The Blue Book issued by the Joint Committee on Taxation (JCT) includes at least 10 technical corrections related to depreciation. The Blue Book explains the Tax Cuts and Jobs Act (TCJA) and identifies more than 70 technical corrections needed to fix various drafting errors in the TCJA. Here is a look at the most important corrections for depreciation provisions.
Qualified Improvement Property (QIP)
The technical correction with the highest profile would assign a 15-year recovery period to QIP placed in service after 2017. Without this fix, QIP has a 39-year recovery period and is not eligible for the 100 percent bonus depreciation deduction.
Qualified improvement property is broadly defined to consist of most improvements to the inside of nonresidential real property which are placed in service after the building is first placed in service. Consequently, this technical correction is of utmost importance to real estate owners and lessees who engage in remodeling projects.
Section 179 Expensing of QIP
QIP as well as roofs, heating, ventilation, and air-conditioning property (HVACs), and fire protection and security systems installed on nonresidential real property may be expensed in tax years beginning after 2017. These improvements must be placed in service after the building is first placed in service.
A technical correction is needed to clarify that the taxpayer claiming the section 179 expense must install the QIP, roof, HVAC, or fire/security system. A taxpayer may not simply purchase a building and claim the section 179 deduction if the improvement was made by the seller. The technical correction would also prevent a taxpayer from claiming the bonus deduction on QIP that was not installed by the taxpayer.
Real Property Trades and Business
A technical correction is required to clarify that a real property trade or business that elects out of the business interest deduction limitations must depreciate 15-year leasehold improvement property, 15-year retail improvement property, and 15-year restaurant property placed in service before 2018 using the MACRS alternative depreciation system. As drafted, ADS is only required for residential rental property, nonresidential real property, and qualified improvement property regardless of the year placed in service.
Election to Use 50 Percent Bonus
A transition rule allows a taxpayer to elect a 50 percent bonus depreciation rate in its first tax year ending after September 28, 2017. A technical correction is needed to clarify that this election is only allowed for a tax year that ends after September 28, 2017 and begins before January 1, 2018. This correction prevents a new business from making the election in a phase-down tax year in which the bonus rate drops below 50 percent.
Rate-Regulated Utilities and Businesses with Floor Plan Financing
Rate-regulated utilities are exempt from the limitations on business interest deduction limitations. Businesses otherwise subject to the limitations are allowed to deduct floor plan financing interest. However, these taxpayers must pay a price ─ their property is no longer eligible for bonus depreciation.
A technical correction should clarify that bonus depreciation is not available for property placed in service by these taxpayers in tax years beginning after December 31, 2017. Without the correction the provision is effective for property acquired and placed in service after September 27, 2017. The corrected effective date coordinates the bonus exclusion with the business interest limitation rule which is effective for tax years beginning after December 31, 2017.
Bonus Depreciation Phase-Down Effective Date
Property acquired before September 28, 2017 is eligible for a 50 percent bonus depreciation rate if placed in service in 2017, a 40 percent rate if placed in service in 2018, and a 30 percent rate if placed in service in 2019. The nonsensical effective date of the provision as enacted, however, is for property acquired after September 27, 2017. A technical correction clarifies that the provision is effective for property acquired before September 28, 2017. Property subject to a pre-September 28, 2017 binding contract is considered acquired before September 28, 2017.
Timing of Technical Correction Bill Uncertain
At present a technical corrections bill is not a high Congressional priority and there is no certainty of enactment in time for the 2019 filing season. Preliminary bill text, however, has been drafted and incorporates fixes for the technical errors discussed in the Joint Committee’s Blue Book.
Taxpayers interested in more information may want to review the following documents:
- Joint Committee on Taxation staff’s General Explanation of Public Law 115-97 (JCS-1-18), (December 20, 2018) (“Blue Book”)
- Committee on Ways and Means, Chairman Kevin Brady, “Tax Technical and Clerical Corrections Act” (January 2, 2019) (draft of bill text)
- Technical Explanation of the House Ways and Means Committee Chairman’s Discussion Draft of the “Tax Technical and Clerical Corrections Act” (JCX-1-19).
By Ray Suelzer, JD, LLM