Does the construction type of a building affect eligibility for Section 179 or bonus depreciation deductions?
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The eligibility of a building or its components for Section 179 expensing or bonus depreciation is not determined by the "construction type" of the building (e.g., steel frame, wood frame, tilt-up, etc.), but rather by the specific nature and use of the property, as defined in the Internal Revenue Code and Treasury Regulations. However, the construction type can indirectly affect eligibility if it determines whether an improvement is a structural component, a land improvement, or qualified improvement property (QIP), which are treated differently for depreciation purposes.
Below is a detailed legal analysis:
1. Section 179 Expensing
General Rule
Section 179 allows taxpayers to expense the cost of certain qualifying property in the year it is placed in service, subject to annual limits and other requirements.
Eligible Property
- Tangible personal property (not real property) used in a trade or business is generally eligible.
- Qualified real property is also eligible, which includes:
- Qualified improvement property (QIP) as defined in IRC §168(e)(6)
- Certain improvements to nonresidential real property: roofs, HVAC, fire protection and alarm systems, and security systems, placed in service after the building was first placed in service.
Ineligible Property
- Buildings and their structural components are generally not eligible for Section 179, except for the specific types of qualified real property listed above.
- Land improvements (e.g., parking lots, landscaping) are not eligible for Section 179, but may be eligible for bonus depreciation.
Effect of Construction Type
- The construction type (e.g., steel, wood, concrete) does not by itself determine eligibility.
- What matters is whether the improvement is a structural component of a building (generally ineligible), or is QIP or another eligible improvement (potentially eligible).
- For example, a new HVAC system installed in a steel-frame or wood-frame building is eligible for Section 179 if it is an improvement to nonresidential real property placed in service after the building was first placed in service.
2. Bonus Depreciation (Section 168(k))
General Rule
Bonus depreciation allows for an immediate deduction of a percentage of the cost of qualifying property in the year it is placed in service. The percentage is 40% for most property placed in service in 2025, with a phase-out in later years.
Eligible Property
- MACRS property with a recovery period of 20 years or less (includes most tangible personal property, QIP, and land improvements).
- Qualified improvement property (QIP) is eligible for bonus depreciation.
Ineligible Property
- Buildings themselves (nonresidential real property, residential rental property) are not eligible for bonus depreciation because their recovery period exceeds 20 years.
- Structural components of a building are not eligible unless they are part of QIP or another eligible improvement.
Effect of Construction Type
- The construction type does not affect whether a component is eligible for bonus depreciation.
- What matters is whether the property is QIP, a land improvement, or other eligible property.
- For example, a parking lot (a land improvement) is eligible for bonus depreciation regardless of whether it is attached to a steel or wood building.
3. Qualified Improvement Property (QIP) and Construction Type
- QIP is defined as any improvement made by the taxpayer to the interior portion of a building that is nonresidential real property, placed in service after the building was first placed in service, and not attributable to the enlargement of the building, elevators/escalators, or the internal structural framework.
- The construction type of the building (e.g., steel, wood, concrete) does not affect whether an interior improvement qualifies as QIP.
- What matters is the nature of the improvement and the timing of when it is placed in service.
4. Summary Table
5. Other Considerations
- Cost Segregation: The construction type may affect the cost and identification of components in a cost segregation study, but not the eligibility for Section 179 or bonus depreciation itself.
- Recapture: Both Section 179 and bonus depreciation claimed on QIP are subject to ordinary income recapture under Section 1245 upon sale, regardless of construction type.
6. Conclusion
The construction type of a building does not, by itself, affect eligibility for Section 179 or bonus depreciation deductions. Eligibility is determined by the nature and use of the property (e.g., whether it is QIP, a land improvement, or tangible personal property), not by whether the building is steel, wood, concrete, or another construction type. However, the construction type may affect the classification of certain components in a cost segregation study, which in turn can affect the amount of property eligible for accelerated deductions, but not the eligibility rules themselves.
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