- Implementing the new tax law: H.R. 1 provides that the IRS may issue guidance for purposes of determining whether property is considered acquired after September 27, 2017, and thus eligible for the 100% bonus depreciation rate. The Treasury Department is generally authorized to write a broad range of new rules to effectuate provisions added to the tax code by the Tax Cuts and Jobs Act. IRS officials have indicated the agency will announce additional regulations and guidance involving the depreciation and expensing provisions of the new law in the future – guidance will be slow to finalize and could take nearly two years to complete.
- Technical Corrections: There is a mistake in the statute that affects “qualified improvement property” (generally defined as an improvement to the interior of a nonresidential building that is placed in service after the date on which the building was placed in service).
- According to the conference report accompanying the Tax Cuts and Jobs Act, Congress intended to consolidate three categories of property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property (all previously listed as separate 15-year properties)—into a new, expanded “qualified improvement property” category and assign that category a 15-year MACRS recovery period and a 20-year ADS recovery period.
- However, due to two related drafting errors in revised section 168 of the Code, “qualified improvement property” was not assigned a 15-year MACRS recovery period or a 20-year ADS recovery period; rather, it has a 39-year MACRS recovery period and a 40-year ADS recovery period. Because such property does not have a MACRS recovery period of 20 years or less, it does not qualify for bonus depreciation.IRS officials have said that technical corrections legislation will be required to fix this error.
CREFC Policy & Strategy
To the extent CREFC members identify the need for additional technical corrections, regulatory guidance and/or additional clarity with respect to the depreciation and expensing provisions under the new tax law, CREFC will remain engaged throughout any regulatory and/or technical corrections processes to ensure these provisions are implemented in a clear, workable, beneficial manner.
Additional Background & History
- Cost recovery and depreciation rules under the pre-H.R. 1 tax code were excessively complicated, and real estate investors recovered the cost of their investments over decades – not a handful of years, as is the case with personal property.
- During the tax reform debate, CREFC advocated in favor of maintaining long-lived cost recovery for real property, worried that immediate or full expensing would lead to projects underway to be rendered economically unviable, such as happened in the late 1980s.
- Prior to the TCJA, Section 179 had a cap of $500,000 and a phase-out that started at $2,000,000. Thus, a taxpayer who bought up to $500,000 in total qualifying property could make an election under section 179 to immediately expense it. A taxpayer who bought total qualifying property of more than $500,000 and up to $2,000,000 could make an election to expense $500,000 and no more. Each dollar by which the taxpayer’s purchase of total qualifying property exceeded $2,000,000 reduced the cap by one dollar. Thus the section 179 benefit phased out completely for purchases of $2,500,000 or more.
- The Tax Cuts and Jobs Act increased the cap under section 179 to $1,000,000 and the amount at which the benefit begins to phase out to $2,500,000. Thus, under current law, the benefit completely phases out for purchases of qualifying property totaling $3,500,000 or more.