As you prepare for the upcoming tax season, here are some things to consider on depreciation. In this article, we will cover bonus depreciation as it relates to qualified improvement property, also known as QIP, and section 179. Watch the video version here.
What is QIP and why does it matter?
The Tax Cuts and Jobs Act classified qualified retail-improvement, restaurant and leasehold improvement property as QIP. Under the new legislation, QIP, placed in service in 2018 and after is now considered 15-year property and is eligible for 100% bonus depreciation, providing many taxpayers with significant tax savings opportunities and incentivizing taxpayers to continue to invest in improvements.
Bonus depreciation is additional first-year depreciation of 100% for qualified property placed in service through Dec. 31, 2022. It should be noted, for 2023 through 2026, bonus depreciation is scheduled to be gradually reduced. But, the statutory language didn’t define QIP as 15-year property, so QIP defaulted to a 39-year recovery period, making it ineligible for bonus depreciation.
Valuable depreciation-related breaks may be available to real estate investors. One such break is the Section 179 expensing election. It allows you to deduct (rather than depreciate over a number of years) qualified improvement property. The Tax Cuts and Jobs Act also allows Section 179 expensing for certain depreciable tangible personal property used primarily to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm and security systems. For qualifying property placed in service in 2021, the expensing limit is $1.05 million. The break begins to phase out dollar-for-dollar when asset acquisitions for the year exceed $2.62 million. (These amounts are adjusted annually for inflation.) Other valuable breaks include bonus depreciation and accelerated depreciation.
It is important to develop your personalized strategy regarding depreciation with your tax advisor. Please click here to connect with your CPA to setup an appointment for tax planning.