The cost recovery for interior building improvements placed in service in 2018 is currently 39-years with no bonus depreciation. This may change. Please read further for an explanation.
Previous Tax Law
Multiple categories governed the tax depreciation/amortization interior improvements including Qualified Leasehold Improvement Property (“QLIP”), Qualified Restaurant Improvements (“QRP”), Qualified Retail Improvement Property (“QRIP”), and Qualified Improvement Property (“QIP”). These categories generally allowed for a 15-year cost recovery for interior improvements to existing buildings.
Intent of Tax Reform
The Tax Cut and Jobs Act, passed in December 2017, consolidated these various categories into one – QIP. Based on draft versions and public discussions, we understand that it was meant to have a 15-year tax depreciation life and also meant to be eligible for 100% bonus depreciation. This would have allowed for immediate expensing of all QIP property. The QIP category generally includes non-structural and non-shell interior improvements to existing buildings.
The legislation, as passed, left QIP out of a list of short life assets. This is widely understood to have been in error. However, without explicit guidance saying otherwise, QIP defaults to the general life for commercial real estate (39-year, no bonus depreciation).
Will It Be Fixed?
At this point, it is unclear if Congress will act in 2018 to correct this oversight.
For a typical taxpayer, immediate expensing in 2018 creates $0.16 in tax benefits per dollar spent on real estate as compared to the default cost recovery method (39-year).
For clients spending out of pocket on interior improvement to leased or owned space – we recommend a wait and see approach until further guidance is provided by the IRS, or the relevant legislation is amended. If Congress does not “fix” this issue to allow for 15-year cost recovery and bonus depreciation for QIP, a Cost Segregation analysis may be a valuable strategy to help accelerate depreciation for interior improvements. If Congress does “fix” this issue, a Cost Segregation analysis may not be needed for interior improvements.
Eli Varol is a Senior Director in the Cushman & Wakefield Valuation & Advisory group. Eli has been practicing Cost Segregation consulting for more than 19 years and is a Senior Member of the American Society of Cost Segregation Professionals. He graduated with a Bachelor of Science in Mechanical Engineering and a Masters of Business Administration, both from Washington University in St. Louis.