In June, a group of restaurants, retailers, and industry associations sent a letter to lawmakers asking them to correct a mistake in the Tax Cuts and Jobs Act (TCJA). The law inadvertently increased the tax burden on a category of business investment called Qualified Improvement Property (QIP).
The new tax law included a provision known as “100 percent bonus depreciation,” which allows businesses to write off immediately the cost of short-lived investments. Due to an error, the language excludes QIP investments.
QIP investments include remodeling and other improvement projects to nonresidential buildings. Now, as currently written, businesses must depreciate those deductions over 39 years. This provision is less favorable than rules that existed before the law went into effect.
According to the Tax Foundation, an independent tax policy nonprofit, before the TCJA, if a business made a $100 QIP investment that had a 15-year cost recovery period, it would have been able to recover $84.38 of that investment over the life of the asset. But now, if a business makes a QIP investment, it can generally only recover $42.12 of that initial investment cost.
Essentially, businesses can write off only 2.5 percent of an improvement cost in the year the expenditures are made, a dramatically different amount from what the immediate full deductibility provision intended.
In the letter to the Senate Finance Committee and the House Ways and Means Committee, the organizations claimed that the significant discrepancy was causing stores and restaurants to delay remodeling projects. They added that businesses were declining to purchase or lease new locations that would require substantial improvements.
The impact, they wrote, was to “deny communities the jobs associated with substantial construction projects, but also deny … opportunity to bring new, permanent jobs to an otherwise abandoned store or to revitalize a declining mall.”
Signatories to the letter include the Petroleum Marketers Association and the National Retail Federation. Though the QIP omission is considered a technical error, some pundits suggest that partisan battles could threaten a swift correction.