Key Depreciation Benefit Eludes Businesses
Feb. 1, 2018
An apparent drafting error will keep businesses from getting a key depreciation benefit for real estate that Congress intended for them to receive as part of the recently passed tax reform unless a technical corrections bill resolves the problem.
Prior to tax reform, improvements to real property classified as qualified leasehold improvements, qualified retail improvements, and qualified restaurant property had a 15-year life and were eligible for 50 percent bonus depreciation. The conference committee report indicated that Congress intended to combine the three types of property into a new category of real estate improvements called qualified improvement property (QIP) that would be eligible for a 15-year life and 100 percent bonus depreciation. QIP includes any improvement to an interior portion of a building that is nonresidential real property.
Unfortunately for taxpayers, how the statute was drafted was not consistent with the clear congressional intent. In order to implement the congressional intent, the legislation had to do two things:
- Eliminate qualified leasehold improvements, qualified retail improvements, and qualified restaurant property from the code and add QIP.
- Include QIP as 15-year property in IRC Section 168(e)(3)(E). This is important as real estate improvements are not eligible for bonus depreciation unless they are classified as 15-year property.
Congress completed the first task but failed to include QIP as 15-year property. By failing to change the classification of real estate improvements, any bonus depreciation for QIP was wiped out. Adding insult to injury, not only is the new QIP not eligible for bonus depreciation, the omitted classification change results in a 39-year depreciable life instead of the 15-year life that clearly was intended by Congress.
Qualified leasehold improvements, qualified retail improvements, and qualified restaurant property placed in service by Dec. 31, 2017, still will be eligible for 50 percent bonus depreciation and a 15-year life. Absent a technical corrections bill to correct the drafting error, however, QIP placed in service in 2018 and later years will not be entitled to bonus depreciation and will have a 39-year life.