Technical Corrections Needed for Qualified Improvement Property and NOL Date

May 31, 2018 | Kristine A. Tidgren

The Tax Cuts and Jobs Act contains a number of provisions that apparently do not accord with legislative intent. This is, in some cases, evidenced through discrepancies between the committee report and the language in the code. Today, we will highlight two apparent errors with significant impact to many taxpayers. The technical correction process is underway; however, it remains to be seen whether those changes will make it through Congress.

Qualified Improvement Property

The TCJA eliminated the separate definitions for "qualified leasehold improvement," "qualified restaurant property" and "qualified retail improvement property," which were previously provided a statutory 15-year recovery period. It then expanded the definition of "qualified improvement property" to include "any improvement to the interior of a building if that building is nonresidential real property and such improvement is placed in service after the date such building was first placed in service." IRC 168(e)(6). All such property is now treated the same, regardless of whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building. Qualified improvement property does not include the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

The committee report states, "The conference agreement provides a general 15-year MACRS recovery period for qualified improvement property." This 15-year life would mean that QIP would also qualify for bonus depreciation. This 15-year class-life provision, however, was not added to IRC § 168(e)(3)(E). As such, "qualified improvement property" remains 39-year non-residential property, not eligible for bonus depreciation. It is widely agreed that this was an unintentional oversight. Fixing it, however, will require legislative action. In a recently published depreciation review, IRS states only that the general recovery period for nonresidential real property is 39 years and that "qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period."

Effective Date for Net Operating Loss Carryback/Carryforward Changes

The TCJA made significant changes to the mechanics of net operating losses. Notably, most taxpayers may no longer carry back losses. And, carrybacks of net operating losses for farming business are restricted to two years (as opposed to five). IRC § 172(b)(1)(B). The law does allow indefinite carryforwards. The TCJA states that the changes to NOL carryforwards and carrybacks are effective for “taxable years ending after December 31, 2017.” The committee report, however, states that the effective date for the changes would be tax years “beginning after December 31, 2017.” It is believed that the committee report captures the true intent of Congress and that the statutory language is erroneous. As written, fiscal year taxpayers with years ending in 2018 are subject to the new restrictions for their 2017 fiscal year, even if the majority of their tax year was in 2017. Calendar year taxpayers are not impacted by this discrepancy. A technical correction is being offered to fix this apparent error. We will watch to see if it gets through Congress.

Note: The TCJA also restricts the NOL deduction to 80 percent of taxable income. The Code, however, correctly provides that this change applies to "losses arising in taxable years beginning after December 31, 2017."