Qualified leasehold improvements eligible for bonus depreciation
Taxpayers should be aware that substantial tax benefits are still available for those who are considering improvement expenditures to their commercial real estate. Qualified leasehold improvements are still eligible for bonus depreciation if they are placed in service by Dec. 31, 2012, even though the beneficial 15 year asset life expired as of Dec. 31, 2011. If placed in service between Jan. 1, 2012 and Dec. 31, 2012, qualified leasehold improvements are eligible for a 50 percent bonus depreciation deduction and depreciated on a straight-line basis thereafter over a 39 year life.
According to the Internal Revenue Code (IRC), a qualified leasehold improvement is any improvement:
- to an interior portion of a building,
- which is nonresidential real property (IRC Section 1250),
- made pursuant to a lease by the lessee or lessor for space exclusively occupied by the lessee (note that leases between related parties will not qualify), and
- made more than three years after the date the building was first placed in service.
Keep in mind that qualified leasehold improvements do not include any improvements attributable to the enlargement of a building, any elevator or escalator, a structural component benefiting a common area, or the internal structural framework of the building.
Bonus depreciation rules can provide tax planning opportunities, and taxpayers should be aware of their options in order to maximize their potential benefits.