Generally, the cost of commercial real estate improvements is claimed over 39 years using the straight-line method of deprecation. Thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015, qualified leasehold, restaurant and retail property improvements can be depreciated over 15 years using the straight-line method.
An improvement is considered a qualified leasehold improvements if it is:
- Made pursuant to a lease;
- Is Sec. 1250 property (defined by the IRS as all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property);
- Not the result of a lease between related parties;
- For the interior of the building or a portion of a building occupied exclusively by a lessee or sublessee, and
- Placed into service more than three years after the building was first placed into service.
The enlargement of a building, internal structural framework, structural components that benefit common areas and addition of an elevator or escalator are not considered qualified improvements.
Qualified restaurant property is any Sec. 1250 property that is a building or building improvement of more than 50 percent of the building’s square footage and is devoted to the preparation of and seating for the consumption of food on the premises.
The cost associated with improvements to the interior of nonresidential building that is open for retail trade or the sale of tangible personal property to the general public is considered qualified retail improvement if they are placed in service more than three years after the building is first placed in service.
PATH makes this once temporary rule permanent. Business owners need to know that the 15-year recovery period is not elective. Failure to properly depreciate qualified real property could cause other property to be reclassified for longer recovery periods. Feel free to contact me if you have questions at 610.828.1900 or Marty.McCarthy@MCC-CPAs.com.