Roundtable Weekly - March 15, 2019

Tax Policy - Tax Reform Technical Corrections

Senators Introduce Bipartisan Legislation to Correct Cost Recovery Period for Nonresidential Real Estate Improvements

This week U.S. Senators Pat Toomey (R-PA) and Doug Jones (D-AL) introduced bipartisan legislation, the Restoring Investment in Improvements Act (S. 803), to correct a mistake in the Tax Cuts and Jobs Act that lengthened the cost recovery period for qualified improvement property (QIP).  

U.S. Senators Pat Toomey (R-PA) and Doug Jones (D-AL) introduced bipartisan legislation, the Restoring Investment in Improvements Act (  S. 803  ), to correct a mistake in the Tax Cuts and Jobs Act that lengthened the cost recovery period for qualified improvement property (QIP).  

  • The unintended drafting error has resulted in a significantly longer 39- or 40-year cost recovery period for most improvements to the interior of nonresidential real estate.  The intent of Congress was to allow the immediate expensing of QIP – or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest.
  • Prior to the law's enactment, commercial building tenants, retail store owners and restaurant owners could write off the costs of their renovations over a span of 15 years.  The legislation drafted by Sens. Toomey and Jones would allow many businesses to immediately deduct the full cost of interior renovations, and would apply retroactively to January 1, 2018. (The Hill, Mar. 14)
  • The Tax Cuts and Jobs Act included a strict new limitation on the deductibility of business interest expense, but also provided an exception for an “electing real property trade or business.”  In general, taxpayers that develop, rent, manage, or operate real estate are not subject to the interest limits, but are subject to longer cost recovery periods for their real estate and real estate improvements.  The Toomey-Jones bill would ensure that the QIP of an electing real property trade or business is depreciated over 20 years, rather than 40 years.   
  • Roundtable President and CEO Jeffrey D. DeBoer applauded the Senators bipartisan legislation introduced this week. “The Restoring Investment in Improvements Act ( S. 803 ) introduced by Senators Toomey and Jones is a simple and straightforward technical correction to the Tax Cuts and Jobs Act," he said.

    “The Restoring Investment in Improvements Act (S. 803) introduced by Senators Toomey and Jones is a simple and straightforward technical correction to the Tax Cuts and Jobs Act.  An acknowledged drafting error significantly lengthened the depreciation period for building improvements.  This has caused a large increase in the after-tax costs of modernizing and altering buildings of all types and uses, from shopping centers to office buildings to industrial properties and restaurants.  The result is an immediate and unnecessary drag on building investment, construction activity, and job creation, said Roundtable President and CEO Jeffrey D. DeBoer.  “Congress should act quickly to pass this legislation and reinstate a much shorter cost recovery period for building improvements.”
  • In October 2018, the Roundtable along with 239 businesses and trade groups, wrote to Secretary Mnuchin urging the Treasury Department to provide taxpayers with administrative relief from the drafting error. (Roundtable Weekly, Oct. 12, 2018) 

On Thursday, Treasury Secretary Steven Mnuchin told reporters that he has discussed fixing technical errors in the 2017 tax law with congressional leaders on both sides. “This is something we’re very interested in doing. There’s a lot of demand,” he said following his testimony before the Senate Finance Committee. (Bloomberg, Mar. 14)

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Property Rights

Roundtable Joins Amicus Brief Urging SCOTUS to Address Constitutional Rights in Income-Producing Private Property

The Roundtable joined the National Association of Home Builders (NAHB) and National Federation of Independent Business (NFIB) today, in an amicus brief requesting the nation’s highest court to accept a case that addresses significant property rights issues.

The Roundtable joined the National Association of Home Builders (NAHB) and National Federation of Independent Business (NFIB) today, in an amicus brief requesting the nation’s highest court to accept a case that addresses significant property rights issues.

  • In Love Terminal Partners, LP v. United States, developers and investors acquired rights to construct and provide flight service from a passenger terminal at Love Field airport near Dallas, Texas.  The venture never proved profitable.  The U.S. Congress subsequently codified a third-party agreement between affected cities, airlines, and the DFW airport regarding interstate air travel to and from the Dallas area.  The Love Terminal investors were not a party to that agreement, which gave the City of Dallas authority to demolish their terminal.  The agreement also provided the terminal could “never” be used for passenger service.
  • The Love Terminal owners thereafter sued the U.S. government for a Fifth Amendment property “taking” by effectuating the agreement in federal law.  At trial, the land owners won a $133.5 million “just compensation” award.  On appeal, however, the Federal Circuit reversed and entirely erased the trial court’s award.  The Love Terminal property owners thus requested the U.S. Supreme Court to hear the case.  The coalition supported that petition today with its amicus brief.
  • Prior Supreme Court precedents determine whether a taking has occurred under these circumstances. Penn Central (1978) considers the economic impact of land-use regulation, and whether the investor has reasonable investment expectations in the property.  Lucas (1992) establishes a “categorical” rule that a taking occurs when government regulations completely “wipe-out” the property’s economic uses.  “[T]his case presents an opportunity … to lay down the law—for the sake of consistency in both Penn Central and Lucas cases—when assessing fair market value for a property that is alleged to have prospective economic value for the buyer,” the brief explains.
  • Notably, the case addresses whether income producing property needs to turn a profit to support a takings claim. In deciding no taking occurred, the intermediate appeals court stressed that revenue never exceeded the owner’s carrying costs.  The amicus brief takes issue with that finding.  It states: “By that standard virtually all start-up companies and development projects would be vulnerable because it often takes years to begin turning a profit on a new venture …. [I]t is improper to ignore the economic realities driving business decisions to invest in a property that will prove profitable in the future.”
  • The brief continues: “Entrepreneurs and business investors typically have a long-term strategy, which assumes a return on investment over an extended period of time. This is especially true for home builders and commercial developers because they bear major upfront financial burdens before they can ever hope to turn a profit …. [I]t is simply wrong to say that negative cash-flow equates to zero value.  Negative cash-flow is commonly an accepted cost of doing business in the beginning of a new venture.”

The Supreme Court will decide whether (or not) it accepts the Love Terminal case likely after its next term starts in October 2019. If it does, briefing on the merits would take place next fall, and a decision would be expected by June 2020.   

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