New Law Drafting Error Involving the Expensing of Qualified Improvement Property

[Abby Normal]

The TCJA Makes Cost Recovery for QIP More Restrictive

The TCJA, in addition to enacting 100 percent bonus depreciation for certain assets with a 20-year recovery period or shorter, made changes intended to simplify the tax code. Among these changes was the consolidation of the different types of improvement property under the single definition of Qualified Improvement Property, with intent to assign this new category a 15-year recovery period, eligible for 100 percent bonus depreciation. The wording of the final bill, however, fails to provide a recovery period, and as a result unintentionally makes QIP ineligible for 100 percent bonus depreciation.

Reviewing the Joint Explanatory Statement of the Committee of Conference provides some insight as to what lawmakers intended to do with improvement property.[6] The Senate version going into the Conference Committee would consolidate the different definitions and assign a shorter, 10-year recovery period:[7]

As a conforming amendment, the provision replaces the references in section 179(f) to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property with a reference to qualified improvement property. Thus, for example, the provision allows section 179 expensing for improvement property without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building. 

During the Conference Committee, lawmakers made some changes to the Senate version to arrive at a final proposal, explained here:[8]

Senate Amendment: The provision eliminates the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and provides a general 10-year recovery period for qualified improvement property, and a 20-year ADS recovery period for such property.

Conference Agreement: The conference agreement follows the Senate amendment….In addition, the conference agreement provides a general 15-year MACRS recovery period for qualified improvement property.

Recall that for property to qualify for the TCJA’s 100 percent bonus depreciation provision, it must be property “with an applicable recovery period of 20 years or less.”[9] The conference agreement clearly intended to simplify the classifications of improvement property under the single heading of Qualified Improvement Property and assign a recovery period of 15 years to make QIP eligible for the new 100 percent bonus depreciation provision.

The final changes made to legislative text did succeed in this first effort: it removed the separate categories of improvement property and added the new QIP definition. However, the changes to make QIP eligible for 100 percent bonus depreciation did not occur. The conference agreement removed the 10-year language from the Senate amendment but then failed to add the 15-year language decided during the Conference Committee. Also, it did not adequately update the 20-year language for the alternative recovery period. The result leaves the newly defined QIP category without an assigned recovery period, while the alternative recovery period definition references a 10-year period provision that does not exist in the final law.

What this means for QIP is that without an assigned recovery period, QIP will in most cases be treated as nonresidential real property with a 39-year recovery period (and 40-year alternative recovery period)—making QIP ineligible for 100 percent bonus depreciation.

https://taxfoundation.org/fixtures-fix-qualified-improvement-property/

[Lee B]

There is a proposed technical corrections bill floating around, but it isn't expected to be to be passed until December.

Supposedly a fix for this problem is not currently included, because the politicians don't want to admit that they made any mistakes !

I am shocked, shocked I tell you 

[Lee B]

Industry Groups urge fixes for errors in TCJA

By Michael Cohn

Published August 22 2018, 4∶18pm EDT

A broad coalition of hundreds of industry associations and companies sent a letter
Wednesday to Treasury Secretary Steven Mnuchin urging him to resolve errors in last year’s tax
code overhaul related to depreciation rules and net operating loss carrybacks.
The nearly 300 business groups include the National Retail Federation, the National
Restaurant Association, the National Grocers Association, the National Federation of
Independent Business, the National Association of Theater Owners, as well as large companies
such as McDonald’s, Best Buy, Kroger, Wendy’s and Yum Brands.

The hastily drafted tax legislation sailed through Congress late last year with few hearings,
driven by Republicans eager to pass the bill before the end of the year. By passing it last
December, they were able to use a budget reconciliation procedure that allowed it to pass in
the Senate without the threat of a filibuster. The text on draft versions of some provisions was
written by hand, and Democrats objected to the way the bill was being rushed through
Congress, warning it would need technical corrections.


Bloomberg News

Last week, a group of Republicans on the Senate Finance Committee asked the IRS and the
Treasury Department to issue guidance based on their explanation of the “congressional
intent” behind several provisions, including the net operating loss deduction and qualified
improvement property expensing referred to in the industry letter (see Senate Republicans
clarify intent of TCJA provisions). Under the Tax Cuts and Jobs Act, remodeling and other
improvements to stores or buildings were supposed to be fully depreciated in the first year the
work is done. Instead, a mistake in the legislative language requires the depreciation to be
done over the course of 39 years.

In a separate error, the legislation made a mistake in the effective date of carryback eligibility,
which the industry groups complained would lead to a retroactive tax increase on businesses
with losses, some of which are already facing liquidity issues. The timing difference is crucial
for cash-strapped businesses that were counting on the carryback to finance their continuing
operations as well as investments needed to revitalize their businesses, they pointed out. Brickand-
mortar retail chains across the country like Toys 'R' Us have been closing in recent years
because of competition from online retailers like Amazon

They complained that confusion over the provisions is keeping them from improving property
in businesses such as restaurants and stores.

“The delay in correcting these provisions has caused
economic hardship (that is) delaying investments across
the economy that impact the communities in which these
companies are doing business,” the groups wrote in a
letter. “We urge the Treasury Department to issue guidance
that will assure that these provisions are administered as
intended by Congress.”

In addition to economic impact, the groups said the
drafting errors have raised safety concerns by delaying
projects such as upgrading sprinkler systems, “creating a
more perilous situation for our nation’s firefighters.”
They argued that the need to correct the errors is
becoming more urgent because most retailers have to file
their first income tax returns related to the change on
November 15, according to the letter. A national chain can
file up to 100 federal, state and local income tax returns
and, if the errors aren’t corrected before then, may have to
file 100 amended returns once the mistakes are fixed.

Such a time-consuming and costly
process, the industry groups noted, would contradict President Trump’s executive order in April
2017 aimed at reducing tax regulatory burdens.