The Trump administration would have to get creative if it wants to fix a drafting error in the 2017 tax act that brick-and-mortar business owners say has hampered their investments.
The mistake, commonly called the retail glitch, makes it more expensive for the retail and restaurant industries to renovate existing shops and eateries and refurbish the insides of new ones—in some cases, more expensive than it might have been before the 2017 law’s passage.
Congressional efforts to correct the mistake have gone nowhere, and Treasury officials have thrown up their hands so far at requests for an administrative fix. But a new chance to push for a correction has materialized: The White House Office of Management and Budget is reviewing IRS regulations to implement the provision, known as 100% bonus depreciation or full expensing.
Matt Herridge, who with his brother-in-law operates several Burger King and Qdoba franchises in West Virginia and Ohio, said the retail glitch has slowed his plans to open three new restaurants this year. Herridge is a member of the National Franchisee Association, which has been pushing for some sort of fix.
“We would welcome the White House getting involved to push this through,” Herridge told Bloomberg Tax. “Certainly, we would love to see the administration get behind this and push this forward.”
The retail glitch stems from an effort by lawmakers to allow an array of businesses to fully write off the costs of their capital purchases under amended tax code Section 168(k). The lawmakers grouped three types of property into one, but they didn’t assign this new category, qualified improvement property, or QIP, the right period over which the costs can be deducted.
Under the 2017 tax law, QIP was assigned a 39-year cost-recovery period by default, rather than the intended 15 years. But the law’s full-expensing benefit only applies to capital with a cost recovery period of 20 years or less.
That means that rather than allowing businesses to fully write off the cost of capital purchases in the tax year they buy it, the 2017 law requires them to deduct that cost slowly over 39 years.
Business owners like Herridge know what Congress meant to do, but they’re worried the IRS will penalize them if they try to fully deduct those renovation costs, as lawmakers intended.
More than a year and a half after the tax law’s enactment, Congress hasn’t been able to pass legislation to fix the mistake. Thirty senators, along with dozens of affected businesses including McDonald’s and Macy’s, have pushed the Treasury Department to either not enforce the glitch or write regulations as if it doesn’t exist.
Treasury officials have cited concerns of overstepping their authority with respect to the retail glitch, and the proposed version (REG-104397-18) of the regulations released in August 2018 simply didn’t address it.
In May, IRS Chief Counsel Michael Desmond said the agency was writing regulations without the expectation that Congress would pass a technical corrections package to fix mistakes in the 2017 tax law.
Both Treasury and the OMB declined to comment on whether the pending IRS rules would fix the retail glitch. But one former OMB official was skeptical that the issue could be addressed administratively.
“We don’t pass legislation through letters from members of Congress,” said Kristin Hickman, who served as a special adviser in the OMB’s Office of Information and Regulatory Affairs from April 2018 to May 2019. “OIRA will not be inclined to let any agency do something that cannot be justified by a legal argument based on the four corners of the statute.”
But some other former government officials and legal scholars identified ways in which Treasury might be able to address the error without further action from Congress.
“I have always thought that for ease of administration that the government could issue simplifying guidance, perhaps as a safe harbor, consistent with the clear intent of the legislative history,” Ellen McElroy, a partner at Eversheds Sutherland LLP in Washington who previously worked in the IRS Chief Counsel office, said in an email.
Andrew Rudalevige, chair of the government and legal studies department at Bowdoin College in Maine, suggested President Donald Trump could issue a memorandum directing Treasury to examine the issue, perhaps with the intent of arriving at a particular conclusion.
“One of the trends we’ve seen over time is, because it’s become increasingly hard to pass new law, executive branch lawyers have become increasingly creative,” Rudalevige said. “You see this in war powers, you see this in lots of places.”
Who Would Sue?
The Trump administration has seen several of its regulatory decisions successfully challenged in court. A recent ruling in Bullock v. IRS saw a federal judge strike down a 2018 IRS policy shift that rolled back donor disclosure requirements for some nonprofits.
Still, Rudalevige questioned who would have standing to contest a potential regulatory retail glitch fix in court. The businesses covered by the rules wouldn’t want to challenge a favorable policy. But Rudalevige suggested it’s possible an individual taxpayer could claim they’ve been harmed by a slight increase in the deficit if businesses are allowed to fully write off renovation expenses.
Sally Katzen, who was OIRA administrator during the Clinton administration, pointed out that it can be hard to predict legal opposition until after the action is taken.
“Can you get cute? Can you get creative? Can you push the envelope?” Katzen asked.
Yes, she said, but in her eyes Congress should be the one fixing the problem.