Retailers and Restaurateurs Cheer Legislation to Fix Expensing for Improvements

By: Ross Boardman, Tax Senior Associate, and Ciara Stephens, R&D Technical Writer

Retailers and restaurateurs are breathing a sigh of relief now that new bipartisan legislation, S. 803, was introduced on March 14 to correct a drafting error in the Tax Cuts and Jobs Act (“TCJA”) that failed to include qualified improvement property as 15-year property and eligible for 100 percent bonus depreciation.

As background, the TCJA create a new simplified definition called “Qualified Improvements Property” (“QIP”), which essentially combined the definitions of “qualified retail improvement,” “qualified restaurant improvement” and “qualified leasehold improvement.” However, the drafters failed to include QIP within the definition of 15-year property under IRC § 168(e)(3)(E), causing such property to be depreciated over 39 year, and more importantly, disqualifying such property from 100 percent bonus depreciation under IRC § 168(k).  Thus, many improvement projects did not qualify for immediate expensing, such as:

• Improving the interior of a retail store;
• Renovating the dining space in a restaurant;
• Upgrading lighting fixtures to more energy-efficient products; and
• Modernizing common areas in office buildings.

To resolve this drafting error, the bipartisan legislation adds “qualified improvement property” as 15-year property in IRC § 168(e)(3)(E). This amendment will consequently provide restaurants and retailers with additional eligibility for 100 percent bonus depreciation under IRC § 168(k).  The legislation is effective as if it was included in the original TJCA legislation.

Due to the TCJA’s intention to include qualified improvement property as 15-year property, it is likely that this bipartisan bill will be passed, allowing restaurants and retailers to benefit from these more favorable expensing rules. Aprio will continue to follow, monitor, and report any significant updates to the bill.

For questions, contact Ross Boardman.