Bonus depreciation after the PATH Act.

• Author: Clark, Nathan P.
• Position: Protecting Americans From Tax Hikes Act of 2015

As part of the Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, Division Q, Congress made a notable change to the definition of qualifying property for bonus depreciation purposes that received little attention, overshadowed by the fanfare given to the extension of bonus depreciation through 2019 (through 2020 for certain longer-lived and transportation property). Applicable to improvements placed in service starting in 2016, Congress created "qualified improvement property," a class of nonresidential real property now eligible for bonus depreciation irrespective of its recovery period. Taxpayers will have to determine separately if real property improvements are eligible for bonus depreciation and what their applicable recovery period is (generally 15 or 39 years for nonresidential real property). To be clear, not all nonresidential real property is eligible to be classified as qualified improvement property for bonus depreciation purposes.

As is well known, the PATH Act extended bonus depreciation through 2019 for property other than certain longer-lived and transportation property and introduced a gradual reduction from 50% in 2015 through 2017, to 40% in 2018, and to 30% in 2019, followed by its expiration after 2019.

Before the PATH Act, qualified property for bonus depreciation under Sec. 168(k)(2) consisted of modified accelerated cost recovery system property (1) with a recovery period of 20 years or less; (2) computer software as defined in, and depreciated under, Sec. 167(f)(1); (3) water utility property as defined in Sec. 168(e)(5); or (4) qualified leasehold improvement property. The PATH Act made changes to the definition of qualified property in Sec. 168(k)(2), removing qualified leasehold improvements from the definition and replacing that category with qualified improvement property. Under the requirements for qualified improvement property, unlike those for qualified leasehold improvement property, the improvement does not have to be made pursuant to a lease and does not have to be made to a building more than 3 years old. Note, however, that these requirements still apply for identifying qualified leasehold improvements under Sec. 168(e)(6).

Property eligible for bonus depreciation also must be original-use property, placed in service in the applicable time frame, and qualified property under Sec. 168(k)(2), as discussed below. Additional criteria also must be satisfied for noncommercial aircraft and...