TCJA’s Drafting Errors removes 15 Year class life and bonus depreciation from Qualified Leasehold Improvements

By PMBA
July 24, 2019
Cost Segregation , Federal Tax , News and Insights

Pundits and politicians have been arguing endlessly on the “winners and losers” of the newly enacted Tax Cut and Jobs Act (TCJA). PM Business Advisors has been and continues to carefully study the language of the new tax code in order to advise clients on how to best position their businesses against the changes and existing ambiguities from this new law.

If you are the owner of leasehold improvements placed in service after December 31, 2017, you, unfortunately, are not a “winner”, thanks to a significant drafting error in the statutory tax language of the TCJA.

The TCJA intended to simplify the handling of all three types of qualified real property. This includes qualified leasehold property, qualified restaurant property, and qualified retail improvement property; all of which were previously provided with a statutory 15-Year recovery period.

The Act effectively created a new combined category known as Qualified Improvement Property (QIP). However, due to drafting errors, the statutory language did not include the new QIP as personal property. Instead, it was left as 39-year real property, thus making it ineligible for bonus depreciation treatment. Consequently, if you fix-up a new store, restaurant, or office space, those improvements can no longer be depreciated as 15-year QIP personal property with bonus depreciation.

Fortunately, through the use of a cost segregation study, there is an opportunity to capture a significant portion of your improvements in an improved class life with bonus. By initiating a cost segregation study, the IRS will recognize personal assets identified by the study and allow those assets 5-year lives with 100% bonus.

All of this may change again, depending on Tax Reform 2.0 which addresses this matter coupled with the outcome of the 2020 presidential and congressional elections.  But for now, businesses who are able to quickly reposition their depreciation strategies by utilizing cost segregation studies will significantly lessen the impact of these significant tax law oversights.

Contact PMBA’s National Fixed Asset Review Team to schedule a complimentary consultation which will include a complimentary benefit analysis at info@pmba.com