expense all or part of the item in the purchase year.  This includes interior non-structural improvements, roof, HVAC, fire protection, alarm systems and security systems.

Congress is aware of the error and is expected – eventually – to correct it. Until then, however, we will work with you to advise you the best way to handle improvements to your business.

Please call our office if you have questions.

Tamra Newman, CPA, is a Tax Manager with Antares Group, Inc. She can be reached at 770-785-7855 or thn@antarescpas.com.