bonus depreciation on leasehold improvments
Anyone following this to see if it gets fixed by year end?
The new law eliminates depreciation categories for qualified leasehold improvements (QLI), qualified restaurant property (QRP), and qualified retail improvement property (QRIP). Only qualified improvement property (QIP) remains.
Qualified Improvement Property – Technical Error in the Law
Prior to the TCJA, Qualified Improvement Property was eligible for 50% bonus depreciation. The published committee reports indicate that Congress’ intended to provide both a 15-year recovery period and 100% bonus depreciation for QIP placed in service after 2017. The drafters of the actual legislation tied bonus eligibility to property with a recovery period of 20 years or less. However, in their haste to push the law through they failed to also specify the intended 15-year recovery for QIP. The result is that, beginning with 2018, QIP retains its 39-year recovery period and loses bonus treatment altogether. Lowering the recovery period to 15 years would also have resulted in a 20-year Alternative Depreciation System (ADS) recovery period (versus a 40-year ADS recovery).
KBKG Insight: Most tax professionals expected the release of technical corrections for multiple issues, including Qualified Improvement Property, before the end of 2018. However, the politics of passing corrections is complicated requiring bipartisan support from both Republicans and Democrats in Congress. There is speculation this could happen during the upcoming lame-duck session, but given the current political climate in Washington there is no certainty it will ever happen.
The IRS must rely on the existing law as written and does not have the authority to correct these obvious drafting errors. Further, tax professionals should not assume technical corrections will occur before they need to prepare returns for the 2018 tax year. For now, QIP placed in service after 2017 is recovered over 39 years (40 years under ADS) with no bonus depreciation eligibility.