For any tax year beginning in 2010 or 2011, a taxpayer may elect to treat up to $250,000 of qualified real property expenses as Section 179 property (subject to a phase-out). In other words, the taxpayer can take a current deduction for qualifying expenses as opposed to depreciating improvements over their useful life.
Qualified real property is:
(A) qualified leasehold improvement property (generally, improvements made pursuant to a lease by the lessor, lessee or sublessee, where the premises are occupied by the lessee or sublessee, and the improvements are made more than 3 years after the building was placed in service);
(B) qualified restaurant property (generally, a building or building improvements if more than 50% of the square footage is used for the preparation of, and seating for on-site consumption of, prepared meals); and
(C) qualified retail improvement property [generally, improvements to the interior of a building (excluding elevators, additions, structural framework modifications and common area improvements) used in a retail trade or business and such improvements are made more than 3 years after the building was placed in service].
The qualified property must be depreciable, acquired for use in the active conduct of a trade or business, and cannot be certain ineligible property (i.e., used for lodging, used outside the U.S., used by governmental units, foreign persons or entities, and certain tax-exempt organizations, air conditioning or heating units).
For purposes of applying the $500,000 expensing limitation for real and personal property, not more than $250,000 of the aggregate cost which is taken into account under Section 179 for any tax year can be attributable to qualified real property. The annual amount which may be expensed is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 and 2011 exceeds $2,000,000. In addition, the expensing deduction is limited to the taxpayer’s taxable income but can be carried over to a subsequent taxable year. Notwithstanding the general carryover rule for expensing deductions, no amount attributable to qualified real property can be carried over to a tax year beginning after 2011.