While the IRS and Treasury Department released proposed regulations implementing the expanded depreciation provisions under the Tax Cuts and Jobs Act (TCJA), there is still no fix for the error that placed Qualified Improvement Property (QIP) in a 39-year category instead of 15 years with bonus eligibility. With apparently no remedy available outside of legislative action, companies with significant QIP e.g. restaurants, retail stores, hotels, office buildings, etc. may want to assume that help is not on the way.
The inability to immediately deduct QIP expenditures is delaying upgrades, renovations, etc. to properties e.g. restaurants, retail stores, hotels, and office buildings due to the unexpected and disadvantageous tax treatment associated with these expenditures. This in turn can negatively affect the values of these companies due to a higher than expected effective tax rate, not to mention potentially reduced growth in revenues and / or profitability due to reduced investment in the properties.
One option to potentially provide some relief is to reallocate certain costs out of QIP and apply to shorter-lived categories through a cost segregation study.
When lawmakers attempted to group three types of renovation property into one category as part of the tax overhaul late last year, they accidentally assigned the new property type, qualified improvement property, a 39-year cost recovery period—rather than 15 years as intended. The IRS issued proposed regulations (REG-104397-18) for the bonus depreciation provision on Aug. 3, but only allowed full expensing for qualified improvement property acquired and placed into service between Sept. 27, 2017, and the end of that year. The error left many businesses that made interior improvements, particularly restaurants and retailers, ineligible for immediate, full expensing of the costs, as the perk only applies to property with cost recovery periods of 20 years or less.