Planning to Remodel? Don’t Miss These Tax Savings

Thinking of remodeling or improving the interior of non-residential property this year? A recent change in the PATH Act lifts many restrictions to "qualified improvement property" and could provide your business with a significant tax-savings opportunity.

Jennifer Verly January 25, 2017

In passing the Protecting Americans From Tax Hikes (PATH) Act of 2015, Congress brought forth several notable changes to the previously expired bonus depreciation provisions. Much was said about the retroactive extension of bonus depreciation through 2019, but an equally noteworthy (in my opinion) change received far less fanfare: the addition of “qualified improvement property” as eligible for bonus depreciation.

Previously, bonus depreciation was available only for improvements to interior property that was older than three years, was subject to a lease, and was not owner-occupied. But now these limitations have been lifted.

As defined in the PATH Act, Sec. 168(k)(3), qualified improvement property includes improvements to the interior of any nonresidential real property placed in service after the date the building was first placed in service. That’s it—nothing about its age or occupancy status. (It does not, however, include any enlargement of the building, improvements to or additions of elevators or escalators, or improvements to the building’s structural framework.)

 

Here’s how this change benefits…


Real estate professionals:
With the introduction of this new property class, improvements made to a building’s common areas, such as its lobby or restrooms, could qualify for bonus depreciation, as could improvements to recently purchased buildings that aren’t yet occupied by tenants. This could pave the way for significant tax savings, especially on larger projects. For instance, say that you own an office building or shopping mall and wish to update the spaces not occupied by tenants. Given the average square footage, this could be an enormous endeavor. But now if you were going to spend $1 million, you could write off 50 percent of this amount during the first year and depreciate the balance over 39 years, whereas the previous law required the full amount to be depreciated over 39 years. As you can see, the tax-savings potential is now much more substantial.
Manufacturers:
With the introduction of this new property class, improvements made to owner-occupied buildings could qualify for bonus depreciation. This means if you choose to embark upon a $200,000 plant or office improvement project—for instance, fixing up restrooms, converting warehouse space to office space, etc.—you could write off 50 percent of the cost during the first year.
Medical practices:
With the introduction of this new property class, improvements made to owner-occupied buildings could qualify for bonus depreciation. This means if you choose to embark upon an $100,000 improvement project of your building—for instance, fixing up restrooms or lobby areas—you could write off 50 percent of the cost during the first year.
Business owners and entrepreneurs:
With the introduction of this new property class, improvements made to a building’s common areas, such as its lobby or restrooms, could qualify for bonus depreciation, as could improvements to recently purchased buildings that aren’t yet occupied by tenants. Improvements to owner-occupied buildings are eligible, too. All of this could result in significant tax savings.

 

Consider moving forward with improvements sooner rather than later.

If you have plans to make interior building improvements (remember, not expansions), I recommend getting started as soon as possible, as bonus depreciation will phase out by 2019.

For property placed in service in 2015, 2016, or 2017, bonus depreciation provides a depreciation deduction equal to 50 percent of the adjusted basis of qualifying property in the first year it’s placed in service. For property placed in service in 2018, the deduction is 40 percent; for 2019 (the final year), it’s 30 percent.

At a minimum, it’s worth putting in a call to your tax advisor to find out how you can benefit from these lesser-known PATH Act changes.