Supporters of 15-Year Depreciation Law Say Expiration Harms Economy
By Heather M. Rothman
Publication Date: 05/04/2012
Uncertainty caused by the expiration of a tax law allowing improvements to restaurants and retail stores to be depreciated over 15 years rather than the 39 years is delaying remodeling projects and negatively impacting the economy, tax lobbyists told BNA May 2.
The 15-year depreciable life for leasehold, retail, and restaurant improvement property and new restaurant construction—first created in Section 168 of the tax code in 2004 and expanded in 2008—expired at the end of 2011.
Lobbyists for the restaurant and retail industries said May 2 that the 15-year depreciation provision is a job-creating engine that stretches its economic benefits across numerous industries, including construction, retail, restaurant, manufacturing, and transportation.
Lawmakers speaking during an April 26 hearing of the House Ways and Means Select Revenue Measures Subcommittee agreed.
“We know that using more reasonable depreciation schedules has spurred tremendous economic activity,” said Rep. Jim Gerlach (R-Pa.), the sponsor of legislation to make the cut to 15 years permanent. “According to the Bureau of Economic Analysis, for every dollar spent in the construction industry an additional $2.39 has been generated for spending in the rest of the economy.”
The temporary tax provision, often called a “tax extender,” is up for review by congressional tax writers looking to slim down the tax code by eliminating tax breaks that are no longer serving their intended purpose, are not creating jobs, or are not providing enough economic benefits.
Impact of Faster Depreciation Schedule
Gerlach also noted that for every dollar spent in the construction industry, 28 U.S. jobs have been created in the broader economy.
Traditionally, the tax code allowed for improvements to depreciate over a 39-year period, but restaurant owners and the retail industry had long argued that such a time frame did not reflect reality. After much debate, Congress settled on 15 years.
The new schedule has been a success, Dave Koenig, vice president for tax and profitability at the National Restaurant Association, said in a May 2 interview. According to a recent NRA study, between 2005 and the end of 2011, nearly two-thirds of restaurant operators benefited from the 15-year depreciation schedule and of those, 52 percent said the expansions or improvements might not have otherwise occurred.
Koenig, who also serves as chairman of the Depreciation Fairness Coalition, said 64 percent of those restaurant operators said they hired extra employees after the projects were completed.
Relevance Essential to Industry
Joyce Lunsford, a Pizza Hut franchisee in southwest Michigan, said the faster depreciation schedule is critical to the restaurant industry, which in many cases has a “very thin margin.” While 39 years might work for a traditional office building, for a restaurant with a lot of foot traffic, it is not realistic, she said. She said too many improvements are needed for owners to wait 39 years to recoup their tax write-offs.
Lunsford, who owns 30 Pizza Hut restaurants, has put $6 million to $7 million into new restaurants over the past four years. “We are creating jobs,” she told BNA in a May 3 interview.
Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, said that typically stores are remodeled and improvements made every five to seven years. It is really more for marketing purposes than because something wore out, she told BNA May 2. “If somebody builds a new store across the street or somebody remodels the store across the street, if your store is old and tired, everybody wants to go to the new fresh store and so the store that didn't remodel needs to respond,” Bernstein said.
She said that during the recession some remodeling was delayed, but she said NRF's members have said that in some cases, remodeling plans were accelerated so businesses could compete when newer stores were opened in close proximity.
Lunsford agreed that some of her business decisions are made for reasons other than timing or because there was a long-term plan in place.
Restaurants have a lot of upkeep and maintenance, particularly because of the foot traffic in the dining room and the heavy equipment in the kitchen. “If you're going to stay relevant, you have to upgrade,” Lunsford said.
Potential Push for Shorter Write-Off
Bernstein said as part of the push for an extension in the short term and permanency in the long term, her organization has told lawmakers that if the write-off for the cost of improvements reverts to 39 years, it will negatively impact a retailer's decision to go forward with remodeling plans, which will cost jobs and ripple through the economy.
Legislation (H.R. 1265, S. 687) pending in both chambers would make permanent the 15-year depreciation schedule, which lawmakers and lobbyists said would provide businesses with the certainty they need to make long-term plans. The legislation is not scored, though a two year-plan covering tax years 2010 and 2011 that was enacted in December 2010 cost $3.6 billion over 10 years.
“There are projects to renovate retail spaces that are being delayed because of the uncertainty in the tax law right now,” Bernstein said. “And those delays in remodeling projects cost jobs.” Delays cost construction jobs, construction materials, the potential for increased foot traffic and sales, and more employment in the store or restaurant, she said.
Koenig said once the extenders phase is passed and substantive work on tax reform resumes, it is possible that lobbyists will ask lawmakers to look at an even shorter depreciation schedule.
“We would argue that 15 [years] may even be too high,” he told BNA, noting that in the restaurant industry, the franchisee/franchisor agreement often states that significant structural improvements must occur over a six- to eight-year period.
Learn More About the Expiring Tax Provisions
Tax Legislation Update:
2010-2011 Expiring Federal Tax Provisions »
The complete text of this article can be found in the BNA Daily Tax Report, May 4, 2012. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2012, The Bureau of National Affairs, Inc.
