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Congress Must Fix Retail Glitch, IRS Says in New Final Rules (2)

Sept. 13, 2019, 3:56 PMUpdated: Sept. 13, 2019, 9:18 PM

The IRS rejected calls from businesses and lobbyists to fix a prominent drafting error in the 2017 tax overhaul administratively or refrain from enforcing it, according to final rules for the law’s full expensing provision released Sept. 13.

“A legislative change must be enacted” to correct what’s often referred to as the “retail glitch,” officials wrote in the 169-page package of final regulations. The proposed version of these rules, (REG-104397-18) issued in August 2018, didn’t address the error.

Internal Revenue Service and Treasury Department officials have repeatedly signaled that the matter is beyond their authority, amid pressure from the retail, restaurant, and construction industries.

Lawmakers amended tax code Section 168(k) to allow businesses to deduct the full cost of property in the year they buy it, rather than doing so piecemeal over a number of years. The provision applies to new and used items purchased and put to use after Sept. 27, 2017, and begins to phase out in 2023.

In an attempt to group three types of property—including those common for retail and restaurant industries—into one, however, lawmakers mistakenly assigned the property a longer cost-recovery period, rendering those sectors’ interior renovations ineligible for the new benefit. In some cases, it made such improvements more expensive.

The final rules, like the proposed version, allow businesses buying and using this kind of property between Sept. 27, 2017, and the end of that year to benefit, but from the first day of 2018 onward, it’s no longer eligible for the perk.

Bipartisan bills (H.R. 1869, S. 803) in Congress would address the error, but moving forward on the fix will require careful negotiation. Democrats have so far been hesitant to help Republicans fix errors in the law.

Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, said that the IRS and Treasury officials’ decision not to fix the error administratively was expected, but the group and others were at least hoping for a notice saying the IRS wouldn’t audit taxpayers for the issue until Congress acted on it. The explicit language in the rules putting the onus on Congress to pass a correction won’t do much to increase pressure on lawmakers to act, she said.

“I think that’s been communicated,” Bernstein said. “I think all of our energy has been on Capitol Hill and getting that legislation passed.”

Upon releasing the final rules, the agency also issued a 79-page proposal to revise the final rules by withdrawing a portion of the proposal issued last year. These proposed rules broaden the types of property eligible for full expensing, such as certain “self-constructed” property, but explicitly say this election to extend the tax perk is not an option for the property type barred from benefiting as a result of the drafting error.

On Sept. 9, the final rules left the White House’s Office of Information and Regulatory Affairs, which gained review authority over tax regulations last year. The proposal to revise the final rules left the office Sept. 6.

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com