Retail Depreciation

The issue
Federal tax law was updated in 2020 to encourage remodeling projects by allowing retailers to immediately write off the entire cost, eliminating a previous requirement that half the cost be depreciated over 15 years. Doing so is expected to create jobs for construction workers, boost orders for materials and supplies, help revitalize troubled shopping malls and struggling downtowns, and create long-term employment for countless retail workers.

The update was originally intended to be part of the 2017 federal tax reform law. Instead, a mistake known as the “retail glitch” lumped retail remodeling – typically done every four to seven years – together with long-term projects like building construction. That meant remodeling done during 2018 and 2019 had to be depreciated over 39 years, dramatically driving up the after-tax cost and putting many projects on hold.

The mistake was fixed when the CARES Act coronavirus stimulus law was enacted in March 2020. In addition to benefits going forward, that means retailers and restaurants that went ahead with remodeling projects during 2018 and 2019 are able to file amended returns and receive an estimated $15 billion in almost-immediate tax refunds.

Why it matters to retailers
Retail stores have always needed to be updated on a regular basis to remain competitive, and that has become particularly important as the in-store experience quickly evolves as part of the transformation of retail into a multichannel industry. Requiring remodeling to be depreciated over nearly four decades ignores economic reality – few stores look the same as they did in 1980 – while allowing immediate write-off makes modernization more affordable.

The ability of retailers to claim a refund on remodeling work done during 2018 and 2019 is an added bonus, giving those eligible to do so an influx of cash that can provide valuable liquidity during the pandemic.

NRF advocates for appropriate depreciation
NRF has worked for nearly two decades to have the depreciation period for remodeling reduced, first to 15 years for leased property, then to 15 years for both leased and owned property, then half immediately with the remainder over 15 years, and ultimately the immediate full write-off intended under tax reform. When the retail glitch made the timeframe revert to the original 39 years, NRF worked for over two years to have it corrected, and was finally able to do so under the CARES Act when COVID-19 put pressure on Congress to help businesses affected by the pandemic.