As a business owner, you've probably heard plenty about depreciation-related tax breaks. But, often, such discussions focus only on the tax benefits of buying assets such as heavy equipment, office furniture and computers. Don't forget that the Internal Revenue Code also allows depreciation breaks for a company's real property.
Section 179, for example, allows businesses to elect to immediately deduct (or "expense") the cost of certain assets acquired and placed in service during the tax year, instead of recovering the costs more slowly through depreciation deductions. However, the election can only offset net income; it can't reduce it below $0 to create a net operating loss.
Among the assets eligible for this break is qualified real property, which includes qualified leasehold-improvement, restaurant and retail-improvement property. Thanks to the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), the relatively high annual dollar limits of the election have been made permanent (indexed for inflation beginning this year).
Specifically, for 2016, you can expense up to $500,000 in qualified real property, subject to a phaseout that kicks in at $2,010,000 in purchases. Before 2016, only $250,000 of the $500,000 limit could be applied to qualified real property.
Another important tax break in this area is bonus depreciation, which allows businesses to recover the costs of certain depreciable property more quickly by claiming first-year bonus depreciation. The PATH Act extended it, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019.
Qualified leasehold-improvement property is generally eligible for bonus depreciation. (Before 2016, such property had to be leased to be eligible for bonus depreciation.) But, before claiming bonus depreciation, see whether you qualify for Sec. 179 expensing. It could provide a greater tax benefit than bonus depreciation. But bonus depreciation could benefit more taxpayers than Sec. 179 expensing, because it isn't subject to any asset purchase limit or net income requirement.
The PATH Act also permanently extended the 15-year straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), qualified restaurant property and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period.
This is especially welcome news for restaurants and retailers, which typically remodel every five to seven years. If eligible, they may first apply Sec. 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Sec. 179 limit.
It's only natural to look at the many individual objects used by your business and wonder whether and how you can depreciate them. But don't forget about the very ground beneath your feet, as well as the walls and structures around you. Real property is depreciable, too.
If you have any questions or need our assistance, please contact your Castellano, Korenberg & Co. tax professional.