Now that the dust is settling on the Tax Cuts and Jobs Act we are starting to get a better idea of some of the provisions in the law. Some areas of the law are becoming clearer while others are still a little muddied. One of the more confusing areas of the new tax law relates to bonus depreciation. Two areas of specific confusion relate to Qualified Improvement Property and the Transition rules for the self-constructed property.
Qualified Improvement Property
Under the PATH Act, a new type of property was created Qualified Improvement Property or “QIP”. This type of property is non-structural improvements to the interior of a building placed in service after the building was originally placed in service. Under the PATH Act, this type of property is bonus eligible with a 39-year depreciable life (15-years if it also qualified for Qualified Leasehold Improvement Property).
In order to simplify the code the new tax reform bill combined Qualified Restaurant Property, Qualified Retail Property and Qualified Leasehold Improvements into one category with a 15-year life “Qualified Improvement Property”. While it appears Congress intended to include the old QIP in the new 15-year category, the new law did not include assets included in the original QIP. This is further confused by the fact that the new property description uses the same name Qualified Improvement Property, as was used under the old rules.
Unless a technical correction is issued this will eliminate the old “Qualified Improvement Property” from bonus eligible assets. Additionally, Qualified Restaurant Property that is also Qualified Improvement Property may be affected. While it is expected that this will be addressed in future guidance the confusion remains until more information is issued.
Another area of confusion relates to the transition rules to 100% bonus depreciation. Under the new bill eligible property acquired and placed in service after September 27, 2017, is eligible for 100% bonus depreciation. However similar to the last time we had a 100% bonus depreciation (9/9/10 to 12/31/11) transition rules and binding contract rules apply.
The biggest area this will affect is with “self-constructed property”. Past guidance provided a 10% test for determining when a self-constructed property was started. However, in that past guidance, a property could be separated as to when different components were installed. For example, if the parking lot was installed prior to the September 27th date it would be under the new ruled, but if the carpet was put in after the September 27th date it would be subject to the new rules. This would be true even if the building was started well before the transition date.
This is further confused when it is considered that the old rules have bonus depreciation at 50% in 2017 and 40% in 2018. Under the transition rules, if an asset is acquired prior to September 27th, 2017, but placed in service in 2018, the property would be subject to the old 2018 bonus numbers of 40%.
Take for example a self-constructed property that was started in March of 2017 and is slated for completion in mid-2018. If the parking lot was installed in June of 2017 it would be subject to the old rules. Since the property will not be finished until 2018, the parking lot would be placed in service in 2018 and subject to a bonus depreciation of 40%. However, if the carpet is installed in December, the carpet would be subject to the new rules and eligible for 100% bonus depreciation. This means that a building may have multiple assets with different bonus eligibility even if the building is Placed in Service in 2018 (or late 2017). It will be critical that any cost segregation analysis looks at the assets paid for prior to 9/27 and those paid for after this date as part of the study.
As demonstrated above this new tax law has many wrinkles. It is more important than ever to work with qualified professionals to ensure accurate handling of depreciation moving forward.