The PATH Act increased the expensing break for qualifying real-estate improvements. It also made it easier for improvements and expenses to qualify for bonus first-year depreciation, but the determinations of qualifying improvements and expenses are more complex. The detail of those new complications is lengthy. However, as summarized by Thomas Reuters in their Checkpoint New dated March 8, 2016, as a general rule, the cost of commercial real-estate improvements is recovered over a period of 39 years via straight-line depreciation only.
“However, for specially-defined categories of realty improvements under Code Section 179, taxpayers may be entitled to expense part of the cost of the improvements; bonus first-year depreciation deductions of the portion of the cost that isn’t (or can’t be) expensed. A relatively short 15 – year recovery period of the cost that isn’t (or can’t be) expensed or recovered via bonus first-year depreciation.
Larger businesses may not qualify for expensing, but they still may be able to obtain bonus depreciation and a short 15 – year recovery period. Generally, Section 179 is tangible depreciable property, other than buildings or their structural components, and “off the shelf” computer software that is acquired by purchase and used in an active trade or business.
Beginning calendar year 2015, a taxpayer can elect to treat “qualified real property” as Section 179 property with the aggregate amount of the cost of qualified real property that a taxpayer could elect to treat as an expense subject to both an annual limit $500,000 expensing limitation and $2 million phase-out. Additionally, both dollar limits are inflation-adjusted after 2015 (for 2016, the expensing limitation remains unchanged but the phase-out amount rises to $2,010,000). The PATH Act also:
- permanently extended the elective treatment of qualified real property as Section 179 property, effective for tax years beginning after December 31, 2014 (Code Sec. 179(f)(1)).
- removed the annual $250,000 limitation under Code Sec. 179(F)(3) on the amount of qualified real property that can be treated as Section 179 property, effective for tax years beginning after December 31, 2015 (PATH Act § 124(c)(2)).