Tax Cuts and Jobs Act (TCJA) update

We understand how busy tax season can be, but we’d like to bring you relative content every other Saturday during tax season. Instead of our standard articles we will be sending out articles every two weeks dealing with more pointed tax filing issues. This Saturday we begin with Dave McGuire addressing issues surrounding the fact that there is no technical corrections bill for the Tax Cuts and Jobs Act (TCJA), how do people move forward with their tax returns?
As most people now know the TCJA contained a drafting error as it relates to Qualified Improvement Property (QIP). Prior to the TCJA QIP was considered “eligible real property” under the 168(k) provisions making it eligible for bonus depreciation. Under the TCJA QIP was intended to have a 15-year life under section 168(e), however due to a clerical error this portion was omitted. The result of this drafting error was eliminating bonus depreciation on QIP. While most people in the industry have been expecting a technical correction, the longer this drags on the less likely a technical correction bill appears. This creates a question as to how taxpayers should operate in this time of uncertainty.
What is QIP?
Qualified Improvement Property is non-structural, real property, installed to the interior of a building, after the building is originally placed in service. This could be anything from drywall partitions, to lighting systems, to bathroom renovations. While the TCJA excluded these from bonus eligibility, it did include these items in the definition for 179. This means that taxpayers eligible for 179 can take QIP as a 179 expense and do not need to worry about the fact that the bonus regulations have been delayed.
However, how do taxpayers that are either in-eligible for 179 or have exceeded their 179 limits move forward? Take for example a restaurant group that builds out three new restaurants in leased facilities in 2018 at a cost of $1.5 million per location, for a total of $4.5 million. If the technical correction bill is written there is a good chance that most, if not all of this $4.5 million is related to QIP or personal property and would be immediately taken as bonus depreciation. However without a technical correction the taxpayer may feel like all of that $4.5 million is 39-year property. Obviously this is a huge adjustment to their tax return.
The easiest solution is a traditional cost segregation study. If a cost segregation study was able to move 35% of the cost of the above example to personal property and land improvements the taxpayer would be immediately eligible to bonus out over $1.57 million of property. Most taxpayers plan on moving forward with this strategy if Congress fails to act on a correction bill.
However when should a taxpayer move forward. With time running out it is important for taxpayers to start getting proposals and engagements in place. With the vast number of projects to be completed a taxpayer should not wait until late February to plan for this contingency. A taxpayer can get a cost segregation estimate in place now, then wait to see if Congress moves forward before the end of January. If Congress fails to act the taxpayer is then in place to quickly get a cost segregation study completed prior to the tax return being filed.
Due to the delay in Congress it will put many taxpayers backs against the wall. It is important that CPAs and Taxpayers prepare for this delay. Please feel free to reach out to your McGuire Sponsel representative with any questions.