Posted on October 12, 2018
Lawmakers in both parties are beginning to understand the real-world consequences of a drafting error in the 2017 Tax Cuts and Jobs Act and are asking for a fix. Last week, a group of 12 Senate Democrats sent a letter to Treasury Secretary Steven Mnuchin urging action on the tax treatment of Qualified Improvement Property (QIP). A similar letter from 58 House Republicans was also delivered to Speaker Paul Ryan.
QIP is broadly defined as improvements to an interior portion of a commercial building. These include tenant improvements or an office build-out.
Kevin Brady, Chairman of the Ways and Means Committee, has promised to introduce and advance a technical corrections bill in the lame duck session of Congress, following the November midterm elections. But with Republicans’ majority in the House in jeopardy, it remains unclear whether Democrats will be willing to help move the bill before the end of the year.
In the meantime, NAIOP is working with a coalition of 300 organizations and businesses affected by the QIP error to stress the need for immediate action.
Under prior law, QIP was typically assigned a 39-year depreciation life, and was also eligible for 50 percent bonus depreciation. For most real estate firms, the new law shortened the lifespan to 20 years, but did away with bonus depreciation.
However, due to a typo in the tax bill, the current statute actually assigns QIP a depreciation life of 40 years. The error has profound implications for the real estate industry, as it effectively raises the cost of making these necessary improvements. The effects are already being felt in the industry, from materials suppliers to contractors to architects.
Legislative drafting errors happen, especially in bills of this size and scope. The only way to fix them is with new legislation. Historically that hasn’t been difficult, since lawmakers understand the errors were unintentional. Given the current political climate, however, the task for Republicans is considerably more challenging, as Democrats are reluctant to help fix a bill they played no part in writing.