Building Improvements Under the Path Act of 2015

The Path Act, passed by Congress in 2015, has paved the way for additional bonus depreciation benefits for certain building improvements.  If you lease a building and made improvements, this is something to pay attention to.  

First a bit of history.  In the past, if improvements were made to a building, the improvements had to be “Qualified Leasehold Improvements” which meant that the building had to be subject to a lease, and the improvement had to be placed in service more than 3 years after the date the building was first placed in service.  If the improvements did not meet these requirements, they were excluded from the bonus depreciation rules. 

However, with the PATH Act, the definition was changed from “Qualified Leasehold Improvement” to a broader definition of “Qualified Improvement Property”.  This change means that in order to qualify for bonus depreciation, improvements no longer need to be subject to a lease and can now be made within the 3 years of placing the building in service, as long as the improvements are made after the building is placed in service. 

Stated another way, Qualified Improvement Property is defined as any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. Expenditures which are attributable to the enlargement of a building, any elevator or escalator, or the internal structural framework of the building are excluded from the definition of Qualified Improvement Property. 

Now turning to the favorable 15-year life on improvements, the new law permanently extends the 15-year recovery period for Qualified Leasehold Improvement Property.  Therefore, improvements which meet the definition of Qualified Improvement Property must still meet the definition of Qualified Leasehold Improvement property in order to obtain the favorable 15-year depreciable life, or else the 39-year life must be used.  

Property which meets the definition of Qualified Leasehold Improvement Property for purposes of the 15-year recovery period also meets the definition of qualified improvement property and, therefore, qualifies for bonus depreciation. 

These expenditures can be significant and can get the attention of an IRS auditor, not to mention the fact that you might lose out on some of the significant benefits, and therefore, we recommend that you consult with an experienced CPA. 

BGBC Partners, LLP is a full service certified public accounting and business consulting practice.