Expedited Nonresidential Qualified Leasehold Improvement Tax Deductions

First let’s explain what qualifies as a nonresidential leasehold improvement:

A qualified leasehold improvement is any improvement made to the interior portion of a nonresidential building if¹:

  • The improvement is made pursuant to a lease by the lessee, sub lessee or lessor as long as the lease is not made between related parties.
  • Lessee occupies the portion being improved, and
  • Improvement(s) is placed into service more than three years after the date the building was first placed into service.

Qualified leasehold improvement expenses exclude any improvements for²

  • Enlarging the building
  • Elevators or escalators
  • Structural components for the common area of the building, or
  • Internal structural framework of the building (load-bearing walls, columns and beams)

Qualified leasehold improvements include the following:

  • Utilities
  • Framing
  • Walls
  • Doors
  • Windows
  • Pipes and fittings
  • Fire protection
  • HVAC (heating, ventilation and air conditioning)
  • Permanent interior finishes
  • Permanent floor coverings, and
  • Millwork and trim

Qualified leasehold improvements qualify for the following tax deductions:

  • Immediate Section 179 expensing up to $500,000³
  • Immediate 50 % bonus depreciation until year 2019 4
  • 15-year depreciation on the basis remainder 5

In other words, you spend $600,000 on qualified leasehold improvements.  You use Section 179 expensing to expense $500,000 this year, then apply the 50% bonus depreciation of $50,000 and leaves you with a basis of $50,000 to expense over the 15-year period beginning this year.

If you would like to learn more about this tax strategy, please call Susan at 847.895.9880

¹ IRC Section 168(e)(6)(A)

² IRC Section 168(e)(6)(B)

³ IRC Section 179(f)(2)(A)

4 IRC Section 168(k)(2)(A)(i)

5 IRC Section 168(e)(3)(E) (iv)

 

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