Extension and modification of bonus depreciation rules and qualified improvement property provisions

On Dec. 18, 2015, Congress passed a tax extenders package, the Protecting Americans from Tax Hikes (PATH) Act of 2015, which modifies, extends, or makes permanent several depreciation-related provisions including:

  • Bonus depreciation rules
  • 15-year recovery period for qualified leasehold, restaurant, and retail property
  • New category for qualified improvement property

Bonus depreciation extension and modifications

The Act extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016, and 2017, but then phases down to 40 percent in 2018 and 30 percent in 2019.

For property placed in service before Jan. 1, 2016, bonus depreciation is available for qualified property that meets the following requirements:

  1. New modified accelerated cost recovery system (MACRS) property with a recovery period of 20 years or less, computer software, water utility property, and qualified leasehold improvement property(QLHI);
  2. Original use must begin with the taxpayer;
  3. Acquired by the taxpayer after Dec. 31, 2007, and before Jan. 1, 2016 (as long as no written binding contract was in effect before Jan. 1, 2008, or acquired pursuant to a written binding contract that was entered into after Dec. 31, 2007, and before Jan. 1, 2016); and
  4. Placed in service before Jan. 1, 2016.

For property placed in service after Dec. 31, 2015, bonus depreciation is available for qualified property that meets the following requirements:

  1. New MACRS property with a recovery period of 20 years or less, computer software, water utility property, and qualified improvement property;
  2. Original use must begin with the taxpayer; and
  3. Placed in service before Jan. 1, 2020.

As indicated above, beginning in 2016, “qualified improvement property” replaces qualified leasehold improvement property in the list of bonus-eligible property. However, the definition of qualified improvement property is broader than the definition of qualified leasehold improvement property—so under the new rules, qualified leasehold improvement property is still eligible for bonus depreciation.

Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first place in service, excluding: 1) enlargements; 2) elevators/escalators; and 3) internal structural framework. The improvements do not need to be made pursuant to a lease.

Bonus depreciation has generally been available since Sept. 11, 2001, with a period of expiration in 2005, 2006, and 2007, and has ranged from 30 percent to 100 percent over the years, as shown in this chart:

Bonus depreciation rates
Start dateEnd dateBonus rate
Sept. 11, 2001May 5, 200330%
May 6, 2003Dec. 31, 200450%
Jan. 1, 2008Sept. 8, 201050%
Sept. 9, 2010Dec. 31, 2011100%
Jan. 1, 2012Dec. 31, 201750%
Jan. 1, 2018Dec. 31, 201840%
Jan. 1, 2019Dec. 31, 201930%

Bonus depreciation may result in substantial present value tax savings for businesses that already had plans to purchase or construct qualified property. Unlike section 179 expensing, taxpayers do not need net income to take bonus depreciation deductions. Further, bonus is not limited to smaller businesses or capped at a certain dollar level, but it is not available for used property, property used outside of the US, tax-exempt use property, or tax-exempt financed property.

15-year recovery period for qualified leasehold, restaurant, and retail property made permanent

The provision makes permanent the 15-year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

View the summary of qualified improvement property rules and bonus depreciation for 2015 and 2016.

Qualified leasehold improvement property is any improvement to an interior portion of a building that is nonresidential real property and placed in service more than three years after the date the building was first placed in service. The landlord and tenant cannot be a related party excluding enlargements, elevators/escalators, common area work and internal structural framework. The improvement may be made by the lessee or by the lessor but must be made pursuant to a lease.

Qualified restaurant property is any section 1250 property that is a building (new building or existing structure) or an improvement to a building, if more than 50 percent of the building’s square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.

Qualified retail improvement property is any improvement to an interior portion of a building which is nonresidential real property and placed in service more than three years after the date the building was first placed in service. Retail establishments that qualify include those open to the public and primarily in the business of the sale of goods (tangible personal property) to the general public and not services. Examples of these retail establishments include grocery stores, clothing stores, hardware stores, and convenience stores. Excluded from qualifying retail improvements are enlargements, elevators/escalators, common area work, and internal structural framework.

As discussed above, qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first place in service, excluding: enlargements, elevators/escalators, and  internal structural framework.

Qualified improvement property has a 39-year recovery period unless it also meets the definition of either qualified leasehold improvement property, qualified retail improvement property, or qualified restaurant property.

Qualified restaurant and qualified retail improvement property placed in service before Jan. 1, 2016, are not eligible for bonus depreciation unless the improvements also satisfy the definition of qualified leasehold improvement property. 

After Dec. 31, 2015, QLHI and qualified retail improvements are, by definition, bonus-eligible because they are also qualified improvement property. Qualified restaurant property is bonus-eligible if the improvements are also qualified improvement property. 

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.


The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.