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  • Content Expert: Accounting

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    I’m afraid we will see the lasting impact of the COVID-19 pandemic for years to come. Not only did it turn our lives upside down, but it also changed the business world as we knew it, including the office space needs of businesses everywhere.
    The commercial real estate industry has had to respond to the business community’s new needs by reimaging office spaces for the “new normal.” Prior to the pandemic, the majority of businesses required their employees to be onsite during regular business hours. Working remotely was a rarity for most industries and completely unheard of in others. The global shut-down in March of 2020 required business owners to move quickly and think outside the box to survive. Businesses quickly converted operations to remote work environments, and many have experienced its advantages and have fully adapted to and perfected their remote environment.
    This new realization and forced adaptation may have turned the commercial real estate industry on its head.\ As businesses prepare to return to workspaces and transition out of this global crisis, what impact will this have on commercial real estate? As they return to “normal,” many are analyzing their individual need for “brick and mortar” office space. As companies have struggled to meet lease obligations, some are considering down-sizing office space or going totally virtual, if possible.
    Property managers are developing creative ways to incentivize renters, identify unconventional tenants and negotiate new terms to help businesses. But keep in mind that changing the terms of your commercial lease might cause unintended consequences. IRC Section 467 may cause some unanticipated drawbacks.
    Section 467 was created in 1984 to prevent tax-shelter-type transactions that took advantage of timing differences between cash basis and accrual taxpayers. So why is this an issue now? Well, anytime a lease is changed significantly, Section 467 requires that it be retested. The rules defined in Section 467 are complex and can easily result in unanticipated tax liabilities if not handled correctly.
    If you’re considering renegotiating your commercial lease because of COVID, be sure to work with your tax advisor before you make any decisions. Considering potential tax impacts should be an essential step during your decision-making process to ensure you avoid any unforeseen tax consequences as you move forward in the new normal.
    Cristy Andrews is a member of Warren Averett and serves in the firm’s Tax Division. She is a leader within the firm’s Real Estate Client Practice Group and has proven experience specializing in accounting, tax and business consulting services for clients in the real estate and construction industries. Contact her at cristy.andrews@warrenaverett.com or 334-260-2339.
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