New law oversight
Generally, leasehold improvements are enhancements to a leased space that are paid for by a tenant or landlord, such as the addition of built-in cabinetry, electrical light fixtures or carpeting.
Prior to 2018, if you made any improvement (not including any enlargement of the building, any elevator or escalator, any structural component benefiting a common area or internal structural framework) to an interior portion of a leased nonresidential building more than three years after the building was first placed in service, you could recover this cost through depreciation over 15 years. In addition, these types of improvements qualified for $179 and bonus depreciation. With the new tax laws, Congress tried to simplify things and consolidate various types of leasehold improvements into one general category—qualified improvement property (QIP). Qualified improvement property is less restrictive in that the timing of the improvement must be only after the building was placed in service, not more than three years later.
However, upon simplification, beginning in 2018, an oversight in the law has left qualified improvement property with a 39-year life for depreciation. This negates any option for $179 or bonus deprecation for QIP. We are hoping for a technical correction soon so that the cost of leasehold improvements can be deducted more quickly and qualify for additional depreciation deductions.