Detail

Tax Foundation Releases Report on 15-Year Qualified Improvement Property Drafting Error; Technical Corrections Bill Likely to Address QIP

  • May 13, 2019

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:

Treasury Secretary
Steven Mnuchin

  • 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.