Tax Reform Drafting Error Jeopardizes Deduction for Qualified Investment Property

More than one year since the enactment of The Tax Cuts and Jobs Act (TCJA), Congress must act to clarify certain areas of the tax code. In this case, a drafting error omitted qualified investment property (QIP) as being eligible for bonus depreciation.

When the TCJA was enacted, QIP was intended to have a 15-year depreciable life, which would qualify that property for 100% bonus depreciation and allow for an immediate tax deduction. Unfortunately, an error was made when the new law was drafted, and the portion providing a 15-year life for QIP was eliminated. Because of this error, QIP was assigned a depreciable life of 39 years under the final law—a vast difference from being able to take an immediate deduction.

QIP is nonstructural real property that is installed on an interior portion of a nonresidential building, after the building was originally placed in service.  Examples include new lighting systems, drywall partitions and room renovations that a restaurant or retail store might install. QIP excludes expenses for any improvement attributable to the enlargement of the building, any elevator or escalator or the internal structural framework of the building.

Congressional Inaction, Taxpayer Confusion

One year after the TCJA was enacted, Congress has not acted to make a technical correction. That leaves taxpayers in flux about how to move forward with their 2018 returns. On Jan. 2, outgoing House Ways and Means Committee Chairman Kevin Brady (R-TX) released draft legislation of technical corrections for the TCJA. However, with the changeover from Republicans to Democrats in control of the U.S. House of Representatives, it appears that action has come to a halt. The newly formed House intends to hold hearings on unresolved provisions of the TCJA before moving forward. These hearings are not expected to take place until March, at the earliest. To add insult to injury, it is not clear if changes to QIP would be retroactive.

For taxpayers who recently performed major renovations on a building or purchased or constructed a building, a cost segregation study can help identify ways to decrease their tax burden—especially if Congress delays taking action to correct the QIP error. Cost segregation breaks out portions of a building that are treated as personal property for tax purposes. Such property recognized could be eligible for bonus depreciation. It will be important to complete a cost segregation study before you file your tax return.

Do you have questions about the deduction for Qualified Investment Property? Please contact your tax advisor or Timothy Devlin, Tax Services Leader, at [email protected].

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