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Tax code typo bars some businesses from enjoying tax reform

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Call it the tax code typo.

When your favorite restaurant or retail store gets a new look, it enhances your dining or shopping experience and invites new customers to take a look.

Main Street business owners, like the ones who greet you at your favorite neighborhood shops and restaurants, update and refresh their interiors regularly to create a better experience for customers and drive more business.

For the past few months, however, an error in the tax reform law that took effect this year has put many of those updates on hold.

{mosads}The mistake means retailers and restaurants are being required to depreciate remodeling work over a glacially slow 39 years rather than taking the immediate write-off Congress intended.

That means the nation’s economy is missing out on an economic stimulus effort that could have unleashed a wave of projects potentially worth hundreds of millions of dollars or more.

If not for the typo, the critical tax provision could be creating jobs for construction workers, boosting orders for materials and supplies, helping the real estate industry, revitalizing troubled shopping malls and struggling downtowns and creating long-term employment for countless retail and restaurant workers.

Before tax reform, retailers and restaurant owners who remodeled their buildings could write off half the cost of the work during the year it was done, but the rest had to be depreciated over a lengthy 15 years.

In a pair of industries that operate under notoriously tight profit margins, that meant projects sometimes did not get done and those that did cost far more than they should.

The Tax Cuts and Jobs Act of 2017 was supposed to address that issue by allowing retailers and restaurants to write off the full cost immediately, dramatically reducing the expense and making it far more likely that the projects — and the economic benefits that come with them — would go forward.

But in the rush toward passage, a mistake in wording meant the legislation failed to specify that stores and restaurants would be among the properties that qualify for the immediate write-off.

That error defaulted improvements at stores and restaurants into a category meant for constructing the building itself, which lasts for decades and has to be depreciated over 39 years.

Given that restaurants and retail stores are typically remodeled every five to seven years to remain attractive to customers and competitive with other brands, even 15 years was too long.

And 39 years is unrealistic; can you imagine shopping in a store that hasn’t been remodeled in four decades or eating in a restaurant that still looks the same as it did in 1979?

Lawmakers on both sides of the aisle have acknowledged the mistake and promised to correct it. Senate Finance Committee Republicans wrote to Treasury Secretary Steven Mnuchin, saying they planned to pass technical corrections legislation and asking that the IRS pass temporary guidance in the meantime.

But nearly a year has passed since tax reform was enacted, and neither the IRS nor Congress has corrected the problem.

In the meantime, countless remodeling projects have been put on hold, and a November deadline has now passed for retailers and restaurants to file tax returns, meaning thousands of amended returns will need to be filed even if the error is corrected after the fact.

This issue is about far more than store display cases and restaurant booths. The ripple effect of the delay has caused economic hardship for retailers, restaurants, the real estate industry and suppliers of building materials.

It is delaying investments across the economy in communities where these companies do business. Industries affected range from plumbing supplies to energy-efficient lighting. Even firefighters have expressed concern as upgrades of sprinkler systems are being delayed.

By encouraging business investment and leaving more money in workers’ pockets, tax reform has played a vital role in creating jobs and boosting our nation’s economy. But this error is keeping reform from living up to its full potential.

A recent survey by the National Association for Business Economics found that two-thirds of companies in the services sector say their capital spending remains unchanged since enactment of the tax reform law, which is attributed to the error in the law causing retailers and restaurateurs to put off new investment until this provision is fixed.

Now that the elections are behind us and Congress is back in Washington for its lame-duck session, the time has come to correct this mistake and uncover the full benefits of tax reform. Let’s not wait another day to fix this tax code typo.

Matthew Shay is president and CEO of the National Retail Federation. Dawn Sweeney is president and CEO of the National Restaurant Association.

Tags Business economics Business investment corporate tax cuts economy full expensing Marketing National Retail Federation retail Retailing Sales taxes Steven Mnuchin Tax Tax reform

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