The depreciation deduction for most tangible property is determined under the modified accelerated cost recovery system (MACRS). But taxpayers are sometimes required to — or can elect to — depreciate property under the alternative depreciation system (ADS), which generally requires a longer recovery period than the MACRS. The new federal income tax law changed the recovery periods for certain types of property under both systems and makes some property potentially eligible for accelerated depreciation deductions.

Nonresidential Real Property

Prior to the Tax Cuts and Jobs Act (TCJA), the recovery periods for nonresidential real property were 39 years under the MACRS and 40 years under the ADS. These recovery periods are unchanged by the new law.

Residential Rental Property

Previously, apartment buildings and other residential rental buildings were depreciated over 27.5 years under the MACRS and 40 years under the ADS. The MACRS recovery period remains 27.5 years for residential rental property placed in service after 2017, but the ADS period falls to 30 years.

Qualified Improvement Property

Prior to the TCJA, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property were subject to a 15-year recovery period under the MACRS and a 39-year period under the ADS. Nonqualified improvement property was recovered over 39 years under the MACRS and over 40 years under the ADS.

The TCJA eliminates the separate definitions for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. It also provides a general 15-year MACRS recovery period for any qualified improvement placed in service after December 31, 2017, and a 20-year period under the ADS.

Under the TCJA, the term “qualified improvement property” generally refers to improvement of the building interiors that are nonresidential real property, and done after the building was placed in service. This change makes these types of property eligible for bonus and Section 179 depreciation.

Decision Time

The TCJA also includes a provision that limits business interest deductions. That limit doesn’t apply to taxpayers with average annual gross receipts of $25 million or less. In addition, the law allows real estate, farming and certain utility businesses to elect out of the limit — but that election comes with a price: The electing business must depreciate all buildings and qualified improvement property under the ADS.

With some of the ADS recovery periods shortened, certain businesses might find it beneficial to elect out of the interest limit. But an electing business can’t claim bonus depreciation, and the election is irrevocable.

Discuss the details with our tax professionals before making this election to ensure it’s your best long-term option. Contact us for more details on the simpler, shorter depreciation rules for qualified improvement property and the new limit on business interest deductions.