Written By: Kevin Jerry / April 26, 2024
Bonus depreciation, in some form, has existed since 2001. It was implemented to stimulate the real estate market by allowing owners and investors to accelerate a portion of a new building’s depreciation. It is also known as the §168(k) deduction.
Prior to 2001, an improvement to the interior of a commercial property was depreciated over the life of the building—usually thirty-nine years. An improvement to the interior of a residential property was usually depreciated over twenty-seven- and one-half years.
As part of the Economic Stimulus in 2001, §168(k) allowed a fifty percent bonus on qualified leasehold improvements, qualified restaurant improvements, and qualified retail improvements. These could all be depreciated over fifteen years, and the bonus depreciation could be taken.
As a side note, these three were put under an umbrella called Qualified Improvement Property (QIP). The IRS described these improvements as “any improvement made to the interior portion of a nonresidential building any time after the building was placed in service.” QIPs were assigned a fifteen-year class life and were available for a one hundred percent bonus in 2020.
The passage of the Tax Cuts and Jobs Act (TCJA) in 2017 drastically changed the rules for bonus depreciation. The TCJA allows investors to expense one hundred percent of the cost of building components with class lives less than twenty years IF the property was purchased on or after September 27th, 2017, but before January 1, 2023.
The portion of the depreciation that can be accelerated has class lives of less than twenty years. These include but are not limited to bathrooms, kitchens, security systems, window coverings, carpeting, and land improvements.
The bonus percentage will still be available but will decline by twenty percent each year.
As stated in a previous blog, there is a Bill passed by the House of Representatives to extend the one hundred percent bonus depreciation opportunity. The Bill is called The Tax Relief for American Families and Workers Act of 2024. Unfortunately, the Senate has not passed the House’s version of the bill because there are many other parts to the Bill (disaster relief, increase of §179 expense, low-income housing credits, child tax credits, etc.) that first must be negotiated. Bonus depreciation is merely along for the ride.
Bonus depreciation is mandatory and automatic unless a taxpayer opts out of bonus for single or multiple asset class lives. Electing out of bonus is made by attaching a letter to a timely filed tax return stating which year the specific class life of assets will be excluded from bonus.
It’s not too late to do a cost segregation study with KAJMST. Cost segregation studies can be completed on eligible properties before October 15, 2024.
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