Looking to remodel? Maybe
The government has funding and tax breaks available for retailers,
but don’t wait too long: Some of those provisions will end this year
By MARK E. BATTERSBY
T
he American Taxpayer Relief Act —
the so-called “fiscal cliff” tax bill enacted late last year — renewed a number
of important tax breaks long used by
savvy retailers to reduce the out-of-pocket
expenditures required to update their
stores. Combined with government funding and other tax breaks that never disappeared, these renewed provisions can
greatly reduce the cost of remodeling your
hobby shop. But many of these tax breaks
won’t last long, so the time to act is now.
Under U.S. tax rules, buildings and other
capital assets are generally depreciated
and written off over 39 years. Those same
tax rules contain a special 15-year, straightline depreciation write-off for what lawmakers call “leasehold improvements, restaurant and retail improvements.” Here’s
how the Internal Revenue Service defines
these improvements:
Qualified Leasehold Improvement Property. Improvements to a nonresidential
building’s interior* in conformity with a
lease. The improved space must be occupied by a tenant or subtenant, and those
improvements must be placed in service
more than three years after the building
was first placed in service.
Qualified Restaurant Property. Buildings and improvements where more than
50 percent of the building’s square footage
is devoted to the preparation of meals and
seating for on-premises consumption of
those meals.
Qualified Retail Improvement Property.
Improvements made to a nonresidential
building’s interior* that are open to the
general public for a building used in a
retail business selling tangible personal
property to the general public. Again, the
improvements must be placed in service
more than three years after the building
was first placed in service.
* Other than elevators, escalators, enlargements,
structural components benefiting common areas,
and the building’s interior structural framework.
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Faster write-offs
Many leasehold improvements also qualify
for the 50 percent bonus depreciation
write-off. In fact, many leasehold improvements, restaurant and retail improvements
may qualify for an immediate Section 179
expensing write-off.
The American Taxpayer Relief Act extended the Tax Code’s Section 179 firstyear expensing write-off through the end
of this year. In addition, the higher expensing limits from 2011 were reinstated for
2012 and extended for expenditures made
before Dec. 31, 2013. Thus, a retailer can
expense and immediately deduct up to
$500,000 of expenditures in 2012 and
2013, subject to a phase-out if total capital
expenditures exceed $2 million.
THE COST of sprucing
up or remodeling your
hobby shop can be
greatly reduced.
The tax break that allows profitable retailers to write off large capital expenditures
immediately, rather than over time, has
long been used as an economic stimulus by
lawmakers. Today, the new law allows a 50
percent bonus depreciation for property
placed in service through this year.
To be eligible for bonus depreciation,
the property must be depreciable under
the standard Modified Accelerated Cost
Recovery System (MACRS) and have a
recovery period of less than 20 years. Code
Section 179 first-year expensing remains a
viable alternative, especially for small businesses. Property qualifying for the Section
179 write-off may be either used or new, in
contrast to the bonus depreciation requirement that the taxpayer be the “first to use.”
Barrier removal
As mentioned, the cost of an improvement
to a business asset is normally considered a
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capital expense. However, a retailer can
choose to deduct the costs of making a
facility more accessible to those who are
disabled or elderly. Naturally, the retailer
must own or lease the facility for use in connection with his or her trade or business.
A “facility” is considered to include all or
any part of buildings, structures, equipment, roads, sidewalks, parking lots, or
similar real or personal property. Of course,
the business cannot deduct any costs paid
or incurred to completely renovate or
build a facility or to replace depreciable
property in the normal course of business.
When it comes to limits, the most that
can be deducted as a cost of removing
barriers to the disabled and the elderly for
any tax year is $15,000. However, any costs
over this limit can be added to the basis of
the property and depreciated.
Although a retailer, or any business, can
deduct barrier removal costs as a current
expense, the IRS will only accept improvement as a barrier removal if it meets the
guidelines and requirements issued by the
Architectural and Transportation Barriers
Compliance Board under the Americans
with Disabilities Act (ADA) of 1990.
Small businesses with 30 or fewer
employees or total revenues of $1 million
or less can use the Disabled Access Tax
Credit. Eligible small businesses may take a
credit of up to $5,000 (half of eligible
expenses up to $10,250, with no credit for
the first $250) to offset their costs for
access, including barrier removal (e.g., widening a doorway, installing a ramp), provision of accessibility services (e.g., sign-language interpreters), provision of printed
material in alternate formats (e.g., large
print, audio, Braille), and provision or modification of equipment.
Naturally, if the operation does choose
to claim the credit, it must reduce the
amount deducted or capitalized by the
amount of the credit.
Component depreciation
Because a building’s “components” could
Uncle Sam can lend a hand
Building improvements
Many landlords offer turnkey construction
of leasehold improvements. Whether the
space planning and construction is provided by the landlord or the tenant, a construction allowance is generally available
to the tenant. When the tenant builds out
its own space, the landlord generally pays
a specified amount of money toward the
construction.
Most commercial office building leases
call for turnkey construction, whereas retail
and industrial leases may mandate that
the tenant perform any improvements.
Often overlooked is the fact that buildouts are not limited to the original lease.
Negotiating the extension or renewal of a
tion’s risk and, in most cases, the amount
of interest charged the borrower.
The SBA’s flexible 7(a) Loan Program is
designed for small businesses, and involves
government-backed guarantees for
amounts loaned for general business purposes. The SBA’s CDC/504 Loan Program
provides businesses with long-term, fixedrate financing to acquire fixed assets (such
as real estate and equipment) for expansion
or modernization. Rather than using commercial lending institutions, the SBA delivers 504 loans via Certified Development
Companies (CDCs) — private, nonprofit corporations set up to contribute to the economic development of their communities.
DREAMSTIME
be depreciated over a smaller number of years, depreciating the components individually usually yielded substantially higher depreciation write-offs,
especially when compared to depreciating
the building as a whole. Rightly or not, the
perception existed that so-called “component” depreciation was often used in an
abusive manner, and it was ended in the
mid-1980s.
However, recent court rulings, most
notably the landmark Hospital Corporation of America case, validated another
strategy for increasing depreciation: cost
segregation. Unlike component depreciation, which focused on a building’s
systems, cost segregation focuses on
land and interior improvements that
have a shorter depreciation period
and/or economic life.
Land improvements that can be
segregated include paving, curbs,
sidewalks, signs and landscaping. Interior improvements, all
of which have shorter depreciable lives, include carpet,
vinyl tile, signs, wall coverings, and certain electrical
and plumbing equipment.
The IRS has developed a
manual for its auditors — the
Audit Technique Guide (ATG) —
that clearly defines expenditures
qualifying for five-, seven- and 15-year
depreciable lives. Using the IRS-guided
method in the ATG provides a safe harbor for taxpayers and faster write-offs.
A number of important tax breaks
were renewed with passage of the
American Taxpayer Relief Act. But
some of those provisions will disappear at the end of this year.
lease can, and often does, include buildout allowances or other amounts to remodel, refinish or otherwise update the
business’ premises.
Overlooked funding
When it comes to financing an all-important makeover, retailers should keep in
mind that the U.S. Small Business Administration (SBA) doesn’t do much lending.
Rather, it guarantees the repayment of
loans made by a financial institution,
thereby lowering or reducing the institu-
Every retailer is, or should be, familiar
with “build-outs,” those allowances for
tailoring space to the needs of a particular business. Build-outs have
long helped retailers create a
profitable selling environment.
Now, both tenants and retailers who own their stores and
showrooms can also take
advantage of U.S. tax laws,
especially the recently passed
American Taxpayer Relief Act,
to help reduce the out-of-pocket
expenses of sprucing up, fixing up or
remodeling their retail spaces.
Although professional assistance may be
required, the shorter depreciable life for
leasehold improvements and retail
improvements — which might also qualify
for the first-year, Section 179 expense
deduction or the bonus 50 percent depreciation write-off — can substantially
reduce the out-of-pocket expenditures
necessary to fix-up or improve any qualifying business’ premises. There are even special tax write-offs for both building owners
and tenants who go through the trouble
of breaking down larger capital expenditures, many from years ago, into a building’s components, for faster — and retroactive — tax savings. But don’t forget:
Many of those breaks will disappear at the
end of this year.
Mark E. Battersby, a Philadelphia-area freelance writer, has written on tax and financial
topics in leading trade magazines and professional journals for more than 25 years.
www.ModelRetailer.com
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