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The PATH Act’s Impact on Depreciation

Taylor Ulezalka, CPA
02.15.2017 | Client Alert

There are some important changes to depreciation resulting from the enactment of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), that may impact business decisions and timing. Prior to the enactment, there were a number of tax provisions that had expired at the end of 2014, specifically, Section 179 expensing and bonus depreciation.

Extension of Bonus Depreciation through 2019

The PATH Act extended bonus depreciation, which permits taxpayers to elect to take a current deduction of a percentage of the cost of property in the year it is placed in service.  Under the PATH Act, the extended bonus depreciation deduction gradually reduces over time as follows:

  • 50% bonus depreciation for 2016 and 2017
  • 40% bonus depreciation for 2018
  • 30% depreciation for 2019 (its expiration)

Bonus Depreciation Allowed for “Qualified Improvement Property”

Prior to the passage of the PATH Act, bonus depreciation for real estate assets was limited to “Qualified Leasehold Improvement Property,” which also qualified for a 15 year recovery period. The PATH Act created a new class of property called “Qualified Improvement Property” which defined similarly to “Qualified Leasehold Improvement Property.” Generally, it is an improvement pursuant to a lease to the interior portion of a building, which is nonresidential real property except that:

  • the property does not need to be placed in service pursuant to the terms of a lease;
  • the property can be  in an owner occupied building; and
  • the improvement need not be placed in service more than 3 years after the date the building was first placed in service.

Additionally, excluded from definition of “Qualified Improvement Property” and “Qualified Leasehold Improvement Property” are:

  • expenditures attributable to the enlargement of a building, elevators, or escalators; and
  • any expenditures attributable to the internal structural framework of the building

Recovery Period Changes:

  • The 15-year recovery period was made permanent for Qualified Leasehold Improvements, Qualified Restaurant Property, and Qualified Retail Property.
  • Improvements that meet the definition of “Qualified Improvement Property” but not “Qualified Leasehold Improvement Property” will now qualify for bonus depreciation but will have a Modified Accelerated Cost Recovery System (MACRS) recovery period of 39 years, as before.

Section 179 Changes

  • The $500,000 limit on Section 179 expensing is made permanent and adjusted for inflation.
  • Section 179 expensing of qualified real property and computer software is made permanent
  • $250,000 Section 179 expensing limit on qualified real property is eliminated

Phase-down of First Year Depreciation Cap Increase on Passenger Automobiles

Under the present law, the first year depreciation cap on passenger automobiles on which bonus depreciation is claimed is: $11,160 ($8,000 bonus + $3,160 first year rate)

Under the new law, the $8,000 bonus depreciation is reduced to $6,400 for passenger automobiles placed in service in 2018 and $4,800 for passenger automobiles placed in service in 2019.

Questions? Contact your Berdon advisor.

Berdon LLP New York Accountants