It may not have made national headlines, but the Ways and Means Committee in the U.S. House of Representatives passed a pair of bills earlier this month that could have a significant long-term effect on the way businesses view investing in things like remodel projects and other facility and equipment upgrades.
If passed, the first bill –– called the Restaurant and Retail Jobs and Growth Act –– includes a “bonus depreciation” measure, which would allow businesses to write off larger portions of remodeling and improvement costs. The standard tax code permits write-offs of building improvements over a 39-year period, resulting in highly incremental alleviation of the cost of such projects.
But H.R. 765 is a game-changer. The write-off period for those same projects would be trimmed to 15 years under the new bill, which would enact a permanent amendment to the Internal Revenue Code.
Rep. Mike Kelly, the sponsor of the bill, explained the inspiration behind the legislation.
“The ability to prepare for business expenditures –– knowing what tax liabilities will be in subsequent years –– is vital to making informed business decisions that result in economic growth,” he said after the bill passed in the Ways and Means Committee. “That’s what the Restaurant and Retail Jobs and Growth Act will do.”
When you pair that with the other bill passed by the Ways and Means Committee –– H.R. 2510 –– you’re looking at a major landscape change for retailers and restaurateurs. H.R. 2510 also deals with bonus depreciation, calling for a 50 percent depreciation allowance in the first year of an improvement project.
What does all of this mean to businesses?
Chain Store Age offered a helpful example in its coverage of the bills:
…Under current law, if a store spent $500,000 on expanding its showroom, it would only be allowed to deduct less than $13,000 of the expansion costs in the first year, with depreciation spread out over nearly four decades.
However, under the two proposed bills, the same store would be allowed to deduct $250,000 from its tax bill the first year and then spread out the remaining $250,000 over the next 14 years, freeing up more money early on for further investment.
The old permanent 39-year depreciation period greatly limits the tax benefits which are meant to encourage businesses to make upgrades. And while similar provisions were temporarily in place in years past, they expired in 2014 and, in effect, slowed economic growth and imperative renovation work in 2015.
When it comes to lighting, that’s problematic, resulting in hesitancy to upgrade to commercial lighting solutions which would improve the brick-and-mortar aesthetics of a business while reducing energy costs and considerably diminishing the need for regular maintenance of building-wide fixtures.
In a letter to the Ways and Means Committee, the National Retail Federation did well to explain the accelerated pace of renovation-oriented improvements due to a more competitive marketplace than what was seen in 1986, when the 39-year depreciatory timeframe was first implemented in the tax code.
A 39-year recovery period for real estate improvements grossly overstates the actual economic life of structures and improvements, increasing the cost of capital and distorting business decisions. Retailers must update their stores every five to seven years to maintain customer interest.
Even when Congress extends the 15-year life for these improvements, the high after-tax cost of making these investments often delays much- needed updates because retailers operate on very slim profit margins. Bonus depreciation provides a very important incentive for making these investments on the more rapid timetable that addresses competition in the marketplace, which helps to boost economic growth.
Finally, adding to the excitement retailers have around these bills, companies that invested in a material upgrade in 2015 won’t be left high and dry should the bills pass. Both provisions will be retroactively applied to such projects, allowing businesses to make bigger write-offs in 2016 tax filings.
Even though we aren’t tax experts, we know these bills could have profound implications for your business and the way you deliberate over prospective projects, so we’ll be sure to keep you posted on how this develops in Congress. The final implications of this bill –– including what actually will be classified as a building improvement –– may change, but the outlook is certainly strong.
It may be time to put that stalled improvement project back on the table to make sure you’re ready to take advantage of these provisions before the market adjusts.