A small glitch in the tax law is harming independent grocers

Independent grocery stores are the cornerstones of communities across the country, providing nutritious food to families and spurring economic growth in the neighborhoods they serve. Further, independents play an important role in providing food access to low-income communities as they often outnumber national chains in these locations, particularly in rural areas, according to research done by USDA Economic Research Service. Whether it be a family dinner or a social gathering, food has always been at the heart of hometown activities, which makes grocery stores a fundamental part of every community.

But recently, grocery store owners are faced with a tremendous tax burden resulting from a flaw in the new tax law that is preventing them from making important investments in their stores. This error has unintentionally created an unleveled playing field for the local independent grocers we represent.

A central goal of the Tax Cuts and Jobs Act (TCJA) was to make it easier for grocery store owners to invest in interior improvements to their stores by allowing them to fully and immediately deduct the cost of their investments in a policy called 100 percent bonus depreciation (or full expensing). Congress intended the TCJA to enhance the tax deductions available to business owners who invest in interior upgrades, such as remodeling, installing energy efficient equipment, or improving handicap accessibility. In IRS-speak, these investments are known as “qualified improvement property,” or QIP. And four words missing from the tax law made a huge mess of it.

Congress inadvertently failed to include QIP improvements for bonus depreciation, which would have increased the total deduction from 50 to 100 percent of the cost of the upgrades. Worse, they also accidentally raised the QIP depreciation period from 15 to 39.5 years.

Let that sink in for a minute. Congress intended to enhance tax deductions for grocery retailers. Because of a few important typographical errors, grocery retailers are actually dramatically worse off than before.

Almost four decades is a nonsensical amount of time for QIP depreciation. Imagine if your local grocery store dated back to 1980. No new shelving, same inefficient fluorescent lighting, and refrigeration units relying on 70s-era technology. Such a store wouldn’t present a welcoming, contemporary atmosphere and couldn’t meet the needs and expectations of today’s consumers, nor could it compete with surrounding larger chain stores or the online market. These stores would likely go out of business and further exacerbate the far-too-prevalent issue of food deserts across the country.

Sadly, the TCJA applies this tax standard going forward—any improvements made this year are treated as if they’ll last through 2058.

That’s exactly what many small business owners have found out from their accountants. Grocery store owners that invested in QIP projects since January 2018 were shocked to owe far more in taxes than expected. As a result, many small businesses are playing catch-up, cutting back on employee wages or hours and making other sacrifices to compensate for a horrible tax year.

Now that the QIP glitch has been widely publicized, many small business owners are putting off planned improvements because, without proper tax treatment, they cannot afford them. And the widespread inclination to “wait it out” on QIP is undermining commercial construction companies, interior design firms, and manufacturers of various types of equipment businesses need.

Simply put, the QIP glitch is costing America jobs and growth.

It’s also another finger on the scale against independent and family-owned grocery stores. Less able to financially accommodate this QIP change, small business owners like grocers are more likely than their corporate counterparts to delay upgrades that would attract more customers and boost their competitiveness. This is an unfair disadvantage.

Lawmakers on both sides of the aisle have acknowledged the retail glitch as a drafting error and are supportive of correcting this issue. Bipartisan legislation to fix the QIP glitch has been introduced in both the House and Senate (The Restoring Investment in Improvements Act, H.R. 1869 / S. 803) and has garnered significant support. Congress must act now and include the QIP fix in any end of year spending package to prevent further harm to independent grocers.

John Ross is CEO of the largest group of independent grocery retailers in the world, Chicago-based Independent Grocers Alliance (IGA). Greg Ferrara is President and CEO of the National Grocers Association in Washington, D.C.