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1 1 (June 24, 2020)

handle is hein.crs/govdqyy0001 and id is 1 raw text is: Updated June 24,2020 Tax Depreciation of Qualified Improvement Property: Current Status and Legislative History The federalincome tax allows companies to deduct the ordinary and necessary expenses theyincurin generating taxable income. These expenses includethe cost of assets whose valuelasts beyond the yearwhen theyare firstused, such as machinery, motorvehicles, and factorybuildings. The proper approachto recovering the cost of such assets is to deduct amounts over time that reflect the actual decline in their value, untilthe original cost has beenrecovered. This decline in value is known as depreciation. Deductions for depreciation usually are taken over three or more years. Depreciation basedon the actual declinein the value of an assetis known as economic depreciation. An advantage of economic depreciation is that it fosters neutralityin an income tax's impact on the returns to investmentin arange of depreciable assets. Forseveralreasons (including a desire to simplify business taxaccounting), many countries employ systems for taxdepreciation that deviate from economic depreciation. Depreciation of Tangibe s sts under CuArrent Feea Tax Law There are two systems for depreciating tangible assets (e.g., nonresidential buildings, equipment, and software) under current law: (1) the modified accelerated cost recovery system, or MACRS (Section 168 of the federaltaxcode); and (2) the alternative depreciation system, or ADS (Section 167 of the federal tax code). With its generally shorter depreciation lives and accelerated depreciation schedules, theMACRS allows firms to write off a larger portion ofan asset's cost early in its recovery period. The MACRS contains two provisions that allow firms to expense part or all of the costofeligible as sets. Section 179, which applies to machinery and equipment, computer software, and s elected nonresidential real property, allows companies to expense a limited amount ofthe cost of qualified assets in the year when they are placed in service. For the 2020 tax year, the allowance is capped at $1.04 million for a taxpayer, and it begins to phaseoutwhen a company'stotalspending onqualified assets in 2020 exceeds $2.59 million. Both amounts are indexed for inflation. Section 168(k), known as the bonus depreciation allowance, applies to tangible assets with a depreciation life of 20 yeas or less under the MACRS. The current allowance covers 100% of the costofqualified as sets placed in service between September 28, 2017, and December 31, 2022. It is scheduledto decrease to 80% of the costof qualified assets placed in service in 2023, 60% in 2024, 40% in 2025, 20% in 2026. and 0% in 2027 and thereafter. Deprciaton f QuaiNfied mpoeetPropert.y Federaltaxlaw regards the cost ofcertainimprovements that leaseholders or owners make to the interior space of nonresidential buildings as a capital expense. As a result, the cost of this improvementproperty is recovered through allowable depreciation deductions. Improvement property can take many forms, including installing new lighting and carpet in aleased office, adding new woodwork and windows to the dining roomof arestaurant, andpainting the walls and upgrading the sound systemofaretail store. Before the enactment of the AmericanJobs Creation Act of 2004 (AJCA,P.L. 108-357), the costofimprovement property was generally recovered over 39 years using the straight-line methodunder the ADS. This methodrequires businesses to deduct an equal amount of the acquisition cost of adepreciable asset everyyearuntilthe initialcosthas been recovered. The AJCA established two categories of improvement property (qualified leasehold improvement property, or QLP, and qualified restaurant improvement property, or QRP) and lowered their cost recoveryperiod under the MACRS to 15 years, making both kinds of improvement property eligible for the 50% bonus depreciation allowance then available under Section 168(k). Consequently, nonresidential building owners or leaseholders could write off half the cost ofnewimprovementproperty in the year it was placed in service and theremaining half over the following 14 years with the straight-line method. Improvements to leasehold property qualified for the 15- yearcost recovery period if they (1) were made according to the terms of a lease by the lesseeorthe lessor; (2) were placed in service more than three years after the nonresidential building was first placedin service; and (3) did not enlarge thebuilding, install orupgrade elevatos and escalators, or alter its intemalstructural framework. Improvements to restaurant property qualified for the 15- year cost recovery period if they met two criteria. First, the improvements had to be placed in service more than three years after the building was first placed in service.Second, atleast50% of abuilding's interior space hadto be usedfor food preparation and dining on the premises. In 2008, Congress created aseparatecategory of improvement property for retailers known as qualified retail improvement property (QRIP) in the Tax Extenders and Alternative MinimumTax Relief Act of 2008 (Division C of P.L. 110-343). The act assigned a 15-year cost recovery period to QRIPplaced in service in 2009 and thereafter. Retail improvements qualified for this treatment k yg

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