[Congressional Record Volume 144, Number 30 (Wednesday, March 18, 1998)]
[Extensions of Remarks]
[Page E414]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              INTERNAL REVENUE CODE'S COST RECOVERY RULES

                                 ______
                                 

                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                       Wednesday, March 18, 1998

  Mr. SHAW. Mr. Speaker, as a Member of Congress, I am continually 
seeking sound policy changes that will make and keep our economy 
productive, create jobs and improve the overall quality of life for 
Americans. It is my belief that an important element of a productive 
economy is modern, efficient and environmentally responsible space for 
Americans to work, shop and recreate. In order to create and maintain 
such space, a building owner must regularly change, reconfigure or 
somehow improve office, retail and commercial space to meet the needs 
of new and existing tenants.
  I believe that the Internal Revenue Code's cost recovery rules 
associated with leasehold improvements are an impediment for building 
owners needing to make such improvements. Therefore, I am pleased to 
introduce this legislation to change the cost recovery rules associated 
with leasehold improvements.
  Simply stated, this legislation would allow building owners to 
depreciate specified building improvements using a 10-year depreciable 
life, rather than the 39 years required by current law, thereby 
matching more closely the expenses incurred to construct these 
improvements with the income the improvements generate under the lease.
  To qualify under the legislation, the improvement must be constructed 
by a lessor or lessee in the tenant-occupied space. In an effort to 
ensure that the legislation is as cost efficient as possible, 
improvements constructed in common areas of a building, such as 
elevators, escalators and lobbies, would not qualify; nor would 
improvements made to new buildings.
  Office, retail, or other commercial rental real estate is typically 
reconfigured, changed or somehow improved on a regular basis to meet 
the needs of new and existing tenants. Internal walls, ceilings, 
partitions, plumbing, lighting and finish each are elements that might 
be the type of improvement made within a building to accommodate a 
tenant's requirements, and thereby ensure that the work or shopping 
space is as modern, efficient, and environmentally responsible as 
possible.
  Unfortunately, today's depreciation rules do not differentiate 
between the economic useful life of a building improvement--which 
typically corresponds with a tenant's lease-term--and the life of the 
overall building structure. The result is that current tax law dictates 
a depreciable life for leasehold improvements of 39 years--the 
depreciable life for the entire building--even though most commercial 
leases typically run for a period of 7 to 10 years. As a result, after-
tax cost of reconfiguring, or building out, office, retail, or other 
commercial space to accommodate new tenants or modernizing work places 
is artificially high. This hinders urban reinvestment and construction 
job opportunities as improvements are delayed or not undertaken at all.
  Additionally, a widespread shift to more energy-efficient, 
environmentally sound building elements is discouraged by the current 
tax system because of their typically higher expense. For example, the 
Natural Resources Defense Council notes that commercial lighting alone 
consumes more than one-third of the electrical energy produced in the 
United States. If a greater conservation potential of energy-efficient 
lighting were to be realized, the demand for the equivalent of one 
hundred 1,000-megawatt power plants could be eliminated, with 
corresponding reductions in air pollution and global warming.
  Reform of the cost recovery rules for leasehold improvements has been 
long overdue but we are making progress. Two years age, Congress 
enacted legislation I sponsored, along with my colleague Mr. Rangel, 
that would clarify that building owners are permitted to fully deduct 
and close out any unrecovered leasehold improvement expenses remaining 
at the time a lease expires and the improvements is demolished. 
Resolution of the ``close-out'' issue was an important reform step. 
Modifying the recovery period for improvements is the logical and 
reasonable next step in the reform process.
  This legislation should be enacted this year. This would acknowledge 
the fact that improvements constructed for one tenant are rarely 
suitable for another, and that when a tenant leaves, the space is 
typically built-out over again for a new tenant. It is important to 
note that prior to 1981 our tax laws allowed these improvement costs to 
be deducted over the life of the lease. Subsequent legislation, 
however, abandoned this policy as part of a move to simplify and 
shorten building depreciation rules in general to 15 years. Given that 
buildings are now required to be depreciated over 39 years, it is time 
to face economic reality and reinstate a separate depreciation period 
for building improvements to tenant occupied space.
  I urge all Members of the House to review and support this important 
job producing, urban revitalization legislation, and I look forward to 
working with the Ways and Means Committee to enact this bill.

                          ____________________