The new tax law has changed a few important things about what was formerly known as Qualified Leasehold Improvement (QLI) property — now called Qualified Improvement Property (QIP). Accounting Today did a nice job, as usual, outlining the changes in one of their articles. Forbes did a similarly solid job more recently discussing the technical glitches that still remain in this area.

Under the old law:

1. Qualifying assets were defined as nonstructural improvements to the interior of a building.
2. Certain improvements did not qualify, including any improvements to a property in which the landlord and tenant were related parties.
3. Improvements made to a property within three years of the property’s completion were not eligible for QLI.
4. Qualified real property was eligible for 15-year depreciation with additionally qualifying assets subject to bonus depreciation.

However, under the new law:

1. QIP still requires that assets be in the interior of a building and be nonstructural in nature.
2. But QIP does not require a lease between unrelated entities.
3. And QIP eliminates the three-year requirement, simply stating that qualifying improvements must be done “after the building is originally placed in service”.
4. QIP was supposed to be provided a 15-year life, similar to previous rules for QLI. This 15-year life would have made these assets eligible for bonus depreciation. Unfortunately, due to errors made in the rush to draft the new tax law, QIP is considered 39-year property, eligible for 179 treatment but not bonus depreciation.

I’m noticing that my tax software is offering me choices between 15-year and 39-year life, and wanted to give a heads-up to those out there in my situation that the technical correction that was supposedly on the way has not yet materialized, so it’s important to select 39-year in these cases.

Source: Common depreciation missteps and misconceptions: Qualified leasehold improvements | Accounting Today