Lessors and lessees have been able to take advantage of bonus depreciation for a number of years, but unless Congress acts now, this tax benefit may soon be gone.

In late November last year, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, better known as the PATH Act, which gave taxpayers much desired tax certainty. Changes were made in the PATH Act to both bonus depreciation and Section 179 expensing, with bonus depreciation to be phased out and Section 179 expensing to be expanded.

Bonus Depreciation and the PATH Act
Bonus depreciation allows for a portion (currently 50%) of an asset’s cost to be deducted in the first year it is in service, and the rest is deducted over time.

The PATH Act did extend bonus depreciation; however, this tax incentive may soon be coming to an end.  From 2016 through 2017, bonus deprecation stays at the 50% level, and certain qualified property will be able to utilize bonus depreciation for a few more years after.

Beginning in 2018, bonus depreciation will begin to be phased out – to 40% in 2018, 30% in 2019, and completely phased out beginning in 2020.

Before the PATH Act: Qualified Leasehold Improvement Property 
Before the PATH, the Qualified Property Act provisions included qualified leasehold improvements, which was defined as improvements to an interior portion of a building that is nonresidential real property as long as that improvement is placed in service after the building was first placed in service by any taxpayer.

The PATH ACT relaxed the rules changed qualified leasehold improvement property to a new category known as Qualified Improvement Property (QIP).

After the PATH Act:  Qualified Improvement Property (QIP)
The QIP definition is similar to that of qualified leasehold improvement property. However, there are subtle, distinct differences. QIP does not have the previous requirements that a building must be at least three years old prior to the expenditure and that building improvements are subject to a lease. Furthermore, there is no longer an exclusion of structural components of a building that benefit a common area.
Similar to qualified leasehold improvements, QIPs do not include any improvement for expenditures attributable to (1) the enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

Accelerated Depreciation on Certain Qualified Property
In addition, the PATH Act permanently extended the 15-year Modified Accelerated Cost Recovery System (MACRS) depreciation period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Note that qualified leasehold improvement property and qualified retail improvement property both satisfy the definition of QIPs, whereas property eligible for depreciation as qualified restaurant property may or may not meet these requirements.

PATH Act Effects on Section 179 Expensing
The PATH Act made permanent and expanded Section 179 expensing for qualified real property. Now, the annual expensing limit for 2016 is $500,000, and the annual investment limit is $2 million before phase-out. Both of these amounts will be adjusted for inflation annually.

Furthermore, beginning in 2016, the following heating, ventilation, and cooling equipment will expressly qualify for Section 179 expensing:

  1. Portable air conditioning and heating units, whether or not they are used for human comfort of for business process purposes
  2. A portion of an HVAC system that is air conditioning or heating property used for business purposes
  3. A portion of an HVAC system that is air conditioning or heating property used for human comfort purposes, if the property is qualified real property

How You Can Maximize Your Tax Benefit with the PATH Act
If you are expecting a 2016 net loss, consider reviewing cash flow available for capital expenditures.  Capital expenditures projected for qualified real property should be made prior to 2017 to take full advantage of bonus depreciation.

If you qualify for Section 179 expensing, take note of the ability to expense certain HVAC property.

Consult with your tax advisor to find out if you qualify for bonus appreciation and learn more about the tax benefits you get from the PATH Act. A little planning can avoid missing out on important tax deductions and put tax dollars back in your pocket.