Tenant Improvement Property No Longer Eligible for Bonus Depreciation and 179

As the provisions of the Tax Cuts and Jobs Act continue to be implemented, unintended consequences of the new law also have been revealing themselves.

One error relates to the depreciation of a new class of property called “Qualified Improvement Property” (defined in new code section 168(e)(6)).  Qualified Improvement Property (QIP) replaces three previous classes of improvement property (Qualified Leasehold Improvements, Qualified Retail Improvement Property and Qualified Restaurant Property). 

All three improvement categories were depreciable over a 15-year life thus making them eligible for bonus depreciation and section 179 expensing.  The new combined category of tenant improvement property (QIP) was intended as a simplification of the old three categories.  QIP was also intended to be depreciable over 15 years continuing its eligibility for bonus depreciation and section 179 expensing.

However, due to a drafting error, QIP was not placed in the 15-year asset class and thus is depreciable over 39 years.  Another consequence of being placed in the 39-year asset class is that QIP is not eligible for 100% bonus depreciation or section 179 expensing which is limited to assets with a class life of 20 years or less.

As of the drafting of this article, a technical correction bill that would fix this error has not been signed into law or even voted on in Congress.  Until this error is fixed, taxpayers will lose out on significant accelerated expenses related to tenant improvements.

The depreciation of Tenant Improvement Property can be complicated so please consult with your professional tax advisor if you have questions on the applicability of these rules.