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Page 18 — Retail Properties Quarterly — May 2021 www.crej.com Taxes C olorado lessees and lessors could benefit from tax sav- ings opportunities intro- duced to mitigate the eco- nomic impacts of COVID-19. Before the pandemic, Colorado’s 2020 nonresidential-sector buildings starts were expected to reach $6 billion. However, delays and cancel- lations reduced actual new project starts to $4.8 billion, according to the Colorado Business Economic Outlook 2021. Capital expenditures still increased for some renovations, including office, medical, restaurant and retail facilities. Some owners and lessors were required to invest to meet COVID-19 requirements, while others utilized the shutdown to perform long-awaited renova- tions. Whatever the case may be, sig- nificant tax benefits could be avail- able. As Colorado construction costs rise, getting the most out of dollars spent on capital improvements is vital. This article identifies opportuni- ties introduced by the Coronavirus Aid, Relief, and Economic Security Act and related property renovation strategies. Tax benefits are available for many COVID-19-related property recon- figurations based on the renovation’s size and scope. n Minor recon- figurations. Some open-air offices have been reverted to single-use offic- es and cubicles, while retail and restaurant spaces have added parti- tions and free-standing modules. Capital expenditures incurred to make these reconfigurations come at an inopportune time; most busi- nesses’ margins are slimmer than in recent years. For these business- es, the CARES Act is a much-needed lifeline. n QIP technical correction. The Qualified Improvement Property technical correction allows demis- ing walls and other qualifying improvements to have a 15-year tax life. These assets now are eligible for 100% bonus depreciation. Most minimal configurations like- ly will fall under this definition, and lessees and lessors may receive sig- nificant tax deduc- tions as a result. n Significant renovations. Many lessors and lessees are performing substantial remod- els, renovations and additions to their properties. Due to the com- plexities of capi- talization rules, taxpayers often capitalize expenditures as one asset on their depreciation schedule, either as nonresidential real prop- erty or QIP. Classifying the amount as 39-year nonresidential real property under- states the depreciation amount, resulting in taxpayers missing poten- tially significant tax benefits. How- ever, classifying the amount as QIP may understate income by including assets that don’t fit the QIP defini- tion, which could increase risk expo- sure. For example, if a taxpayer installs a new HVAC system in the facility, the interior ductwork would fit the QIP category, but the exterior HVAC com- ponents wouldn’t. Alternatively, if an improvement is a partial remodel and partial expan- sion, the remodel could fit the QIP definition, but building components for the expansion wouldn’t. n Cost segregation analysis. A cost segregation analysis can help deter- mine which assets qualify for accel- erated depreciation recovery. Cost segregation involves breaking down real property into short-life assets. The analysis identifies tangible personal property by reviewing cost and construc- tion details and conducting a site inspection. This technique can identify build- ing-cost compo- nents eligible for QIP, including: • Interior versus exterior renova- tions, • Structural versus nonstructural changes and • Expanded versus existing prop- erty. A cost segregation analysis also can identify short-life property, which is beneficial for businesses in states that don’t recognize bonus deprecia- tion. Colorado conforms to the fed- eral treatment of bonus depreciation. While an analysis has upfront costs, the results typically help tax- payers save by increasing deprecia- tion deductions in the initial years of an asset’s life. n Claim depreciation deductions. Claiming accelerated depreciation deductions for larger reconfigura- tions can be complex. Entities with minimal reconfigurations may only need to confirm new assets meet eligibility criteria for QIP and apply increased deductions to reduce taxes. Entities with significant renova- tions or prior tax-year additions 2020 aftermath: Savings for capital improvements Chris L’Heureux Partner, Moss Adams Jackie Noland, CPA Director, Moss Adams Derek Woodworth, CPA Manager, Moss Adams Please see L’Heureux, Page 24