What is Qualified Leasehold Improvement Property

What is Qualified Leasehold Improvement Property

Bonus depreciation is one method of accelerated depreciation, often called a “special depreciation allowance,” by the IRS.

The IRS defines qualified Improvement Property (QIP) as any improvement made by the taxpayer to an interior portion of a nonresidential real property building. Such modification is placed in service after the date such a building was first placed in service.

It does not qualify as QIP if the improvement is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

However, many items that would not typically qualify for short life can be eligible as QIP property such as ceilings, lighting, walls, paint, interior doors, all interior electrical and plumbing including domestic use, and interior HVAC ducting, etc.

Since QIP property is 15 Year Property, it also qualifies for 100% Bonus Depreciation.

What is Bonus Depreciation?

Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), the Internal Revenue Code now permits “bonus depreciation” of up to 100% of the cost of eligible business property. This was enacted to stimulate investment in business property (but not land or buildings). Before the TCJA, the Code permitted up to a 50% deduction.

Bonus depreciation is one method of accelerated depreciation, often called a “special depreciation allowance,” by the IRS.

In 2021, businesses may receive a 100% deduction of the cost of “qualified business property” after applying any applicable §179 deductions. This “immediate” depreciation deduction is available for eligible property placed in service between September 27, 2017, and January 1, 2023.

After January 1, 2023, the deduction will be reduced according to the following schedule:

  • 2023: 80%
  • 2024: 60%
  • 2025: 40%
  • 2026: 20%

Assets that qualify for Bonus Depreciation

Qualified business property with a useful life of 20 years or less.

·         Equipment

·         Furniture

·         Fixtures

·         Machinery

·         Computer Software

Qualified Improvement Property

·         Improvements made to the interior of commercial buildings

·         Some “listed property,” which is used for both personal and business, such as vehicles and cameras

·         The property must be used in your business

·         The property must have a determinable useful life of more than one year.

More qualifiers

·         The property may be used but new to the taxpayer.

·         The property must be purchased-not leased or rented

·         It cannot apply to transactions between related parties or in the context of a like-kind exchange 

Important

Residential Apartment Buildings, Assisted Living Facilities, Nursing Homes, and any other residential rental properties do not meet the requirements for Qualified Improvement Property and must depreciate interior improvements over 27.5 years.

Would you like help to sort all of this out?

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