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By Lydia O'Neal
Retailers and restaurants will miss out on some generous tax write-offs as a result of an apparent congressional oversight as finishing touches were being put on the tax reform bill enacted in 2017.
It’s unclear how soon these businesses will get a technical correction or guidance to address the omission, which involves bonus depreciation deductions, given the deep partisan divide in Congress and the sheer volume of apparent glitches in the law, according to tax professionals.
Lawmakers intended to consolidate three types of improvement or renovation property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property—into one “qualified improvement property” category and assign it a 15-year recovery period under modified tax code Section 168.
All three were eligible for 15-year recovery periods under the prior law. But tax writers neglected to designate qualified improvement property for the 15-year life, which means it now falls under a default recovery period of 39 years, effective Jan. 1.
That oversight makes those property expenses ineligible for one of the new tax law’s biggest corporate perks: the Section 168(k) bonus depreciation provision. The expensing provision allows businesses to fully write off certain property and capital improvements purchased and placed into service after Sept. 27, 2017, and through 2022, after which the amount begins to taper annually by 20 percentage points. The 100 percent expensing allowance, however, only applies to property with recovery periods of 20 years or less.
As soon as the three improvement property types, which were previously eligible for 50 percent bonus depreciation, were merged at the start of 2018, they weren’t eligible for any bonus depreciation.
“The idea of this to some degree is rooted in simplification: Let’s just provide one definition that we’re going to subsume all those things into, give it a 15-year life, and make it eligible for bonus,” said Scott Mackay, partner at Ernst & Young LLP in Washington and former taxation specialist at the Treasury Department’s Office of Tax Policy. ”In certain cases, unfortunately, that didn’t make it into the final version of the statute.”
The conference committee agreement made it clear that lawmakers intended to give such property a 15-year recovery period and full expensing, and the Joint Committee on Taxation therefore calculated its budget scorecard accordingly, according to Mackay and others who spoke with Bloomberg Tax. But “at the last minute, when everyone was compromising, this one little piece of it got missed,” said Jane Rohrs, director in the Federal Tax Accounting Periods, Methods & Credits Group at Deloitte Tax LLP in Washington.
The oversight, one of several for which practitioners and executives are awaiting guidance or corrections, likely stemmed from the speed with which Congress members pushed the bill through the legislative process, said Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center and former chief counsel on the Senate Committee on Small Business and Entrepreneurship.
“Even under the most extended periods, errors happen,” she said. “The legislative process oftentimes is an exaggerated example of a game of telephone. What a member wants, translated to legislative staff, translated to legislative text, is not always fully represented in the end product.”
The end product has left restaurants without a tax write-off they hold dear, Bruckner said. (Indeed,"accelerated depreciation” was among the list of tax issues on which the National Restaurant Association lobbied Congress during the fourth quarter of 2017, federal lobbying forms show.)
Retail companies face a situation further complicated by the industry’s tendency to operate on fiscal-year schedules that end Jan. 31 or March 31, as opposed to calendar years.
Many companies that have made interior improvements that fall under the new “qualified improvement property” definition are coming to terms with the unexpectedly less-generous tax treatment of those expenses until a correction is enacted, and the likelihood that they’ll have to amend their annual filings once the law is fixed, said Rachelle Bernstein, tax counsel at the Washington, D.C.-based National Retail Federation, an industry lobbying group.
“They’re committed to the improvements they’re making in 2018 regardless of whether this gets fixed or not,” Bernstein said, based on her anecdotal conversations with retail business owners who had already negotiated and finalized their property improvement expenses. “What they will have is a cash flow hit that’s going to affect them in other ways,” she said.
If members of Congress don’t squeeze the correction into a continuing resolution, finding the 60 votes needed to pass a corrections bill could prove a serious obstacle, Bruckner said. She expressed doubt that Democrats would “work to improve a bill that Republicans completely shut them out of the process on,” making the continuing resolution a more viable route.
Bernstein said members of Congress and their staff are aware of the issue, but not inclined to pass a multitude of corrections bills, and would likely compile as many fixes as possible into a single bill.
“Honestly, everybody I’ve talked to has said, ‘It’s on our list. We know about it. We plan to fix it whenever we fix it,’” she said. “We are hopeful it gets fixed this year, but I certainly don’t think it would be early in the year,” Bernstein said, based on her experience.
A spokesperson for the Senate Finance Committee told Bloomberg Tax that correcting the omission was a priority but didn’t comment on questions regarding the use of a continuing resolution measure to move a corrections package. A spokesperson for the House Ways and Means Committee didn’t respond to similar questions by press time.
When it’s time to file a return, most companies should have more certainty on how to treat qualified improvement property, according to Deloitte’s Rohrs.
Guidance should be available when companies start filing their returns, “whether that’s to follow the statute as it’s written, or whether a technical corrections bill is passed, or perhaps, in the absence of an enacted technical corrections bill, then some sort of guidance from Treasury and the IRS,” Rohrs said. “I think everybody’s aware of it. Certainly the IRS and Treasury are aware of it, and the Joint Committee on Taxation.”
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