Since the December passage of the
U.S. Tax Cuts and Jobs Act of 2017,
individuals, businesses, accountants and lawyers alike have
been trying to decipher what impact the changes to the tax
code will have on the bottom line. Thanks, in large part, to
BOMA International’s advocacy efforts, the fair taxation of
commercial real estate was maintained. The final legislation
preserved many tax features important to the long-term
health and strength of commercial real estate, and it
lowered the corporate rate, which should be a net positive
for larger commercial real estate companies. However, in
an effort to create simplicity within the tax code, Congress
unintentionally complicated issues surrounding qualified
improvement property, previously known as leasehold
improvement, and damaged a very important tax provision
for commercial real estate.
Leasehold improvement depreciation is the class life
that a building owner and tenant can use to write off the
tenant improvement (TI) dollars that they agree to upon
signing a lease. The shorter the depreciation period, the
faster the write-off. The faster the write-off, the more
building owners can afford to spend to help tenants create
the best office spaces. Creating these office spaces
requires a wide range of workers: drywallers, carpet layers,
painters, electricians and many others. Local economies
benefit from these TI expenditures, and many local jobs
are created as a result.
Economists generally argue that a property’s depreciable
life should be directly tied to the length of the useful
life—for instance, a lease term. Unfortunately, this has
never been the case for leasehold depreciation. Previously
set at 39 years, BOMA fought hard for many years to
change the law and allow for 15-year depreciation. Despite
being a straightforward provision with bipartisan support,
this took more than a decade of lobbying to accomplish.
In 2015, leasehold depreciation finally was given a permanent
15-year life via the Protecting Americans from Tax
Hikes (PATH) Act. Then, during the massive tax overhaul
in 2017, tax writers sought to combine leasehold with
three other similar property types: restaurant and retail
property—which also had a 15-year life thanks to the
PATH Act—and qualified improvement property, which
held a 39-year life, but could be used on new property. All
four property types were merged and renamed qualified
improvement property, or QIP. The next and vital step was to grant them a permanent 15-year life, as well as full
expensing until 2022. Unfortunately, a simple cut-and paste
error prevented this from being included in the act.
Congress did not intend to revert leasehold depreciation
to 39 years. All major legislation comes with a “conference
summary” outlining the details of the bill’s actions
in straightforward language. The Tax Cuts and Jobs Act
conference summary stated that leasehold, now referred
to as QIP, was subject to a 15-year depreciation period. The
Joint Committee on Taxation even took this into account
in determining how much the tax overhaul would cost. In
short, this was an unintentional drafting error.
BOMA International, in coalition with dozens of other
groups affected by this error, has been lobbying Congress,
the Treasury Department and the Internal Revenue
Service for relief since January. A legislative fix is
ultimately needed, but temporary guidance from a regulatory
agency would aid the process and provide some
certainty to building owners and their accounting staffs.
It also would allow building owners to continue tenant
improvement projects as planned and keep money flowing
into local economies.
With ongoing gridlock on Capitol Hill, a resolution to
this issue remains uncertain. Though lawmakers have
promised that this issue will be remedied after the midterm
elections, that leaves countless tenants and building
owners opting out of improvements to their spaces in
the meantime, allowing local economies to stagnate. As
Congress also prepares for a government funding fight
and a battle over a Supreme Court vacancy, the effort to
fix qualified improvement property might get lost in the
shuffle. BOMA International will continue to work with
like-minded organizations to keep this issue top-of-mind
for lawmakers.
This article was originally published in the July/Augustl 2018 issue of BOMA Magazine.