Accellerating Space Improvement Deductions: Depreciation versus Expensing
A simple way to help lower your tax bill in the short and long term is the concept of accelerating deductions and deferring income. To prevent this, normally the IRS does not allow you to take a deduction for something that is going to help your business make money over a long period of time (like your office improvements), instead they make you depreciate it over what they determine to be its useful life (often longer that it is actually useful). What can be done? Enter Code section 179 (favorable) that allows you to deduct things like your laptop 100% in the year that you purchased them (yay).
That being said, historically, Code Sec. 179 expensing has not been available for structural improvements. However, to stimulate the economy, congress allowed us taxpaying small businesses to elect to treat up to $250,000 of qualified real property as Code Sec. 179 property for the years 2010-2013.
For years beginning after 2013 this "qualifed property" will have to be depreciated over a much longer tax period unless Congress acts to extend it. Basically you dont get to deduct it for the year that you pay for it.
So What is qualified real property for expensing purposes?
Qualified real property is:
(A) qualified leasehold improvement property described in Code Sec. 168(e)(6) ,
(B) qualified restaurant property described in Code Sec. 168(e)(7) , and
(C) qualified retail improvement property described in Code Sec. 168(e)(8) . ( Code Sec.
The qualified property must be depreciable, acquired for use in the active conduct of a trade or business, and can't be certain ineligible property (i.e., used for lodging, used outside the U.S., used by governmental units, foreign persons or entities, and certain tax-exempt organizations, air conditioning or heating units). ( Code Sec. 179(f)(1)(C) )
What is qualified leasehold improvement property?
Qualified leasehold improvement property is an interior building improvement that qualifies for bonus first-year depreciation, except that if a lessor makes an improvement that is a qualified leasehold improvement, it can't be qualified leasehold improvement property to any subsequent owner, subject to exceptions for nonrecognition and death transfers. ( Code Sec. 168(e)(6) )
What is qualified restaurant property?
Property is qualified restaurant property if it is any Code Sec. 1250 property which is a building or an improvement to a building, if more than 50% of the building's square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals. ( Code Sec. 168(e)(7) ).
What is qualified retail improvement property?
Qualified retail improvement property is any improvement to an interior portion of a building that is nonresidential real property if:
... that portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and
... the improvement is placed in service more than three years after the date the building was first placed in service. ( Code Sec. 168(e)(8) )