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Jun 5, 2018
Sign on to Retail Glitch Fix Letter
The National Restaurant Association Public Affairs team has been actively engaged in efforts to correct a technical glitch in the tax reform legislation passed last December. As part of these efforts they are gathering signatures from companies for a letter to Congress requesting a fix.
Please let the National Restaurant Association know by COB Tuesday, June 5th if they can add your company’s name to this letter. See below for a copy of the letter.
As background, due to a drafting error, qualified improvement property and leasehold improvements now depreciate over 39-years instead of the intended 15-years - and further do not qualify for bonus depreciation.
Known as the “retail glitch,” this error is already causing many businesses to delay improvements, cancel renovations and postpone other investments. NRA has been actively engaged in a coalition of industries pushing Congress to correct this error as soon as possible. This letter is meant to increase the political pressure for a fix.
Should your company like to join as a signatory, please contact Ali Davidson firstname.lastname@example.org by COB on Tuesday, June 5th with your intent to sign.
For additional details on the nature of the error or what has been done to date, you can contact Michael McHugh at email@example.com.
We encourage you to share this with other restaurant locations and franchisees as well as other restaurant businesses.
Here's the letter we are asking businesses to sign onto
The undersigned organizations and companies urge you to correct at the earliest possible opportunity a drafting error in recently-enacted H.R. 1 (the Tax Cuts and Jobs Act or “Act”).
While we greatly appreciate efforts to simplify the tax code and alleviate tax burdens on American businesses and families, this particular error in the overall tax reform effort is unintentionally stifling investment, job creation, and other important economic and community benefits.
The Act aimed to spur investment in upgrades and improvements to commercial properties by making qualified improvement property or “QIP” (generally, improvements to the interior of existing nonresidential buildings) eligible for accelerated bonus depreciation and subject to a 15- year depreciation recovery period. This policy, which we applaud, is consistent with years of bipartisan efforts to encourage such investments.
The text of the final bill, however, mistakenly failed to assign QIP a 15-year Modified Accelerated Cost Recovery System (“MACRS”) recovery period. As a result of this pure drafting error, QIP (including retail, restaurant and leasehold improvements) no longer qualifies for bonus depreciation and defaults to a MACRS recovery period of 39 years, rather than 15 years. 1
It is evident this was a pure drafting error. The Joint Explanatory Statement accompanying the final legislative text says that the Act assigned “a general 15-year MACRS recovery period for qualified improvement property” and the bill was scored as if the 15-year assignment were made. This error is also among the few provisions in the Act identified by the Joint Committee on Taxation as needing a true “technical correction.”
As the law stands now, businesses investing in upgrades are worse off from a cash flow and tax exposure perspective than they were pre-tax reform (when 40 percent bonus depreciation would have applied to all QIP, and restaurant, retail and leasehold properties would have had a 15-year recovery period). To put this into perspective, in 2018, instead of being able to write off 100 percent of these investments under the Act’s accelerated bonus depreciation provisions or roughly 47 percent under pre-tax reform law, businesses are only able to write off 2.5 percent this year and then depreciate the remainder over the next 38 years.
This error is already slowing investments in QIP and commercial renovation projects—the opposite of lawmakers’ longstanding and laudable goal to grow such investments and fuel related economic activity. It also is causing numerous ripple effects, including on sales of QIP products, job creation, property values, building occupancy and rental income, cost-saving energy efficiency gains, and even on fire safety. These unintended negative consequences flowing from the error will only be exacerbated the longer the error persists. Specific examples of such consequences include, among others:
- Significant cash flow disruptions for businesses—especially small businesses and franchisees (who are often obligated to remodel on a particular schedule)—that have already planned and committed to substantial renovation projects, which may result in these businesses having to make trade-offs in other areas such as hiring and employee pay/benefits;
- Delays in store and restaurant remodeling projects and, by extension, negative impact on these business’s ability to attract customers and compete with newer market entrants;
- A slow-down in installation of life-saving fire sprinkler systems because businesses generally install such products at the same time they do other upgrades and renovations;
- Loss of construction jobs associated with commercial renovation projects;
- Businesses refraining from purchasing or leasing vacant stores or other leasehold spaces that require improvements, which means foregoing permanent jobs that would be generated with new businesses moving in and other benefits of revitalizing our communities;
- Hampering of building owners’ ability to offer “improvement dollars” in their lease terms to retain existing commercial tenants or attract new tenants;
- Declining sales for QIP product suppliers (e.g., lighting and other improvements), including high-quality products manufactured in the U.S.; and
- Less investment in energy-efficient QIP products, which save businesses substantial operating costs in the long term and reduce energy consumption.
Every day a fix is delayed means foregoing significant investment in QIP and a loss of related economic activity and other benefits to our communities. Correcting this drafting error is a top priority for each of us, and we respectfully request that you take action as soon as possible to help our businesses and industries that are being negatively impacted with respect to commercial improvements and QIP investments.
Thank you for your continued support of American businesses and families. We look forward to working together to address this specific challenge as soon as possible.
1 Due to another, related drafting error, the Act’s provision purporting to assign a 20-year Alternative Depreciation System (“ADS”) recovery period for QIP references a Code section that does not exist. As a result, for businesses electing out of the MACRS system, this property now defaults to a 40-year ADS recovery period—a period far longer than the actual useful life of QIP.