The Tax Cuts and Jobs Act (TCJA) made several significant changes to depreciation rules when it became law in December 2017. In the “good news” department, two provisions in the law provided increased opportunities for businesses—including physician practices, hospitals and other medical practices that own or lease buildings—to expense the cost of depreciable assets sooner. On the “not-so-good news” side of things, several types of building improvements will now be depreciated over longer periods when their costs exceed the limits for immediate expensing. In addition to the longer recovery period, the new law and related guidance have created some uncertainty over what improvements may qualify for the same-year recovery provisions.
First, the Good News: Expanded Accelerated Depreciation
The TCJA expanded existing accelerated depreciation regulations.
- Code Section 179 allows taxpayers to deduct the full cost of assets placed in service during the year subject to certain dollar limits. TCJA raised the dollar limit for tax years beginning after December 31, 2017. If your purchase was less than $2.5 million in assets during the year, you can fully expense up to $1 million of asset purchases. The new law also extended Section 179 treatment to the cost of used assets and to amounts spent on HVAC systems and roofs for non-residential property already in service.
- The TCJA also calls for the immediate expensing of most fixed assets under a new set of 100 percent bonus depreciation rules for fixed assets placed in service on or after September 28, 2017, and before December 31, 2022. The new provision applies to costs for new and used property, as long as the depreciable life of the assets is less than 20 years.
How might these changes affect your medical practice or hospital? Let’s say you purchased a new HVAC system for $1 million on January 15, 2018, and equipment valued at $1 million in total during 2018. You will now be able to immediately expense the $1 million HVAC under Section 179. Before TCJA, HVAC systems did not qualify for this treatment. The remaining $1 million of equipment can be deducted in 2018 under 100 percent bonus depreciation rules.
The Bad News: Qualified Improvement Property
While the good news part of the TCJA depreciation story is pretty straightforward, the law also created a new asset class called “qualified improvement property” – and that’s where things start getting complicated.
Qualified improvement property combines several previous groups of improvement property and is essentially any improvement to a building that:
- Does not enlarge the building,
- Does not add an elevator or escalator, and
- Is not an improvement to the internal structural framework of the building.
These improvements can be made to property that is either leased or owned. Under the previous rules, these types of improvements were depreciated over 15 years. Under the TCJA, this new combined category of qualified improvement property will generally be depreciated over 39 years.
Qualified improvement property is eligible for immediate Section 179 expensing, subject to dollar limitations mentioned above. However, this asset category is not eligible for the 100 percent bonus depreciation deduction, because the 39-year depreciable life of qualified improvement property exceeds the 20-year limit imposed under the rules. Tax practitioners and the AICPA submitted numerous requests to the IRS for guidance on the eligibility of qualified improvement property for the 100 percent bonus depreciation provisions. Initially, commentators believed that excluding the new class of property from this benefit was a legislative oversight that could be remedied in proposed regulations or a technical correction.
Work in Progress: IRS Continues to Clarify Depreciation Rules
Proposed regulations on the provision issued near the end of August did clarify that qualified improvement property acquired and placed in service September 28, 2017, to December 31, 2017, would be depreciated over 15 years and thus qualify for bonus depreciation. The bad news, however, is that the proposed regulations did not extend this 15-year treatment beyond December 31, 2017. Because this guidance is in proposed form, it may still be revised before being issued as final. Many commentators are suggesting the extension of the 15-year treatment through December 2022. Hopefully, the IRS will listen to the commentators, but there’s no guarantee. For now, taxpayers are forced to assume that these improvements will not be eligible for the 100 percent bonus depreciation starting in 2018. This will likely be a major factor as hospitals and medical practices evaluate the costs of potential improvements to their buildings going forward.
This blog is the second in a series that will address the provisions of the TCJA and their impact on the healthcare sector. See our first blog, TAX REFORM: IRS Limits Tax Strategies for Pass-Through Healthcare Entities. In future blogs, we will be exploring how the TCJA altered deductions for meals, parking and entertainment, as well as how it changed the discussion around altering an entity’s corporate structure. We will also be closely watching for any additional IRS clarifications concerning areas of interest for healthcare entities. Consult with your HORNE tax advisor for how these proposed regulations will specifically affect you and be on the lookout for our next blog in this series.