MACRS Improvements to Property
Taxpayers must follow specific MACRS rules when they make significant improvements to a property, since upgrades and changes can impact depeciation.
Figure the MACRS deduction for an improvement made to property based on the date the improvement is placed in service, not the date the original property was placed in service.
Leasehold Improvements
Generally, depreciation allowances for improvements made on leased property are determined under MACRS, even if the MACRS recovery period is longer than the lease term. For example, if in a year after 2017, a tenant makes an improvement to a non-residential building, the improvement is depreciated over 15 years, straight-line, even if the tenant’s lease is only for 10 years.
The TCJA wrapped qualified leasehold improvements into the general category of qualified improvement property rather than as a separate category. Code Sec 168(e)(6)(A) defines the term qualified improvement property to mean “any improvement made by the taxpayer to an interior portion of a building which is non-residential real property if such improvement is placed in service after the date such building was first placed in service.” This is a broader definition than the pre-2018 definition, which said that a qualified leasehold improvement is any improvement to an interior part of a building that is non-residential real property, if all of the following conditions are met:
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The improvement is made under a lease by the lessee, or any sublessee, or the lessor of that part of the building, which is occupied exclusively by the lessee (or sublessee) of that part;
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The improvement is made more than 3 years after the building was first put into service by any person; and
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The improvement is Sec 1250 property.,
As noted above, the CARES Act corrected a drafting error in the TCJA, so that effective as if enacted with the TCJA, qualified improvement property is depreciable over 15 years and qualifies for bonus depreciation.
In CCA Letter Ruling 201310028, the IRS Office of Chief Counsel determined that the installation of a heating, ventilation, and air conditioning (HVAC) unit, either located on the roof of a building or located on a concrete pad adjacent to the building, was not qualified leasehold improvement property because the installation of an exterior HVAC unit was not an improvement to an interior portion of a building.