From the moment the new Tax Cuts and Jobs Act (TCJA) passed, there was a flurry of questions about how the TCJA would affect owners of real estate. Signed into law late December, this legislation represents the first major tax reform in over three decades, and stands to impact virtually every US taxpayer.
As tax season progresses, the Capstan team has continued analyzing the legislation with an eye towards identifying and clarifying opportunities. We are starting to roll out major updates of our tools and website as well. In this blog though, we thought we’d share the most common questions we’re getting about the TCJA, and give you the Capstan take on the issues at hand.
Bonus depreciation for 2017 was fixed at 50% under the PATH Act, and people are naturally excited about the TCJA boosting it to 100% for new and used assets with a depreciable MACRS life of 20 years or less. This provision of the TCJA was retroactive, and may apply to filings for TY 2017. Sounds good. However, you need to dig a little deeper to understand the practical application of the dates.
The TCJA states the following:
If a written binding contract for the acquisition of property is in effect prior to September 28, 2017, the property is not considered acquired after the date the contract is entered into (Act Sec. 13201(h)(1) of the 2017 Tax Cuts Act).
And that’s all it says. This is the total sum guidance from the IRS right now, and the final interpretation of these “written binding contract rules” is still uncertain. We’re telling our clients that until the IRS releases further guidance on this matter, the most reasonable current interpretation should be based on the guidance the IRS issued the last time they did a mid-year split of Bonus rates (Reg. 1.168(k)-1(b)(4) and Revenue Procedure 2011-26). This is subject to change at literally any moment, but for now, Capstan is interpreting the matter as follows:
ACQUISITIONS OF REAL ESTATE – BONUS RATE DETERMINED BY DATE OF WRITTEN BINDING CONTRACT
If there was a written binding contract signed before 9/28/17, the acquisition technically took place before the TCJA era, and the pre-established PATH Act rules would apply. As such, the acquisition would not be eligible for Bonus depreciation.
If there was a written binding contract signed on or after 9/28/17, the property would have been acquired firmly during TCJA-time, and therefore TCJA Bonus rules would apply, giving you 100% Bonus. Furthermore, in this post-TCJA era, the requirement that the original use of the asset must commence with the taxpayer no longer applies, meaning that “new-to-you” assets would also be Bonus-eligible.
NEW CONSTRUCTION – BONUS RATE DRIVEN BY DATE “SUBSTANTIAL” CONSTRUCTION BEGUN
If “substantial” construction began before 9/28/17, pre-established “phase-down” rules would apply – i.e. the old 50%/40%/30% Bonus rates would be in play. If construction began on or after 9/28/17, the property would be considered a TCJA-era project and associated 100% Bonus rules would be in play.
We’ve been hearing a lot about this issue, and we’ve helped a number of clients understand how specific time frames may affect their returns. As with most tax issues, the facts and circumstances of each project will determine the most advantageous outcome. We encourage clients to consult with their CPA and/or attorney to determine the critical dates involved in their projects. ________________________________________________________________________________
The other major talking point we’re hearing so far has to do with Qualified Improvement Property (QIP). Established by the PATH Act in 2015, the original QIP quickly became a fan-favorite, expanding the scope of Bonus-eligible assets by removing the restrictions associated with other categories of qualified improvements. In fact, the only requirements necessary to meet the original definition of QIP were that the improvement be made to an interior portion of a building which is non-residential real property, and that the improvement be placed-in-service after the date the building was placed-in-service. And with a few small exceptions — building enlargements, escalators, etc. — voila, you’ve got Bonus-eligible assets with a 39-year life after Bonus.
39-year after Bonus? That’s fine, but QLI (Qualified Leasehold Improvements), QRI (Qualified Restaurant Improvements), and QRIP (Qualified Retail Improvements) were all depreciated as 15-year SL. These various qualified improvements were, for the most part, not eligible for Bonus.
The TCJA rules intended to create a new balance, establishing a new QIP that would encompass and replace all the old qualified improvement categories. Furthermore, this new QIP would be assigned a 15-year MACRS class life. However, there was a bit of a hiccup in the execution. The TCJA amended Section 168 to eliminate any reference to QLI, QRI, and QRIP. And it specifically repealed QLI, QRI, and QRIP from Section 168(e)(3)(E), the subparagraph that lists assets eligible for a 15-year class life. As of 1/1/18, QLI, QRI, and QRIP no longer exist. So far so good. Unfortunately, the new of QIP was never actually put into Section 168(e)(3)(E). So technically, the class life of the new QIP in the post-TCJA era is questionable. This could become crucial. Remember that Bonus-eligible assets must have depreciable lives of 20 years or less. If we don’t know the class life of QIP assets, how do we even know that they are eligible for the new 100% Bonus depreciation at all?
Take a deep breath. This is probably just a small oversight, and in fact many tax professionals are referring to this colloquially as a “whoops.” It’s pretty clear that Congress intended to establish post-TCJA QIP as 15-year (P.L. 115-97), and odds are a technical correction will be issued to straighten this out. For the moment, we’re advising Capstan clients to proceed with caution, but we anticipate that this will be resolved soon.
There are definitely a lot of changes coming our way, but with those changes and challenges come opportunity as well. The Capstan team is here to work with your team to help you understand your options in 2017 and beyond. Having a trusted partner is more crucial now than ever, and Capstan is honored to collaborate with you, your CPA, and your entire team.
We’ll have a new webpage up as soon as possible. We’ve already updated our pre-TCJA Depreciation Accelerator and rolled out a new post-TCJA Depreciation Accelerator, as well as an “ADS vs MACRS” Decision Tree. If you would like to request a PDF version of these materials please click here . We’re also working on a new slate of in-house and virtual CPE presentations to help you and your clients make sense of, and make the best of, the TCJA. Watch this space, and please feel free reach out to Bruce Johnson, Terri Johnson, or Carly Ferris for personal assistance.
Image courtesy of Ambro at FreeDigitalPhotos.net