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Proposed Regulations Address Bonus Depreciation Issues for Certain Qualified Improvement Property

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On August 3, 2018, the Treasury Department issued Proposed Regulations regarding the additional first year depreciation deduction under Section 168(k) of the Internal Revenue Code.

One change instituted under the Tax Cuts and Jobs Act, P.L. 115-97 (“TCJA”), was to eliminate the separate categories of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property (all of which had a 15-year MACRS recovery period and were eligible for bonus depreciation).  These types of property are now included in the general definition of “qualified improvement property” (“QIP”).  This definition change was effective for property placed in service after December 31, 2017.

The TCJA also provided for 100% first-year bonus depreciation for property with a MACRS recovery period of less than 20 years which is placed in service after September 27, 2017.

Prior to the TCJA, I.R.C. § 168(k) specifically provided that QIP was eligible for bonus depreciation.  The Conference Committee report accompanying the TCJA clearly states Congress’s intent was to reduce the MACRS recovery period for QIP from 39 years to 15 years.[1] Therefore, since all 15-year property would now be eligible, the TCJA amended § 168(k) to remove the specific provision for QIP.

However, the text of the TCJA failed to expressly provide for a 15-year class life for QIP.  Thus, technically QIP is not eligible for 100% bonus depreciation.

This amendment also created a donut-hole for qualified leasehold improvement, qualified restaurant, and qualified retail improvement property placed in service between September 27 and December 31, 2017: are they eligible for 100% bonus depreciation under their prior classification, or are they now QIP with a 39-year class-life?

The Proposed Regulations clarify that qualified leasehold improvement, qualified restaurant, and qualified retail improvement property placed in service between September 27 and December 31, 2017 was 15-year property and therefore eligible for 100% bonus depreciation.

However, the Proposed Regulations do not address the problem relating to QIP placed in service after December 31, 2017.  This issue requires a statutory change, which may only be made by Congress.

[1] See Conference Report to Accompany H.R. 1, Joint Explanatory Statement of the Committee of Conference, p. 367.

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