Detail

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

  • August 17, 2018

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)

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)