On the Hill



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.