What Constitutes Eligible Leasehold Enhancements? Eligible vs. Non-Eligible Leasehold upgrades

From 2001 to 2017, the most common upgrades to a building's interior under a lease were referred to as Qualified Leasehold Improvement Property (QLIP). These enhancements encompassed HVAC installations, fire protection systems, alarm systems, and security systems, primarily in commercial buildings like retail or factory establishments. Notably, tangible personal property identified in a cost segregation study did not fall under QLIP. Additionally, improvements carried out within the first three years of a building's service did not qualify.

Building expansions, elevators, escalators, or internal structural frameworks did not meet the QLIP criteria. Gradually, between 2016 and 2017, Qualified Leasehold Improvement Property transitioned to Qualified Improvement Property (QIP). QIP improved upon QLIP by abolishing the three-year rule and considering any qualifying improvement as QIP, regardless of whether it was executed under a lease.

Bonus Depreciation Rates for Eligible Enhancements

Explore the attractive bonus depreciation rates provided for various periods:

  • QIP Placed from 2018 to 2022: Enjoy 100% bonus depreciation
  • Between 2016 and 2017: Avail a generous 50% bonus depreciation rate

Approval for Building Improvements

While studies usually focus on the past 5-7 years, some have examined properties in service since 1987. Depreciation spans 27.5 or 39 years currently. Considering a starting point of $500,000 or more in capitalized costs is wise for Cost Segregation. Eligible properties include those acquired, constructed, expanded, or remodeled. The property owner must be a tax-paying entity. Ideal building types encompass auto dealerships, banks, casinos, distribution centers, grocery stores, health care facilities, hotels, manufacturing facilities, office buildings, restaurants, shopping centers, sports facilities, warehouses, and other specialized properties.

Cost Segregation studies often yield the most substantial advantages for intricately designed structures.

Conventional QIP Cost Segregation Analysis

  • Reveals §1245 Assets (5, 7, and 15-year typical property)
  • §1250 Eligible Leasehold Enhancements, Retail Improvements, and Restaurant Upgrades (15-year straight-line assets)
  • §1250 Certified Enhancement Property (15-year straight-line assets and bonus depreciation for §1250 interior enhancements post 12/31/2017)

Case Study: Food and Beverage Maker with Retail Locations

Facts- In the vibrant realm of manufacturing, a dynamic corporation set forth on its illustrious journey in 1993. With the dawning of 2008, they commenced a strategic expansion plan, gracefully acquiring smaller producers and erecting retail facilities and marketing offices nationwide. Amidst their captivating growth, some acquisitions and improvements were mistakenly classified for tax purposes during 2008-2018. Nonetheless, this resolute manufacturer's indomitable spirit and visionary pursuits continue to propel them toward an extraordinary future.

Execution- In 2019, cost segregation engineers conducted a thorough fixed asset review spanning a decade, revealing opportunities for proper cost classification. Architectural plans, invoices, and inspections were artfully used to identify qualifying components for a shorter tax life, culminating in a detailed and enchanting report.

Result- In a bold financial expedition, it deftly reclassified $6,039,000, with 9% as Qualified Leasehold Improvement Property, 3% as 15-year land improvements, and 20% as 7 and 5-year tangible personal property. The taxpayer's daring choice to forgo bonus depreciation in most years hints at even greater untapped benefits. A captivating tale of financial ingenuity unfolds, paving the way for new and exciting possibilities.

How We Can Support

Founded in 1983 as LIFO Systems,it has been a pioneer in specialized tax consulting for over 37 years. Our expertise lies in providing solutions for Qualified Leasehold Improvement, Cost Segregation, R&D Tax Credit, Energy Efficiency (§179D), and LIFO inventory matters. Now operating under the name, our commitment to empowering companies and CPA firms to harness government-sponsored tax credits and incentives is stronger than ever.

With a seasoned team of CPAs, attorneys, engineers, technology experts, and Big Four professionals, we strive to optimize savings and stimulate business growth. As legislation governing these incentives continually evolves, our guidance helps companies and CPA firms navigate the ever-changing landscape with confidence.

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Which Industries Qualify?

The R&D tax credit can be applied to a wide variety of industries, including (but not limited to):

Aerospace

Tool & Die

Metal Fabrication

Plastics & Injection Molding

Consumer Products

Manufacturing

Architecture & Engineering

Food & Beverage

Financial Services

Mortgage & Banking

Software Development

Chemical

Contract Manufacturing

Construction / MEP

Pharma

Oil & Gas

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