June 28th, 2005: DB&M Reports to Clients

Just a reminder that the "American Jobs Creation Act" (the "Act") that was signed into law by President Bush on October 22, 2004 added a provision that permits commercial property owners to depreciate "qualified leasehold improvements" and "qualified restaurant property" over a fifteen year period, rather than the current 39 year period. Only improvements placed in service or use after October 22, 2004 and before January 1, 2006 qualify for this accelerated depreciation allowance. A taxpayer must use the straight line method of depreciation over the recovery period and use the half-year convention unless the mid-quarter convention applies.

The Act defines "qualified leasehold improvements" as those which are completed for tenants, such as improvements to an interior portion of a building that is non-residential real property, so long as the improvements are (i) made by or pursuant to a lease, (ii) occupied by lessee and (iii) placed in service more than 3 years after the building was first put into service. Enlargement of the building or the internal structure framework does not qualify.

As indicated, the Act also provides a 15 year depreciation period for "qualified restaurant property" that is placed in service after October 22, 2004 and before January, 2006 rather than the usual 39 year recovery period for improvements to restaurant buildings. "Qualified restaurant property" must be property (i) placed into service more than 3 years after the date the building was first placed into service and (ii) more than 50% of the building's square footage must be used for preparation and seating for on-premises consumption of prepared meals.

Should you need detailed information on the subject of depreciation, amortization, Section 179 expensing and related issues, please note aware that the Internal Revenue Service has issued "Publication 946" entitled "How to Depreciate Property." It provides a 112 page detailed analysis of depreciation and amortization, including the election of the Section 179 expense deduction, the claiming of special depreciation allowances, including the qualified Liberty Zone special allowances, the computation of depreciation under the MACRS system ("Modified Accelerated Cost Recovery System") and special depreciation rules for depreciating or expensing "listed property" (e.g., a passenger automobile weighing 6,000 pounds or less, property generally used for entertainment, recreation or amusement, computers and related peripheral equipment, and cellular phones).

For example, to close what it perceived was a "loophole," the Act added a provision to crack down on the Section 179 expensing of SUV's weighing over 6,000 pounds (such as the Cadillac Escalade) by rolling back the maximum Section 179 "expense deduction" (i.e., $105,000 in 2005) to $25,000. This change took effect immediately upon the President's signing of the Act on October 22, 2004 for such vehicles first used in business after that date. However, SUVs are still entitled to favorable "annual" depreciation rates on top of the $25,000 that is allowed to be immediately expensed.

You or your clients may find this reduced 15 year recovery period for the depreciation of certain leasehold improvements and restaurant property of interest. In addition, this Internal Revenue Service Publication can be a very informative guide when it comes to determining the appropriate depreciation method and/or recovery period to be applied to certain classes of property being depreciated, or expensing qualified property rather than depreciating it.

If we can be of any assistance to you or any other issue affecting your business, please call us.

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