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Depreciation on Buildout Improvements Still Unclear as Tax Filing Season Approaches

January 16, 2019

As filing season for 2018’s taxes nears, one area of the new Tax Cuts and Jobs Act (TCJA) that remains unsolved is how depreciation on qualified improvement property will be treated. When conducting a major buildout or refurbishment project, business owners are generally offered major tax depreciation incentives. However, these incentives could be at risk for tax year 2018, unless a technical correction to the new law is issued.

Under the TCJA, fixed assets placed into service after September 27, 2017 are now eligible for 100 percent bonus depreciation, as compared to 50 percent bonus depreciation under the old law. One-hundred percent bonus depreciation enables business owners to deduct the full cost of the fixed asset in the year it is placed into service.

The new law also consolidates qualified leasehold improvement property with qualified improvement property. Qualified improvement property includes enhancements to the interior portion of a building that is considered non-resident property. Qualified leasehold improvement property acts in a similar way, except the enhancements are pursuant to the lease and must be placed in service more than three years after the date the building was first placed into service.

Under the old law, qualified improvement property was depreciated over 39 years and was eligible for 50 percent bonus depreciation, while qualified leasehold improvements were depreciated over 15 years and were eligible for 50 percent bonus depreciation. The new law states that only items with a depreciable recovery period of 20 years or less are eligible for the 100 percent bonus deduction.

While it was intended for qualified improvement property to have a 15 year recovery, the way the new tax law is written results in qualified improvement property being depreciated over 39 years, making them technically not eligible for bonus depreciation.

On November 27, 2018, then-House Ways and Means Chairman Kevin Brady introduced the “Tax Technical and Clerical Corrections Act.” This discussion draft addresses needed technical fixes to the TCJA, including a technical correction to depreciation of qualified improvement property. Congressional Democrats have shown limited interest in making these technical corrections. Between the pushback from the Congressional Democrats and the current government shutdown, the package prepared by the House Ways and Means Committee is unlikely to become law in time for many business owners to file their 2018 tax returns. This could result in a major issue for business owners looking to claim tax deductions on qualified improvement property.

Qualified improvements are one of the greatest expenditures that come with completing a major renovation project, especially for restaurant and hotel owners. Significant tax incentives could go away until a technical correction to the new tax law is completed. It is critical for business owners that completed major renovation projects last year to reach out to their tax advisors on how this could impact their 2018 tax return.

Our tax specialists are available for consultation on this issue and other business management topics for restaurants, hotels, or food distributors. Please contact our hospitality tax advisors or Aaron Boker at 301.231.6200 for more information.