• New Depreciation Bonus
  • May 5, 2003 | Author: Duane E. Schroeder
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • On March 11, 2002, President Bush signed into law the Job Creation and Worker Assistance Act. This federal tax law provides, in part, a retroactive, special depreciation bonus to landlords or tenants of nonresidential real estate for qualified leasehold improvements made to the interior of a building. The bonus depreciation is a straightforward 30% additional deduction on qualified assets or improvements. It is available for all qualified property purchased or improvements made after September 10, 2001 and before September 11, 2004. The bonus is 30% of the adjusted basis of the property prior to the depreciation bonus and is in addition to any other available depreciation. However, the adjusted basis of the property must be decreased by the depreciation bonus deduction.

    Eligibility Requirements

    To receive the bonus, six requirements must be met. The improvements must be:

    1. "qualified expenses,"

    2. made to the interior of a nonresidential building,

    3. made pursuant to an unrelated party lease or right to use the building,

    4. made by the landlord or the tenant (or any subtenant) to the improved portion of the building,

    5. in a portion of the building that is occupied exclusively by the tenant (or any subtenant), and

    6. made to a building that is more than three years old at the time the improvements are made.

    Qualified Expenses

    Only Qualified expenses are for capital improvements that generally have a depreciation recovery period of 20 years or less and are for "original use" property. This means the first use of the property and not just the first use of the property in the taxpayer's hands. The purchase of used equipment, for example, would not qualify for the depreciation bonus. Other expenses that would not qualify include those that relate to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the building's internal structural framework.

    Related Party Leases Do Not Qualify

    To qualify for the bonus depreciation, the lease must be between unrelated parties. If the landlord and tenant are affiliated parties or are directly or indirectly controlled by the same party, the improvement expense will not qualify for the bonus depreciation.

    Minnesota's Version of the Bonus Depreciation

    For Minnesota income tax purposes, the corporate taxpayer must add back to its taxable income 80 percent of the federal bonus depreciation in the year the improvements were made so, in effect, the taxpayer only gets an immediate 6 percent bonus depreciation deduction rather than the full 30 percent amount allowed for federal purposes. Minnesota does allow, however, the corporate taxpayer to carry the remaining 24 percent bonus depreciation forward and deduct it equally over the next five years. For partnerships and limited liability companies, the full 30% bonus depreciation can be taken by the entity, but the partners or members of the limited liability company must add back 80% of the federal depreciation and carry the unused portion forward for deduction over the next five years.