Late in 2017, Congress enacted and President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. The TCJA represented the largest tax reform effort in the United States since the mid-1980s. One of the more impactful provisions of the TCJA was the expansion of bonus depreciation that was available to taxpayers. However, Congress made a drafting error when the bonus depreciation modifications were written. Specifically, the TCJA excluded a certain type of property, known as Qualified Improvement Property, from bonus depreciation eligibility. Since the passage of the TCJA, practitioners have been hopeful that Congress would enact technical changes or that regulations would be issued correcting this error. On September 13, 2019, the U.S. Treasury issued final regulations regarding the bonus depreciation changes under the TCJA, and, unfortunately for taxpayers, the regulations did not make the hoped-for corrections.
As Congress was drafting the bonus depreciation rules in the TCJA, they made some key, taxpayer-friendly changes. For instance, the bonus depreciation allowance increased from 50% to 100% for tax years 2018 to 2022 on qualifying property. In addition, the availability of bonus depreciation was also expanded to used equipment, while only new assets qualified for bonus depreciation under prior law.
While these were very welcome changes, the TCJA also included a fairly large error. The law, as written, disallowed bonus depreciation for “Qualified Improvement Property.” Qualified Improvement Property is defined as any improvement to an interior portion of a commercial building as long as that improvement is placed in service after the building was first placed in service, with some exclusions. Qualified Improvement Property is generally present when there is a renovation or remodel to commercial property. Prior to the enactment of the TCJA, property that would be defined as Qualified Improvement Property under the TCJA was depreciable over a 15-year period and qualified for bonus depreciation. While the clear intent of Congress was for this type of asset to retain its depreciable period and bonus depreciation eligibility, the law was drafted such that Qualified Improvement Property is now depreciated over 39 years and not eligible for bonus depreciation.
Unfortunately for taxpayers, the final regulations issued in September were unable to fix the problem. The fact that the regulations did not address the issue make clear that the Treasury is limited in its ability to “fix” the Qualified Improvement Property issue. Rather, the error will have to be fixed via technical corrections or other changes from Congress. There was some hope that Congress would act by the end of the year, but, as the end of 2019 approaches, this hope is beginning to wane. If you have questions about the depreciation changes under the TCJA and how they may impact your business, please contact your P&N tax advisor.