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January 26, 2016

Congress Permanently Extends Several Tax Provisions Important to Real Estate Industry (article)

The “Protecting Americans from Tax Hikes Act of 2015” (“PATHA”), signed by President Obama on December 18, 2015, for the first time permanently enacting a number of the tax breaks generally dubbed the “Extenders” because of the need to extend them year after year. The House of Representatives passed the bill on December 17 and the Senate followed suit the next day. This represents the opportunity for an extended period of certainty for taxpayers who rely on these tax incentives but have to wait until December of each year to make business and personal decisions affected by them.

 

Business Provisions

 

Permanently Extended

 

Several provisions important to the commercial real estate industry which had expired at the end of 2014 not only were reinstated but were extended permanently. Further, some provisions have been enhanced significantly from their previous incarnations.

 

Increased Section 179 Expensing Election – The Section 179 immediate expensing election had plummeted from $500,000 in 2014 to $25,000 in 2015. With PATHA, businesses with adequate taxable income can immediately deduct up to $500,000 of qualified tangible property (including off-the-shelf computer software) in 2015 and all subsequent tax years. The Section 179 deduction begins to phase out when total qualified purchases for the year exceed $2 million. Several enhancements to the Section 179 deduction take effect in 2016:

 

  • The $250,000 cap on qualified real property (consisting of qualified leasehold improvements, qualified restaurant property and qualified retail improvement property) no longer applies;
  • Air conditioning and heating units will be eligible property; and
  • The $500,000 and $2 million limits both are indexed for inflation.

 

15-year Straight Line Cost Recovery – Traditionally depreciated over 39 years, qualified leasehold improvements, qualified restaurant property and qualified retail improvement now permanently can be depreciated over 15 years on a straight-line basis. Improvements must be made to the interior of non-residential real property more than three years after the building was placed in service. Qualifying restaurant and retail improvements can include improvements to owner-occupied or leased space while qualifying leasehold improvements may only include leased space (related party leases do not qualify).

 

PATHA also permanently reduced the recognition period for built-in gains of S corporations from 10 to five years. Therefore, anyone holding real estate in a C corporation can consider converting to an S corporation if you plan to hold the appreciated real estate for more than five years.

 

Extended Through 2019

 

While not extended permanently, some business provisions received a healthy five-year extension through 2019:

 

Bonus Depreciation – Taxpayers can once again elect to take additional first-year (“bonus”) depreciation on qualifying asset purchases through December 31, 2019. The bonus depreciation percentage, however, decreases in the later years as follows:

 

Placed in

Service During

Bonus Depreciation

Percentage

2015

50%

2016

50%

2017

50%

2018

40%

2019

30%

 

As in previous iterations of the provision, qualifying assets generally include new tangible personal property, off-the-shelf computer software and qualified leasehold improvements. Qualified restaurant or retail property do not qualify for bonus depreciation in 2015 unless the property also meets the definition of qualified leasehold improvements. Beginning with property placed in service in 2016, however, bonus depreciation may be claimed on an addition or improvement to the interior of any nonresidential real property. PATHA also reinstates the corresponding election to accelerate AMT credits in lieu of claiming bonus depreciation, increasing the amount of AMT credits that can be claimed beginning in 2016.

 

Extended Through 2016

 

Not to be left out, some of the narrower or less popular business provisions were extended through 2016. Though the long-term prospects for these provisions are unclear, the multi-year extension at least gives taxpayers who can benefit from the provisions the opportunity to do so. Provisions extended through 2016 of most interest to the commercial real estate industry include the energy efficient commercial buildings deduction. Several other energy incentives were also extended.

 

For more information about income taxes, please contact your local CBIZ MHM professional.

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