[Congressional Record (Bound Edition), Volume 147 (2001), Part 3]
[Extensions of Remarks]
[Page 3683]
[From the U.S. Government Publishing Office, www.gpo.gov]



 LEGISLATION TO CHANGE THE INTERNAL REVENUE CODE'S COST RECOVERY RULES

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                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                       Wednesday, March 14, 2001

  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 elements 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 a 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 workplace 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. If a greater 
conservation potential of energy-efficient lighting were to be 
realized, the demand for the equivalent of one hundred 1,000-megawatt 
powerplants 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. In the 106th Congress, this bill enjoyed widespread 
support with 144 Members co-sponsoring it. 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 build-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.
  Mr. Speaker, I urge my fellow members to review and support this 
important job producing, urban revitalization legislation. I look 
forward to working with my colleagues on the Ways and Means Committee 
to enact this bill.

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