Tax Policy

Issue

• Qualified Improvement Property is defined as any improvement to an interior portion of a nonresidential building, excluding an elevator or escalator, changes to the internal structural framework, or enlargement of the building. QIP includes leasehold and tenant improvements.
• These improvements to commercial office and industrial properties, restaurants, retail, and other leasehold spaces are often the largest investments made by firms with real property holdings, after the land and building themselves.
• Congress intended to make permanent shorter depreciation periods for QIP, which would reduce the after-tax cost of these improvements, provide added certainty and predictability to encourage long-term investment, and foster job growth and economic opportunity in the real estate, construction and other industries.
• Because of a drafting error in tax legislation, businesses are now required to write off the cost of these expenditures over a much longer time period, leading to a considerable increase in the after-tax cost of making improvements.
• The mistake is most accurately characterized as a clerical error, rather than the result of a misguided policy. It has been identified by the Joint Committee on Taxation as one of only three provisions in the bill that require a true technical correction in order to have the statute reflect legislative intent.
• Firms nationwide are delaying or even cancelling leasehold renovation projects, causing a ripple effect across the real estate, construction, retail, restaurant and manufacturing industries.
• The U.S. Treasury Department has stated that the issue cannot be remedied through regulation or Internal Revenue guidance, but requires a statutory change. Consequently, Congress should pass technical corrections legislation early in 2019 to address the error and enable businesses to go forward with investment decisions.

Status

NAIOP is working with a broad coalition of real estate, manufacturing, retail, restaurant, and other organizations to encourage Congress to pass technical corrections legislation remedying the Qualified Improvement Property depreciation period error.

Key
Points

• Congress sought to incentivize increased capital investment in buildings by establishing shorter depreciation periods for leasehold improvements (Qualified Improvement Property). A drafting error in the 2017 tax reform bill resulted in much longer depreciation periods than intended.
• The Restoring Investment in Improvements Act (S. 803, H.R. 1869) provides a needed technical correction to the tax law, restoring the original congressional intent to increase investment and promote job growth.
• Economic incentives offered by state and local public entities are critical for the success of redevelopment projects in underserved communities. Previously, deferral of tax for these “nonshareholder contributions” were enshrined in the tax code.
• A change in tax law now requires upfront taxation of such incentives, reducing their value and increasing development costs. Bipartisan legislation in the Senate (S. 2942) would reverse this change and enable state and local governments to maximize incentive dollars.

Talking
Points

• Qualified Improvement Property (QIP) includes modifications to the interior of a building, such as leasehold improvements.
• The 2017 Tax Cuts and Jobs Act (TCJA) sought to make permanent shorter depreciation periods for QIP to reduce the after-tax cost of these improvements, encourage long-term investment, and foster job growth and economic opportunity.
• A drafting error in TCJA requires businesses to recover these costs over a much longer period of time than intended, sometimes over four decades. Firms are delaying or even cancelling renovation projects, disrupting development in retail, restaurant and manufacturing.
• Congress should pass the bipartisan Restoring Investment in Improvements Act (S. 803, H.R. 1869) to correct the error and enable businesses to go forward with investment decisions.
• Public entities at the state and local levels have long used incentives as a means of spurring economic development, particularly in underserved communities. Grants, contributions of land, and other incentives often determine whether or not a development is viable.
• Though previously treated as tax-free contributions to capital under Section 118 of the tax code, these incentives are now taxed up front, reducing their value and forcing local governments to make up the difference.
• NAIOP supports bipartisan legislation (S. 2942) that would restore the prior tax treatment of these incentives and ensure that local investment dollars are maximized and directed towards much-needed development projects. naiop

Resources

• NAIOP’s position on Tax Policy 
• Tax Cuts and Jobs Act of 2017 
• Senate Finance Committee Letter Supporting QIP Fix  
• QIP Coalition Letter 
• Jim Neyer Op-Ed: Congress Should Fix Property Deduction Flaw

Contact

Aquiles Suarez
Senior Vice President for Government Affairs
703-904-7100, ext. 115