TAX POLICY - August 17, 2018 - Roundtable Weekly

Senate GOP Taxwriters Request Treasury Secretary Mnuchin to Clarify Cost Recovery Period for Real Estate Improvements   

Senate Finance Committee Republicans yesterday sent a letter to Treasury Secretary Steven Mnuchin and Acting IRS Commissioner David Kautter requesting clarifications to the tax overhaul legislation enacted last year – including guidance related to a drafting error that unintentionally pushed the cost recovery period for qualified property improvements (QIP) from 15 to 39 years. (The Hill, Aug. 16)

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The August 16 letter, signed by all Republican members of the Finance Committee and Chairman Orrin Hatch (R-UT), urges Treasury and the IRS to "issue guidance that is consistent with the congressional intent" of the new tax law regarding QIP expensing and two other tax policy areas

  • The unintentional drafting mistake has resulted in a longer cost recovery period for qualified nonresidential interior improvements – a category that previously covered leasehold improvements, retail improvements, and new restaurant construction.  ("Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property" – The Tax Foundation, May 30) 
     
  • As a result of the mistake, businesses across the country are delaying, or significantly reducing, capital expenditures for building improvements, undermining job creation and economic activity.  

  • The August 16 letter, signed by all Republican members of the Finance Committee and Chairman Orrin Hatch (R-UT), urges Treasury and the IRS to "issue guidance that is consistent with the congressional intent" of the new tax law regarding QIP expensing and two other tax policy areas. 

  • On the depreciation of real property, the letter notes: "[I]n eliminating the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property and providing a new single definition of qualified improvement property, the language...failed to designate qualified improvement property as 15-year property under the modified accelerated cost recovery system ("MACRS").  In addition, there is a typographical error in a cross-reference identifying qualified improvement property as property which is recovered over 20 years under the alternative depreciation system ("ADS").  Congressional intent was to provide a 15-year MACRS recovery period and a 20-year ADS recovery period for qualified improvement property. Such intent is set forth in the Conference Report to accompany (the Tax Cuts and Jobs Act )." (H.R. Rep. 115-466, at p. 366)."  

  • During a February hearing in the House, Treasury Secretary Mnuchin testified about the QIP issue: "I am aware of the error and it obviously was unintended. We are looking at whether there is anything we can do with regulations. I think it is likely that this is something that may need to be fixed in the bill. We look forward to working with you." (Ways and Means Committee – Mnuchin's testimony and hearing video and Roundtable Weekly, June 1) 

  • The letter, signed by Senate Finance Committee Chairman Orrin Hatch (R-UT) and other GOP tax writers, states they will also introduce legislation to correct unintentional mistakes in the new tax, although support from Democrats would be needed to pass such a bill.  An amendment (# 3597) introduced July 26 by Sen. Pat Toomey (R-PA) to an appropriations bill (H.R. 6147) would have corrected the QIP drafting error, but did not receive a vote.  

The letter also notes that the Finance Committee continues to review the law for potential areas that may require regulatory guidance or technical corrections: "After this review, we intend to introduce technical corrections legislation to address any items identified."  (Senate Finance Committee News Release, Aug. 16)

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