Decorworx official: Few seem aware of opportunities
This is the second article in a two-part series by The Shelby Report on fixing the “retail glitch.”
by John McCurry, contributing writer
Decorworx, a Cedar City, Utah-based firm specializing in design, engineering and décor services primarily for independent grocers, has seen its business accelerate in recent weeks as grocers take advantage of the Coronavirus Aid, Relief and Economic Security Act.
The CARES Act provides a fix for the “retail glitch” that was a result of a drafting error in the Tax Cuts and Jobs Act of 2017. Some categories of business investment, including qualified improvement property, were excluded from being 100 percent eligible for bonus depreciation. Due to this error, retailers making investments to improve their stores have faced a more restrictive cost recovery period than under the prior law.
Decorworx CEO Jeff Dansie explained that the CARES Act allows retailers to write off 100 percent of the cost of remodeling for any money they invest into their physical space for 2020 and 2021.
If that money is put into long-term improvements, they are able to take the profits from this year and put it into their store to reduce their tax liability. In many cases, they are able to write it off.
Dansie said his company helps grocers “provide an experience” for their customers through strategy, branding and interior décor and design. During the shelter-in-place orders of the early weeks of the pandemic, much of the firm’s work was put on hold due to retailers being busy and dealing with supply chain worries.
“At that time, we pivoted and we were supplying safety products to help them with those concerns – directional signage, acrylic panels for the registers and things like that,” Dansie said. “That was the main need.
“Now that things are somewhat normalized – and the supply chain is better, even though they still have some supply issues, they still do not have every single thing on their shelves – they are starting to think about what their next steps are and where they are going.”
Tenia Wallace, chief operating officer at Decorworx, said it’s an opportune time to launch projects that have been on hold. To that end, Decorworx has been informing grocers about the opportunities offered through the CARES Act.
“Grocers are still extremely busy,” she said. “They may not have time to find out what programs are available to them to help them along, unless someone is actively calling them and emailing and making sure they know the details.
“This is how we have gone about providing services to them during the pandemic. The clients we work with, we made sure they got a personal call to inform them and help them brainstorm.”
Wallace said none of the grocers she contacted were aware of how the CARES Act fixed the glitch until Decorworx told them. The ones who were familiar with the glitch said they had just changed their plans and go to an accelerated depreciation method, but not as fast as the CARES Act established.
Many grocers proceeded with projects despite the glitch because the work needed to be done, according to Dansie.
“They decided they would just deal with the tax liability,” he said. “With the shift now, most businesses are currently doing well, and they are looking at tax liabilities, and that is why they are really jumping onto this.
“Basically, the government pays for the remodeling, or 50 percent of it. Instead of paying the tax on it, they can put it toward their store.”
Decorworx has projects in the works for a number of stores and expects business to be brisk through the remainder of the year.
“What we anticipate, as the year goes on and they learn more about it, that they are going to try to get as much work as possible in this year if they can,” Dansie said. “We are setting things up and, obviously, everyone wants it done before Thanksgiving. But as we go along, people are going to be buying equipment, and doing things to dress up their physical spaces.
“A lot of them have been having a difficult time the last few years. I almost hate to say it, but if there is an upside to all of this, it is that it has brought people back to shopping their local independent stores.”
Dansie noted that online shopping eliminates the ability to look at food and other products. People are reinvesting in cooking at home and being with family, which was forced by the pandemic. However, it also has reinforced the need for the independent grocers across the country.
Decorworx has performed services for big chains, but Dansie said he and his staff like the intimacy of being able to work directly with the owners of stores and feel that they are making an impact. They also enjoy the process of designing, implementing and installing.
“It’s interesting, because we are a small business, and that is who we find the most in common with and successful relationships with,” Wallace said. “We understand the struggle. If it’s a family business, we do all we can to look out for the future generations.
“They can sometimes be more complicated than the big chains, because they are not used to doing renovations as often. It is more time consuming and labor intensive, but the reward is great. We are having a positive effect on small communities, to help them win against big chains that can sometimes dominate so effortlessly.”
Wallace said grocers had taken a beating in morale and revenue the past couple of years, so seeing people have renewed enthusiasm about their local grocer, plus having the “retail glitch” fixed, has given them hope.
They now can take advantage of the change and try to create an experience in their stores that will position them differently than the major chains. It has breathed a bit of life into the industry, she said.
“I currently have a design proposal with a store…with the additional help, he has been able to put in curbside pickup and online ordering and other things that he was not able to do in the past,” Dansie said. “In some ways, it will help independents catch up with the larger chains and compete with the online sites like Amazon.”
Wallace said the plan going forward is to educate customers that they can still shop in person safely, yet stores also have all of the options they need.
Tax expert: Planning is crucial before embarking on projects
Navigating the tax implications of the “retail glitch” and its subsequent fix via the CARES Act can be complicated.
Olga Blyweiss, a Pennsylvania-based tax partner with Mazars USA, an accounting, tax and consulting firm, recently spoke with The Shelby Report to offer some tips. She works in the food and beverage group within Mazars’ manufacturing and distribution practice and has clients in the supermarket business.
Blyweiss noted that supermarkets have been doing well this year, in part due to increased business due to the pandemic, so they have been given the opportunity to be profitable and to reduce tax liability. With the chance for the current deductions, she said it will motivate supermarkets to go ahead and renovate or add square footage – both from a demand perspective and from an improved cash flow situation – to take advantage.
“The glitch of no longer being able to take bonus depreciation on qualified improvement property that was passed through [2017 Tax Cuts and Jobs Act], that would technically be corrected as part of the CARES Act, provided a lot of businesses with the opportunity to go back and make depreciation election on their 2018 returns, through an amended return, or they could take advantage of it through the 2019 tax year filing, by filing an automatic accounting method change,” Blyweiss said.
Typically actions such as installing Plexiglass and other responses to the pandemic would fall into another depreciation category, and not in the qualified improvement of property category, which is what the glitch is related to, Blyweiss said.
“However, an awning or a façade or structural change or shelving renovation as part of a larger-scoped project, those would be qualified,” she said. “The resolving of the glitch will be helpful in federal returns but may not apply on the state-level returns.”
The fixing of the glitch goes back to the beginning of 2018. Blyweiss said her first advice to a supermarket owner is to see if there is an opportunity to go back and amend the tax returns of the prior filed year.
She also recommended that supermarkets considering an expansion or a renovation find out first what categories of change will qualify as improvement property deductions. They can then keep that in mind throughout the planning and construction stages.
“At the point they go through the renovation, we would suggest they go through what is called a cost-segregation study,” she explained. “That allows a business to have a third party come in – primarily engineers, not tax people – and categorize the improvements into specific categories and study which things fall into the category of a repair. By doing so, this allows for a much more detailed analysis by experts to know how things should be labeled.
“For example, if you replace an outlet, is that part of overall improvements, or is that under the category of personal property? [Personal property] is eligible for a bonus under the five-year category. We have a group internally that does cost-segregation studies and, as tax partners, we work with them quite frequently as far as recommending them to clients.
“The strategy around this is accelerating the advantage to the client. Anything categorized as a repair is eligible for both state and federal deductions. We want our clients to go through a planning process as they embark on these.”
For the first article in this series, click here.