By now, almost everyone in the CPA profession knows about the Qualified Improvement Property drafting error in the Tax Cuts and Jobs Act of 2017. In an effort to reduce redundancy in the Tax Code, the law inadvertently removed QIP from bonus eligible property. This was a mistake and a technical correction was expected. However, none was ever made.
Some people questioned why the IRS did not fix the error, and the short answer is the IRS does not have the authority to make this correction. As the IRS pointed out in its guidance on Section 168(k) bonus depreciation, this change will take legislative action. The IRS can only interpret the law as passed and cannot make this adjustment without congressional action.
So where do we stand with congressional action? A few bills have been drafted that would address this issue, but none has been acted upon. The Restoring Investments in Improvements Act was issued in March 2019 by Sen. Pat Toomey, R-Pa., and Doug Jones, D-Ala., as a bipartisan bill to correct this error. A similar House bill was introduced about the same time by Reps. Jimmy Panetta, D-Calif., and Jackie Walorski, R-Ind. Unfortunately, despite being bipartisan, neither has been put up for a vote or received any other action. Many people expect this lack of movement is due to the bills’ simplicity, and bipartisan bills most likely will not move forward on their own.
That brings us to the last quarter of 2019. Congress seems less likely than ever to pick up this action. Public hearings on impeachment began Nov. 13, and the 2020 presidential race is in full swing. The Democrats, who control the House, seem to have little motivation in taking action to fix a Republican tax measure. Going into the 2020 election, the odds of Congress enacting much tax legislation seem unlikely. Affected taxpayers need to move forward as if no correction will be made.
Lack of a correction increases the importance of tax planning strategies such as cost segregation. If QIP language were fixed, certain renovations would qualify for significant amounts of bonus depreciation, reducing the need for a detailed cost segregation study. Without the law change, however, a cost segregation analysis can identify property that is eligible for bonus depreciation even without QIP. In addition, Qualified Leasehold Improvements and Qualified Restaurant Property, which for years have enjoyed preferential depreciation treatment, now may require cost segregation studies for the first time.
There’s another reason for cost segregation studies to identify QIP eligible property: though not currently bonus eligible, a correction might be passed with a provision that it be applied on a retroactive basis. This means taxpayers may have the option of amending their returns or applying for a change in accounting method to maximize their depreciation deductions. Also, it’s important to note that while QIP is not bonus eligible, it is 179 eligible. For taxpayers who can utilize the 179 deduction, a cost segregation study should identify these assets. Although we do not expect the tax law to change in the coming months, it is important to monitor actions surrounding it.
