There's Still Time...

....to take advantage of qualified real property expensing.

Historically, Code Sec. 179 expensing has been available only for tangible personal property, but the Small Business Act of 2010 provides an exception for certain types of real property. Specifically, under Code Sec. 179(f)(1), for any tax year beginning in 2010 or 2011, a taxpayer may elect to treat up to $250,000 of qualified real property as Code Sec. 179 property. Unless Congress changes the rules, otherwise eligible property placed in service in tax years beginning after 2011 generally will have to be depreciated over 39 years via the straight line method.

What is qualified real property for expensing purposes? Qualified real property is:

(A) qualified leasehold improvement property described in Code Sec. 168(e)(6)

(B) qualified restaurant property described in Code Sec. 168(e)(7)

(C) qualified retail improvement property described in Code Sec. 168(e)(8)

The qualified property must be depreciable, acquired for use in the active conduct of a trade or business, and can't be certain ineligible property.

Qualified Leasehold Improvement Property

As one of the above categories that qualifies as qualified real property component, qualified leasehold improvements are a hot button topic with many of our clients as they look to improve and grow their business. A qualified leasehold improvement property is an interior building improvement that qualifies for bonus first-year depreciation, except that if a lessor makes an improvement that is a qualified leasehold improvement, it can't be qualified leasehold improvement property to any subsequent owner, subject to exceptions.

In general, qualified leasehold improvement property includes interior improvements to a building if:

(1) The improvement is Code Sec. 1250 property.

(2) The improvement is made “under or pursuant to a lease”

(3) The portion of the building is to be occupied exclusively by the lessee

(4) The improvement is placed in service more than three years after the date the building was first placed in service.

The Code doesn't define what types of building improvements are eligible to be treated as qualified leasehold improvement property. Rather, it lists the types of property that can't be so treated. Under Code Sec. 168(k)(3)(B), qualified leasehold improvement property does not include any improvement for which the expense is attributable to:

the enlargement of the building,

any elevator or escalator,

any structural component benefiting a common area, and

the internal structural framework of the building.

What kinds of improvements are qualified leasehold improvements after eliminating those that are ineligible? The following types of improvements would appear to qualify, if they benefit the tenant's space only rather than a common area:

(1) electrical or plumbing systems (including a sprinkler system);

(2) permanently installed lighting fixtures; and

(3) ceilings and doors.

Two breaks apply to qualified leasehold improvement property bought and placed in service this year. It qualifies for up to $250,000 of expensing under Code Sec. 179, and there's a 100% bonus first-year depreciation allowance under Code Sec. 168(k)(2)(A) for the portion of such property that is not expensed.

Is it Real or Personal?

A number of assets installed in commercial buildings are personal property depreciable over five or seven years under MACRS. As a result, these assets are subject to the general expensing rules for personal property, rather than the more-restrictive rules for qualified real property. Shorter-lived assets also are potentially eligible for the bonus first-year depreciation allowance if bought and placed in service this year. These shorter-lived assets include carpeting, movable and removable partitions, and electrical and plumbing equipment necessary for the operation of specialized equipment (rather than for overall building maintenance and operation).

Identifying whether or not your business is eligible for these write-offs is an important task in determining your tax liability for the year and one that should bear importance on your business and tax planning. If you've made these sort of improvements, have a discussion with your CPA about how they plan to treat the items. If you are planning these sort of improvements, know that time is of the essence and discuss with your CPA the rules that govern your improvements. These elections can provide a positive tax outcome; however, like with any deductions for your business, the business purpose cannot be forgotten. If you have questions regarding this information, please reach out to our Firm and we will be glad to assist.

brad@mcarthurco.com

704.544.8429