As a business owner, you've probably heard plenty about depreciation-related tax
breaks. But, often, such discussions focus only on the tax benefits of buying assets
such as heavy equipment, office furniture and computers. Don't forget that the
Internal Revenue Code also allows depreciation breaks for a company's real property.
Section 179, for example, allows businesses to elect to immediately deduct (or
"expense") the cost of certain assets acquired and placed in service during the tax
year, instead of recovering the costs more slowly through depreciation deductions.
However, the election can only offset net income; it can't reduce it below $0 to
create a net operating loss.
Among the assets eligible for this break is qualified real property, which includes
qualified leasehold-improvement, restaurant and retail-improvement property. Thanks
to the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), the relatively
high annual dollar limits of the election have been made permanent (indexed for
inflation beginning this year).
Specifically, for 2016, you can expense up to $500,000 in qualified real property,
subject to a phaseout that kicks in at $2,010,000 in purchases. Before 2016, only
$250,000 of the $500,000 limit could be applied to qualified real property.
Another important tax break in this area is bonus depreciation, which allows
businesses to recover the costs of certain depreciable property more quickly by
claiming first-year bonus depreciation. The PATH Act extended it, but only through
2019 and with declining benefits in the later years. For property placed in service
during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40%
for 2018 and 30% for 2019.
Qualified leasehold-improvement property is generally eligible for bonus depreciation.
(Before 2016, such property had to be leased to be eligible for bonus depreciation.)
But, before claiming bonus depreciation, see whether you qualify for Sec. 179
expensing. It could provide a greater tax benefit than bonus depreciation. But bonus
depreciation could benefit more taxpayers than Sec. 179 expensing, because it isn't
subject to any asset purchase limit or net income requirement.
The PATH Act also permanently extended the 15-year straight-line cost recovery period
for qualified leasehold improvements (alterations in a building to suit the needs of
a particular tenant), qualified restaurant property and qualified retail-improvement
property. The provision exempts these expenditures from the normal 39-year
This is especially welcome news for restaurants and retailers, which typically remodel
every five to seven years. If eligible, they may first apply Sec. 179 expensing and
then enjoy this accelerated depreciation on qualified expenses in excess of the
applicable Sec. 179 limit.
It's only natural to look at the many individual objects used by your business and
wonder whether and how you can depreciate them. But don't forget about the very
ground beneath your feet, as well as the walls and structures around you. Real
property is depreciable, too.
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whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2016