What is Qualified Improvement Property (QIP)?
“Qualified improvement property,” or QIP, is any improvement to the interior portion of an existing nonresidential building, including restaurant, retail, grocer, or other commercial property. Examples of these improvements include facility remodeling, installing energy efficient upgrades, replacing floors or fixtures, and making safety or access upgrades.
Why is the current law a problem for small businesses?
Due to a drafting error in the Tax Cuts and Jobs Act of 2017, the period over which restaurant owners, retailers, grocers, and other small businesses can expense these facility improvements has nearly tripled—from 15 to 39 years.
The error also excludes these improvements from a benefit called bonus depreciation—which intended to allow businesses full deductions on certain investments over a period of time. As it stands, this QIP glitch is making it more expensive for these businesses to renovate and refurbish existing facilities.
What are some of the long-term impacts of the provision as it stands?
There are numerous unintended consequences of the glitch as of today.
• Significant cash flow disruptions for businesses—especially small and franchises businesses—that have already committed to substantial renovation projects. This could force these businesses to make trade-offs in other areas such as hiring and employee pay/benefits.
• Delays in store, restaurant and facility remodeling projects and, by extension, a negative impact on these businesses’ ability to attract customers and compete with newer companies.
• Loss of construction and contract jobs associated with commercial renovation projects.
• Hesitancy to purchase or lease vacant stores or other leasehold spaces that require improvements, which would harm job creation, specifically in communities that need revitalizing.
• Hamper building owners’ ability to offer “improvement dollars” in their lease terms to retain existing commercial tenants or attract new tenants.
• Declining sales for QIP product suppliers (e.g., lighting and other improvements), including products manufactured in the U.S.
• Less investment in energy efficient QIP products, which save businesses substantial costs in the long term and reduce energy consumption.
What can be done to fix the problem?
Congress can fix this glitch by giving QIP a 15-year depreciable life as intended, making QIP eligible for immediate expensing.
Is there current legislation that would address the issue?
Yes, there is currently a bipartisan, bi-cameral legislation that would fix the glitch. The Restoring Investment in Improvements Act (H.R. 1869) was introduced by Rep. Jimmy Panetta (D-CA) and Rep. Jackie Walorski (R-IN). The Senate bill—S. 803—has been introduced by Sen. Toomey (R-PA) and Sen. Jones (D-AL) with 14 bipartisan cosponsors.
What happens once this is fixed? Will the legislation be retroactive?
Yes, the current draft of the legislation is retroactive to when the error first occurred, covering QIP investments made in the years 2018 and 2019. Should this version of the legislation be enacted, improvements made during this time would be eligible to receive the shortened depreciation schedule of 15 years as well as bonus depreciation.