The information included in this update concerns multiple opportunities for deductions and/or acceleration of depreciation – keep it top of mind when accounting for fixed assets.
KSM is fielding a number of questions that show a need for a refresher on rules governing the capitalization or deduction of expenditures on tangible property, the de minimis safe harbor, and a new classification of property created by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) called Qualified Improvement Property.
Capitalization vs. Deduction
The Building Improvement Decision Matrix and Non-Building Improvement Decision Matrix give you a decision tree to analyze whether money spent on tangible property (buildings, land improvements, furniture, fixtures and equipment, etc.) must be capitalized and depreciated, or whether it may be deducted.
- Reminder 1: If your business undertakes a remodeling project, an expansion project or any other work that requires demolition or removal of previously-made improvements, be sure to talk with your KSM advisor about whether a partial disposition deduction (i.e., an abandonment deduction) is available.
- Reminder 2: The de minimis threshold (a.k.a the capitalization threshold) for taxpayers without an applicable financial statement (typically without an audit) is raised from $500 to $2,500 for tax years beginning after Dec. 31, 2015.
New Property Class
The Asset Classification Matrix outlines the criteria for classification of different types of building improvements. The most noteworthy change to these classifications is the creation of the class Qualified Improvement Property. This classification will be widely applicable to companies who self-rent their buildings (e.g., operating company leases from related real estate holding company) and to businesses making improvements to buildings not yet three years old.
- Important: Qualified Improvement Property carries a 39-year recovery period but is eligible for bonus depreciation. Be sure not to confuse it with Qualified Leasehold Improvement Property.
Sifting through these classifications can be very confusing and conclusions are heavily influenced by facts and circumstances. Please contact your KSM advisor, or Chris Bradburn, if you need help analyzing your activities.