It took a pandemic for Congress to fix the 2017 tax law’s retail glitch, which inadvertently penalized the kinds of businesses that have been temporarily forced to close during the new coronavirus outbreak.
The error prevented brick-and-mortar companies like restaurants and retailers from immediately writing off the cost of interior improvements, essentially making store renovations more expensive. There have been pushes to pass a fix, but Congress’ inaction over the past two years left businesses trying to figure out accounting maneuvers to obtain some of the tax benefits they would have otherwise been entitled to.
Democratic leaders have been hesitant to correct an error made by Republicans, holding onto the issue as a bargaining chip they could use later to expand provisions like the earned income tax credit. As recently as early March, Treasury Secretary Steven Mnuchin said he was talking with House Ways & Means Chairman Richard Neal (D-Mass.) about a way to move forward with fixing the mistake.
“This is not a partisan issue,” Mnuchin said during a March 3 congressional hearing.
But those equations changed with the arrival of the pandemic and pressure to move an enormous $2 trillion relief measure. The retail glitch would be fixed, retroactive to the passage of the 2017 tax law, as part of a sweeping virus relief package (H.R. 748) signed into law on Friday by President Donald Trump.
A senior House Democratic aide told Bloomberg Tax that top Democratic lawmakers never had a policy objection to fixing the error. Instead their objections were rooted in the partisan way the 2017 tax law was passed, the aide said.
The tax law passed Congress without a single Democratic vote. In the run-up to passage, top Democrats repeatedly complained that they were completely shut out of the process. In the years since, senior Democrats like Senate Finance ranking member Ron Wyden (D-Ore.) have referred to the measure as the “Trump Tax Scam” and complained that it favors the wealthy over the working and middle-class.
Cash Back Expected
In the tax law, Republicans inadvertently set the the depreciation schedule for certain restaurant and retail businesses’ qualified improvement property to 39 years. The amended version of H.R. 748 classifies QIP as 15-year property, or 20-year property under an alternative depreciation system. That makes the property eligible to be written off immediately.
Correcting the tax law error is a way to get more cash back to struggling retailers and restaurants, staff for the Senate Finance Committee Chairman Chuck Grassley (R-Iowa) said during a Wednesday conference call.
The fix is coming at a good time for retailers, according to Russ Sullivan, a former staff director for the Senate Finance Committee who is now with Brownstein, Hyatt, Farber, Schreck.
“If the business is closed, that’s a good time to do upgrades,” Sullivan told Bloomberg Tax. “If they have already done them, this can provide cash liquidity to them through accelerated refunding.”
Robert Jones, president of American Sale—a Chicago-area retailer that sells swimming pools, hot tubs and patio furniture—said he expects to now have a chance to obtain refunds for renovation projects that he took in spite of the retail glitch.
Jones isn’t alone in expecting a refund once the virus bill becomes law: Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, said retailers around the country would get significant amount of money back under the change. That organization represents department stores, specialty stores, grocers, wholesalers and others.
“These overpayment in taxes were obviously made by our brick-and-mortar stores because they are the ones who have to make the improvements and they are the ones right now that are getting the least amount of sales because their stores are either mandated shut by state or local governments or social distancing is keeping people out of the stores,” Bernstein said.
The massive economic package passed through Congress without the tax provisions that House Democrats were previously seeking in exchange for the retail glitch.
But the bill, after lengthy negotiations between Mnuchin and Democratic leadership, does now include expanded unemployment benefits and stronger oversight language regarding a $500 billion that will be used to provide loans and other economic assistance.
“The Senate bill now contains a lot of provisions requested by Democrats which could be viewed as part of the compromise that led to the retention of QIP in the final package,” said Marc Gerson, a former Ways and Means Republican staffer, now with Miller & Chevalier Chartered.
The Democratic aide told Bloomberg Tax that while the House majority didn’t exactly get what they wanted in exchange for fixing the error, they are expecting to make a push to include expanded refundable tax credits in future stimulus bills.
—With assistance from Colin Wilhelm.