With the passing of the new tax law, depreciation rules were changed for qualified improvement property in an attempt to help simplify this tax rule. Here’s a glimpse into what changed as a result of the Tax Cuts and Jobs Act.

What Changed

Under the Tax Cuts and Jobs Act, the depreciation period for qualified improvement property life was reduced to 15 years from 39 years, and is now 20 years under the alternative depreciation system (ADS).

The Act also eliminated the separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property, and instead, created a general qualified improvement property category.

Therefore, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, excluding: enlargements, elevators/escalators and internal structural framework. The improvements do not need to be made pursuant to a lease.

Additionally, building property placed in service after Dec. 31, 2017, that does not meet the definition of qualified improvement property, is depreciable as nonresidential real property, using the straight-line method and the mid-month convention.

Tax Planning Considerations

With these new depreciation rules in mind, consider the following tax planning considerations:

  • With the limitation of business interest, certain businesses may not want to maximize depreciation deductions in order to deduct all of their interest.
  • Real property trades or businesses that elect out of the limitation on the deduction for interest under Section 163(j) must use ADS lives to depreciate any of their nonresidential real property, residential rental property and qualified improvement property.

To obtain assistance today with navigating these new depreciation rules, contact Doeren Mayhew’s tax advisors.

 

Want to reach the author? Email Michael Weller or contact him at 248.244.3039. Michael Weller, JD is a Senior Tax Manager with Doeren Mayhew.