Accelerated Depreciation of Retail Space 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the 15-year leasehold-depreciation period through 2011. /1/  The Emergency Economic Stabilization Act of 2008 /2/  also expanded the provision beyond leaseholds to allow, for the first time, owners of retail property and newly constructed restaurants to utilize the shortened recovery period.  The extension of the leasehold period is effective for property placed in service after December 31, 2007.  The new allowance of the 15-year depreciation for retail property and new restaurants is effective for property placed in service after December 31, 2008.

The Obama Administration proposed in its Fiscal Year 2012 budget to extend the 15-year depreciation provision through 2012. /3/  Representatives Jim Gerlach (R-PA) and Richard Neal (D-MA) have introduced H.R. 1265, /4/ and Senators Kent Conrad (D-ND) and John Cornyn (R-TX) have introduced the companion bill, S. 687. /5/   Both bills would make the extended depreciation period permanent, including its application to retail and restaurant property.

RILA urges Congress to make permanent the current 15-year depreciation recovery period for improvements to leased and retailer-owned real property.  Short of that goal, RILA will continue to advocate for extending the current cost-recovery period given its importance to the retail community.

In order to provide an inviting, modern shopping environment, which is paramount to retail customers, retailers generally remodel their stores every five to seven years.  Whether a large format retail operation or a smaller store, retailers spend significant resources on “build out” and other improvements to reflect changes in their customer base and to compete with newer stores.  Moreover, many improvements such as interior paint, partitions, ceiling tiles, and restroom fixtures may only last a few years before requiring replacement.

It is well established that the current 39-year depreciation period for buildings bears little relationship to the economic life of such structures and even less to building improvements and upgrades required in successful retail businesses.  Retailers, whether they own or lease their stores, should be able to depreciate such improvements over their useful lives, rather than based on the arbitrary and substantially longer recovery period set in the Internal Revenue Code.

In the American Jobs Creation Act of 2004, /6/  Congress enacted a temporary provision to allow retailers that lease their stores to write off remodeling expenses over 15 years rather than 39 years as previously required.  This provision was included in subsequent extensions, and is now set to expire on December 31, 2011.