Architects & Engineers Articles -
D epreciation Update

Qualified Leasehold Improvements:

50% or 30% depreciation applies to Qualified Leasehold Improvements placed in service prior to 1/1/05. You may elect out of the bonus depreciation treatment.

Qualified Leasehold Improvements are depreciated over 15 years if placed in service after 10/22/04 and before 1/1/06 using the 150-percent declining balance method and half year/mid quarter convention. This treatment is mandatory and not elective. However, to avoid the 15 year rules you could elect ADS depreciation and use 39 years, but ADS depreciation would have to be used for all 15 year property.

A Qualified Leasehold Improvement (lessee or lessor) is any improvement to an interior portion of nonresidential property. The improvement must be made under a lease, the lease is not between related parties, the building (or that portion) is occupied exclusively by the lessee, and the improvement is placed into service more than 3 years after the date that the building was first placed into service.

The following are not Qualified Leasehold Improvement:

• Exterior improvements (roofs, etc.).
• Enlargement of the building.
  
• Elevators and escalators.
  
• Improvements to a common area. Common areas include stairways, hallways,
• lobbies, walkways, loading docks and rest rooms.

Bonus depreciation will expire December 31, 2004

Property with a life of 20 years or less (including computer software and qualified leasehold improvements) that is new property placed in service before January 1, 2005 will qualify for 50% bonus depreciation for 2004.

Code Section 179 Expensing Limits Extended

The American Jobs Creation Act of 2004 extended for an additional two years the Section 179 deduction limitation for depreciable recovery property (not real estate). The amount that may be expensed of $100,000 with an investment limitation of $400,000 is extended to 2007. The amounts are indexed for inflation, for 2004 the amounts are a $102,000 expense limit and a $410,000 investment limit. For years beginning in 2008, the expense limit will decrease to a $25,000 expense limit and a $200,000 investment limit.

Depreciation for Sport Utility Vehicles (SUVs)

The American Jobs Creation Act of 2004 limits the amount that can be taken under Section 179 to $25,000. Previously, the amount could have been up to $100,000. The change applies to vehicles that weigh less than 14,000 pounds and are placed in service after October 22, 2004. SUVs will still be allowed bonus deprecation (prior to January 1, 2005) and the normal depreciation deduction as long as they weigh more than 6,000 pounds. For vehicles that weigh less than 6,000 pounds, they will be subject to much lower luxury auto depreciation limits.

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