Source: http://historiccredit.com/advocacy-items/guidance-to-members-on-qualified-leasehold-improvement-property/
Timestamp: 2019-04-23 08:52:24+00:00

Document:
On September 9, 2016, the Historic Tax Credit Coalition released its guidance memorandum to members on Qualified Leasehold Improvement Property (QLIP) per Section 168 of the Internal Revenue Code. In an effort to explain confusing language and discrepancies in the Code, the Historic Tax Credit Coalition submitted this guidance document on QLIP to all members.
U.S. Code § 168 contains a series of rules relating to depreciation and cost recovery. These provisions include the assignment of cost recovery periods to specific categories of property, as well as special rules providing for additional depreciation deductions to incentivize investment in certain types of property. The Historic Tax Credit (HTC) is available for both nonresidential and (in the case of certified historic structures) residential property. The normal cost recovery periods for nonresidential and residential rental property are 39 years and 27.5 years, respectively. However, participants in an HTC transaction should be aware of certain special depreciation rules that can affect (i) the availability of the HTC, (ii) the period over which rehabilitation improvements must be depreciated, and (iii) in a master lease transaction involving an election under Code § 50(d), the period over which any so-called “50(d) income” must be realized by the lessee (or its partners or members).
These provisions include: (i) a requirement that QLIP, as well as certain other categories of nonresidential property, be depreciated over a 15-year recovery period rather than the normal 39-year period applicable to such property, unless an election is made to use the alternative depreciation system (ADS), and (ii) a requirement that QLIP, as well as certain other categories of so-called “qualified property,” are subject to additional “bonus” depreciation unless an affirmative election is made not to claim such additional depreciation. This is of critical importance in an HTC transaction because qualified rehabilitation expenditures eligible for the HTC include only expenditures for which straight-line depreciation is used. As a result, the HTC may not be claimed with respect to QLIP or other qualified property unless the election out of additional depreciation is made.
Finally, Code § 50(d)(5) provides that “rules similar to” the old § 48(d) rules in effect in 1990 apply under current law to an HTC master lease transaction. The old § 48(d) rules provided that the lessee of property eligible or an investment credit such as the HTC for which a pass-through election was made must recognize income equal to the amount of the credit over the shortest cost recovery period that could apply to the property. The IRS has issued guidance that, in the case of property eligible for bonus depreciation, the shortest recovery period is the stated recovery period for such class of property in Code § 168(c). In the case of QLIP, this period is 15 years even though the normal recovery period for commercial property is 39 years and the ADS recovery period for both nonresidential and residential rental property is 40 years. As a result, it appears that 50(d) income attributable to QLIP (or other 15-year property) must be recognized over a 15-year period while 50(d) income attributable to nonresidential property that does not constitute QLIP (or another category of 15-year property) must be recognized over a 39-year period.
The terminology used in the Code to describe these rules is extremely confusing. The term “qualified leasehold improvement property” (or QLIP) is defined in Code §168(e) and a 15-year cost recovery period for such property is prescribed in Code § 168(c). Property eligible for bonus depreciation, or “qualified property,” is described in Code § 168(k). One of the categories of qualified property eligible for bonus depreciation is “qualified improvement property” (or “QIP”), which includes QLIP but also includes other categories of property not covered by the QLIP definition such as improvements that are not made pursuant to a lease, property leased to a related party, common areas, and improvements to buildings that are less than three years old. In short, QLIP always will be QIP eligible for bonus depreciation but the term “qualified property” (including QIP) also includes other categories of property. Conversely, although QIP always qualifies for bonus depreciation, not all QIP (or other types of qualified property) must be depreciated over a 15-year period.
For more information on the recommendation issued by the Coalition, please see the attached guidance document.

References: § 168
 § 50
 § 50
 § 48
 § 48
 § 168
 §168
 § 168
 § 168