Improvement to a commercial building, 39 year depreciation

[Just-Lisa-Now-]

If you know the equipment isn't going to last 39 years, do you have the option to depreciate it for a lesser amount of time?

Ive got a client replacing the roof and HVAC ducting on a commercial building this year.  The last time he did it was back in 2005, so the equipt lasted 15 years.  (this was my ex-employers client and he set it for a 15 year depreciation back in 2005...how he knew it would only last that long, I have no clue)

Do I really have to depreciate this new equipt over 39 years when in all likelihood this will only last 15 years as well?

[sjrcpa]

No you don't have the option of choosing a shorter depreciable life even when you know it won't last 39 years.

But, could these be expensed under the Repair Regulations?

Could they be classified as 15 year property?

Those more knowledgeable about these regulations please chime in.

[Just-Lisa-Now-]

The total hes going to spend is around 44K, the unadjusted basis of the property is low, only about 300K (bought in 1994) so lesser of 10k or 2% of the unadj basis,  the 2% would only be 6K that could be expensed using the SHST election....is that what you're referring to as Repair Regulations?  

So when my old boss did the 15 years back in 2005, he just winged it and did what he wanted, not what was allowed? (that sounds like him! I find funky stuff all the time leftover from him!)

Could they be classed as 15 year property?  Thats what Im asking.  LOL  

[qbteachmt]

Read this article, specifically the details starting after, "Most of the provisions within the AJCA were set to expire on Dec. 31, 2006"

https://rsmus.com/what-we-do/services/tax/federal-tax/confusion-over-qualified-leasehold-improvement...

[qbteachmt · Accepted solution]

Oh, I had this one, too:

https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-...

[Just-Lisa-Now-]

However, improvements do not qualify if they are attributable to:

Roofs, HVAC, fire protection systems, alarm systems and security systems.

Which is exactly what hes doing.   I think hes SOL.

[qbteachmt]

I read the Bullets differently than you did:

The two outer bullets are included.

The inner bullets under bullet 1 are the exclusions.

Otherwise, the line with Roofs and HVAC would be an indented, secondary level bullet with the other Exclusions.

The previous person didn't do it wrong in 2005; there were different regulations in force then.

"This break historically allowed a shortened recovery period of 15 years for property that qualified. Before the TCJA, the break was available for qualified leasehold-improvement, restaurant and retail-improvement property. Again, the TCJA expanded the definition to “qualified improvement property.” But, due to a drafting error, no recovery period was given to such property, so it defaults to 39-year property."

Read this: "Finally, all that changed with the passage of the CARES Act. QIP is now classified as 15-year property. This change is implemented retroactively for property placed in service after December 31, 2018, generally impacting tax years beginning in 2018 and also affecting a number of related elections."

https://www.wegnercpas.com/depreciation-breaks-commercial-real-estate/

And the CARES correction:

https://badermartin.com/made-an-investment-in-qualified-improvement-property-the-cares-act-changes-t...

[qbteachmt]

How about CCH?

http://news.cchgroup.com/2020/04/15/cares-act-restores-15-year-recovery-period-for-qualified-improve...

I didn't realize CARES Act had this in it.

[Just-Lisa-Now-]

Hmmm...maybe Thanks!

[rbynaker]

@TaxGuyBill is really good at this stuff . . .

[TaxGuyBill]

---

@Just-Lisa-Now- wrote:

Ive got a client replacing the roof and HVAC ducting on a commercial building this year.  

Do I really have to depreciate this new equipt over 39 years when in all likelihood this will only last 15 years as well?

---

Yes, it is 39 year property.  It does not qualify as 15 year Qualified Improvement Property.  That is restricted to certain interior improvements.

IF the rental rises to the level of a "Trade or Business", it does qualify for Section 179.

However, ProSeries automatically assumes it is NOT a "Trade or Business", so if it does rise to the level and you want to use Section 179, you need to override Line 11 on form 4562 to factor in the rental profit/loss.

[rbynaker]

See, he's like Batman!  A snowman-kidnapping Batman.

[Just-Lisa-Now-]

It DOES qualify as a trade or business, this guy keeps meticulous records and time logs for all his rentals.   This appears like it qualifies for 179 treatment.

FS-2018-9, April 2018

Businesses can immediately expense more under the new law

A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.

The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

• Qualified improvement property, which means any improvement to a building’s interior. However, improvements do not qualify if they are attributable to:
  • the enlargement of the building,
  • any elevator or escalator or
  • the internal structural framework of the building.
• Roofs, HVAC, fire protection systems, alarm systems and security systems.

These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.