What is a Qualified Leasehold Improvement Property? Qualified vs. Non-Qualified Leasehold Improvements
From 2001 through 2017, Qualified Leasehold Improvement Property (QLIP) were most improvements to a building’s interior made under a lease. This includes interior improvements such as HVAC, fire protection systems, alarm systems, and security systems. It only applies to commercial buildings, such as retail or factory buildings. Tangible personal property identified in a cost segregation study was not QLIP. Improvements made the first three years a building was in service were not QLIP.
Building enlargements, elevators or escalators, or the internal structural framework of the building did not qualify. Qualified Leasehold Improvement Property was gradually replaced by Qualified Improvement Property (QIP) between 2016 and 2017. QIP expanded upon QLIP by eliminating the three-year rule and also treated any qualifying improvement as QIP regardless of whether it was made under a lease.
Qualified Improvements Bonus Depreciation Rates
The bonus depreciation rates are as follows:
- QIP Placed in 2018 through 2022: 100% bonus depreciation
- 2016 through 2017: 50% bonus depreciation rate
Eligibility of Building Improvements
- Placed-in-service since 1987 though, generally speaking, most studies are limited to the last 5-7 years.
- Currently depreciation over 27.5 or 39 years
- $500,000+ in capitalized costs is a good starting point to begin thinking of Cost Segregation
- Have been acquired, constructed, expanded, or remodeled
- The property owner must be a tax-paying entity
- Ideal building types include: 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 property types.
Typically, the more complex buildings will generate the greatest benefit from a Cost Segregation study.
Cost Segregation Standard Study for QIP
- Identifies §1245 Property (5, 7, & 15 year property (Typ.))
- §1250 Qualified Leasehold Improvements, Qualified Retail Improvements, & Qualified Restaurant Improvements (15-year straight-line property)
- §1250 Qualified Improvement Property (15-year straight-line property and bonus depreciation for §1250 interior improvements after 12/31/2017)
Case Study: Food and Beverage Manufacturer with Retail Facilities
Facts
The subject manufacturer is a corporation that originally began production in 1993. Beginning in 2008, the company started a program of expanding its current facilities and acquiring other smaller producers. They also diversified by opening retail facilities and marketing offices, around the country, during this period. Some of these acquired properties were purchased and some were leased. The total costs of the acquisitions and improvements were $22,224,000. For tax years 2008-2018, the manufacturer erroneously classified some manufacturing personal property, Qualified Leasehold Improvement Property, Qualified Restaurant Property, Qualified Improvement Property, and site improvements as building property.
Execution
In 2019, the Source Advisors Cost Segregation engineers were engaged to do a full fixed asset review to identify opportunities to properly classify the costs of these transactions that spanned this 10-year period. Some of the properties required a full cost segregation study to properly allocate the capitalized costs using architectural plans with detailed cost files and invoices, while others required invoice reviews for proper classifications. They conducted a thorough inspection of some properties where improvement projects were done. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.
Result
Source Advisors reclassified 9% or $2,013,000 into Qualified Leasehold Improvement Property 3% or $605,000 to 15-year land improvements and 20% or $4,421,000 as 7 and 5-year tangible personal property. In this example, the taxpayer had chosen to opt-out of bonus depreciation in most years, if the full benefits of bonus depreciation were realized, the benefits would have been higher.
How Source Advisors Can Help
Founded as LIFO Systems in 1983, Source Advisors is a specialized tax consulting firm providing Qualified Leasehold Improvement, Cost Segregation, R&D Tax Credit, Energy Efficiency (§179D), and LIFO inventory solutions for more than 37 years. Our new name, Source Advisors, strengthens our resolve and commitment to partnering with companies and CPA firms as an advisory source in maximizing government-sponsored tax credits, deductions, and incentives.
Our team of experienced CPAs, attorneys, engineers, technology experts, and Big Four professionals help companies save money and create cash flow to stimulate businesses and drive overall growth. We are experts in the legislation that governs these incentives and assist CPA firms and companies navigate the laws that continue to evolve and change.
Frequently Asked Questions
According to the IRS, Qualified Leasehold Property Improvements include any improvement to a building’s interior. But as the IRS states, these improvements do not qualify if they include the enlargement of a building, an elevator or escalator, the internal structural framework of a building. QLIP may include interior improvements such as drywall, electrical fixtures, and plumbing.
Qualified leasehold improvement property includes, as mentioned above, any improvement to a building’s interior. Unqualified leasehold improvements are things such as enlargement of the building, elevators or escalators, or the internal structural framework of the building.
Qualified Leasehold Improvements must depreciate over a 15-year period. This is done using the straight-line method.
