Tax Breaks Offer Relief for Commercial Real Estate Owners Needing to Repurpose or Reconfigure Existing Space to Accommodate Social Distancing

The current crisis is forcing many rapid changes to be made in the use of commercial real estate space – at considerable expense. Now, there is at least some good news for those struggling with the cost of making major interior changes to their commercial space, thanks to generous tax incentives for qualified improvement property (QIP) under the umbrella of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These tax breaks can help alleviate the financial costs of redesigning and repurposing commercial space. The key to benefiting from these incentives is the interpretation of QIP, which now includes any non-structural improvement to the interior of an existing building, necessitated by the need for social distancing.

The Problem

Pre-COVID, office spaces were often crowded, with employees squeezed into tiny cubicles; however, the current need to ensure a safe, socially distanced workplace has forced major alterations to the layout of traditional office buildings. Office space is now being reconfigured to allow for dedensification, with many companies having 50 percent or less of their work force in the office while others continue to telecommute. Apart from the health and safety aspects, having some employees work from home has proved a win-win for businesses, assuring that the trend will likely continue, making a major rethink on office design imperative. Eliminating commuting benefits the environment while also saving workers valuable travel time; employees also report being far more productive when working from home, away from the frequent interruptions and distractions of a shared office space. Some businesses have already had employees who travel extensively ‘hoteling,’ – simply reserving a desk or office space for times when they are at home base – or ‘hot-desking,’ with multiple employees using one desk and computer at different times in the day, or days in the week. 

While reducing the number of employees in the existing office space can help maintain safe social distancing, physical changes are still necessary to ensure a safe work space. Existing cubicles need to be removed, and possibly new partitions or screens hastily erected, to provide correct spacing between workers. Collaborative spaces such as board rooms and conference rooms, currently redundant due to the increased use of video conferencing, may also be repurposed to increase usable square footage. In all likelihood, these changes are set to continue for the foreseeable future. It might also be necessary to make changes to the HVAC system to improve ventilation and air filtration, and in high-rise buildings, additional elevators may be needed to avoid congestion. These are costly renovations that will impact on the bottom line of companies that are already struggling with an economic downturn. 

It is not only office buildings where owners are sustaining major expenses to reconfigure work space for social distancing. In the hospitality sector, bars and restaurants have quickly moved to increase patio space, a temporary fix that works well enough during good weather; however, as we move towards the fall, the need to accommodate patrons indoors will mean, at a minimum, installing extra walls or screens to comply with distancing requirements. 

social distancing at restaurant

Similarly, the retail sector continues to experience downturns as online shopping has taken off at warp speed during the pandemic. Even with stores now reopening, many consumers are still reluctant to shop in person. While this is bad news for those retailers operating from bricks and mortar stores, warehouse space has seen increased demand, and some retailers are looking to repurpose part of their retail space into storage space to accommodate greater demand for online sales. Smaller stores may be limiting the number of shoppers in the store at one time, requiring a reconfiguration of their existing space, including widening aisles and establishing screens, to accommodate safe distancing. Again, this is a major expense for business owners.

The Solution

Fortunately, recent government tax changes offer business owners some relief when considering costly physical changes to their commercial space; the key to accessing these tax incentives is how QIP is interpreted.

The CARES Act is a $2 trillion relief package aimed at protecting Americans from the public health and economic impact of COVID-19. 

Under the act, qualified improvement property (QIP) was made bonus eligibleQIP is considered any non-structural improvement to the interior of a building, if that improvement is placed in service after the building is placed in service. This will mean that most, if not all, of the improvements companies need to make to design a socially distant office can be taken as a tax deduction in the current year, thus lessening the financial hit when it is most needed.” – David McGuire, Forbes Finance Council Member.

Additionally, the act allows taxpayers to increase the amount of “allowable business interest” deductions from 30 percent to 50 percent. Since “any non-structural improvement to a building’s interior” can potentially qualify for this additional tax deduction, improvements made to enable social distancing and improve ventilation should all qualify for sizable tax breaks.  

The CARES Act also updates an earlier tax reform act (2017), ensuring that the original intention is met. This involves depreciation for restaurant, retail and leasehold remodeling, which is consolidated under QIP; the original intent, which has now been clarified, was to give QIP a 15-year depreciable life and make it eligible for 100 percent bonus depreciation. 

For all changes accepted as QIP, business owners now have access to welcome tax breaks to offset the expenses they have incurred to make their commercial premises compliant with social distancing and health and safety protocols. These incentives will come as a welcome relief for business owners and investors alike. 

Joy Taylor April 2020