We have blogged frequently about an oversight in the new tax law (TCJA) that inadvertently created a disincentive for companies to invest in improvements to properties e.g. interior renovations. A recent Wall Street Journal article highlights the practical effect that is encouraging some companies e.g. restaurant chains to delay previously planned renovations. Companies therefore should be aware of the requirement to depreciate Qualified Improvement Property (QIP) over 39 years rather than the expected immediate expensing. We note that a cost segregation study is one approach to somewhat mitigate this negative effect, given a cost segregation study can reallocate some QIP costs from 39 years to shorter-lived categories and thus be eligible for immediate expensing.
Furthermore, values are affected by this oversight and most commonly impact companies including retailers, restaurants and real estate entities. These companies could be affected by a combination of a less favorable (and unexpected) tax position and delay in capital spending that would otherwise drive revenue growth.
Four missing words in the new tax law mean fewer aging White Castle restaurants will get renovated this year. The fast-food chain, known for its sacks of square burgers, typically refurbishes six to 10 of its nearly 400 company-owned locations annually, often updating the dining room, redesigning the kitchen and fixing bathrooms. But a tax-law goof put White Castle in a pickle, and the company is postponing some of those projects as the retail, restaurant and commercial-real-estate industries push Congress to correct an inadvertent omission. As intended, the new tax law would have let White Castle and other companies deduct their renovation costs immediately, rather than over many years, providing an incentive to do such work.