Question

What is qualified Improvement property?

Explain what happened in 2017 law and what was the mistake

Answer 1

Protecting Americans from Tax Hikes (PATH) Act of 2015 defines Qualified Improvement Property as a category of property. Under Section 168(k)(3), improvements to non-residential real estate now qualify for accelerated depreciation (bonus depreciation), except for improvements that enlarge the building, involve elevators or escalators, or change the internal structural framework of the building. Though the assets are still subject to a 39-year life, the act afforded them bonus depreciation eligibility starting with the 2016 tax year.

PATH Act made an exception for QIP. QIP assets placed in service before September 27, 2017, are eligible for bonus depreciation on 50% of their unadjusted basis, while qualifying assets acquired and placed in service between that date and December 31, 2022, are eligible for 100% bonus. No elections or forms are required to claim the benefits of QIP; its characteristics are simply applied to individually qualifying assets. These broad limitations have allowed for significantly quicker cost recovery on small business assets.

Tax Cuts and Jobs Act (TCJA) was enacted in December 2017.One of the key provisions in the bill, known as “100 percent bonus depreciation,” allows businesses to immediately deduct the cost of short-lived investments—limiting the penalty that the federal tax code placed on businesses that make capital investments in the United States.However, the law excludes some categories of business investment from 100 percent bonus depreciation. For instance, many interior improvements to buildings are not eligible for the provision, and will be required to be written off over time periods as long as 39 years. This exclusion is widely believed to have been due to a legislative oversight: Congress seems to have intended building improvements to be eligible for 100 percent bonus depreciation, but left them out due to a last-minute drafting error. As a result, the new tax law actually worsens the tax treatment of this type of investment, which previously qualified for bonus depreciation, by reducing the ability of businesses to deduct their full building improvement costs.

Ideally, all business expenses should be immediately deductible, including the amount that businesses spend on capital investment. As such, the exclusion of building improvements from the benefit of 100 percent bonus depreciation—whether accidental or not—is unjustified. Policymakers should act to ensure that qualified improvement property is eligible for 100 percent bonus depreciation; at a minimum, they should make sure that the rules for deducting the cost of building improvements do not become more restrictive than they previously were.