The 2010 Tax Relief Act may have a large unintended loophole. The Act allows business to claim a 100% depreciation deduction in the year assets are placed in service for qualified assets. As usual, the devil is in the details. So what are qualified assets?
As we’ve previously discussed in our letter on the Act (See letter here), qualifying equipment purchased from September 8th, 2010 through December 31st, 2011 can be 100% written off in the current year. Generally this is only for equipment that would have a depreciation life for tax purposes of 20 years or less. This covers many things, but it doesn’t cover leasehold improvements (which are generally expensed over 40 years).
The confusion lies in another provision of the law that says qualified restuarant and retail leasehold improvements can be depreciated over a shorter 15 year period.
Not So Sure Thing
So do the restaurant and retail leasehold improvements qualify for the 100% or not? My opinion (insert disclaimer here:This written advice is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer) is that they do if they meet the following provisions:
- Improvement is made under or pursuant to a lease
- The portion improved is occupied exclusively by the lessee
- The improvement is placed in service more than 3 years after the building was first placed in service
- For restaurant, more than 50% of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of prepared meals
- For retail, the portion of the building that is open to the general public and is used in business of selling tangible personal property
What Definately Doesn’t Count
Specifically excluded from the definition of qualified retail property are:
- Enlargement of the building
- Any elevator or escalator
- Any improvement to a common area
- The internal structural framework of the building
This is one of those technical parts of the law, so if you think your business may qualify, definitely consult a professional.