A Tax Foundation report released this week urges policymaker to correct a technical drafting error regarding cost recovery for qualified improvement property (QIP) that was included in the tax overhaul legislation enacted last year. 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)
Chart from " Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property " – The Tax Foundation, May 30 – enlarge chart image.
Key Points of the Tax Foundation Report:
- The Tax Cuts and Jobs Act (TCJA) stimulated investment by allowing businesses to immediately deduct the cost of certain assets and expenditures under a 100 percent bonus depreciation provision. It also sought to consolidate the cost recovery
period for nonresidential real estate improvements into a single, 15-year period for qualified improvements.
- However, due to an unintended drafting mistake, the law accidentally excluded the 15-year reference, and qualified improvements defaulted to a 39-year recovery period. As a result, investments of this type face a higher tax burden than under prior law.
- More restrictive cost recovery treatment for interior improvements to buildings will increase costs and discourage companies from making these types of investments.
- Policymakers should work to ensure that cost recovery for qualified improvement property (QIP) does not remain worse off due to a technical drafting error, and that it is eligible for 100 percent bonus depreciation.
Legislative vs. Regulatory Correction:
- During a February hearing in the House, Rep. Jim Renacci (R-OH) explained to Treasury Secretary Steven Mnuchin that Ways and Means members are working to address the tax reform drafting mistake that should have provided for a 15-year recovery cost-recovery period to qualified property improvements, instead of the 39 year period that was enacted.
- Mnuchin responded to Renacci: "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 ).
- The Real Estate Roundtable and its industry partners are working actively with key lawmakers to advance a legislative technical correction or obtain formal, clarifying guidance from the Treasury Department.
Along with TCJA rulemaking and implementation, potential technical corrections that impact CRE will be a focus of discussion at The Roundtable's Annual Business Meeting and its Tax Policy Advisory Committee (TPAC) Meetings on June 14-15 in Washington, DC.