Des Moines is booming with restaurant and retail development. East Village, Western Gateway, Ingersoll Avenue, Jordan Creek—everywhere you look, new concepts are opening, existing spaces are getting renovated, and commercial contractors are busier than ever.

But here's what most commercial contractors don't realize: Restaurant and retail buildouts have completely different tax implications than residential construction or new commercial buildings.

Different depreciation rules. Different cost segregation opportunities. Different cash flow patterns. Different contractor liability issues. Different tax strategies that can save you $25,000-$75,000 annually—if you know how to structure them correctly.

Most Des Moines commercial contractors treat restaurant buildouts the same as any other project: Do the work, send the invoice, move on to the next job. Meanwhile, contractors who understand restaurant and retail tax strategies are capturing massive deductions, optimizing depreciation timing, and structuring deals that reduce taxes while increasing profitability.

This article reveals:

• Why restaurant/retail work creates unique tax opportunities
• How cost segregation can generate $50,000-$200,000 in immediate tax benefits
• The contractor-as-developer strategy that's creating millionaires
• Des Moines-specific opportunities in high-growth corridors
• Tax traps that can destroy profitability if you're not careful

If you're bidding restaurant or retail projects in 2026, you need to understand these strategies before signing another contract.

Why Restaurant & Retail Buildouts Are Different

Residential remodeling: Straightforward. Materials + labor = revenue. Pay taxes. Done.

Commercial buildout: More complex. Tenant improvements. Cost segregation opportunities. Lease considerations. Developer relationships. Multiple tax strategy layers.

The Financial Structure Differences

Typical Residential Project:

• Homeowner pays contractor directly
• Lump sum or progress payments
• Contractor has no ongoing interest after completion
• Standard tax treatment

Typical Restaurant/Retail Buildout:

• Multiple parties involved (tenant, landlord, lender)
• Complex payment structures (TI allowances, landlord contributions)
• Potential ongoing relationships
• Sophisticated tax optimization opportunities

The Three Types of Buildout Projects

Type 1: Tenant-Paid Buildout

• Restaurant/retail tenant hires contractor directly
• Tenant pays for all improvements
• Tenant owns the improvements (or landlord owns, depends on lease)
• Tax benefits go to tenant

Type 2: Landlord-Funded Buildout

• Property owner hires contractor
• Landlord pays for buildout
• Landlord owns improvements
• Tax benefits go to landlord

Type 3: Hybrid with TI Allowance

• Landlord provides tenant improvement allowance
• Tenant pays for overages
• Split ownership/benefit of improvements
• Tax benefits split (if structured correctly)

For contractors: Understanding these structures affects how you bid, when you get paid, and whether you can capture additional value beyond the construction contract.

Tax Strategy #1: Cost Segregation for Restaurant/Retail Properties

Cost segregation is the process of identifying building components that can be depreciated faster than the standard 39-year schedule for commercial real estate.

Why this matters for restaurant/retail:

Restaurant and retail spaces have extensive specialized components that qualify for accelerated depreciation:

• Specialized HVAC (kitchen exhaust, refrigeration)
• Electrical systems (specialized restaurant/retail loads)
• Plumbing (grease traps, specialized systems)
• Flooring (can be 5-year property in certain circumstances)
• Decorative lighting and fixtures
• Built-in furniture and equipment

The Depreciation Comparison

Standard depreciation:$500,000 restaurant buildout depreciated over 39 years = $12,821 annual deduction

With cost segregation study:

• 15-year property (improvements): $150,000 → $10,000/year
• 5-year property (equipment, fixtures): $250,000 → $50,000/year (with bonus depreciation)
• 39-year property (structural): $100,000 → $2,564/year

First-year deduction:

• Standard: $12,821
• Cost segregation: $112,564 (assuming 40% bonus depreciation for 2026)

Tax savings (36% bracket): $40,523 vs. $4,616 = $35,907 additional savings in year one

The Contractor-as-Investor Strategy

Some Des Moines contractors are capturing these benefits for themselves:

Structure:

1. Contractor identifies building with restaurant/retail potential
2. Contractor purchases building (or partners with investor)
3. Contractor completes buildout
4. Contractor leases to restaurant/retail tenant
5. Contractor captures both construction profit AND tax benefits

Real Example:

West Des Moines contractor purchased small building in Ingersoll district:

• Purchase price: $425,000
• Buildout cost: $185,000 (at his cost)
• Total investment: $610,000

Tax Benefits First Year:

• Cost segregation study: $187,000 accelerated depreciation
• Tax savings: $67,320 (36% bracket)

Plus construction profit:

• If he'd bid the job to someone else: $240,000
• His actual cost: $185,000
• "Profit" to himself: $55,000

Plus rental income:

• Monthly rent: $6,500
• Annual rent: $78,000
• Operating expenses: $28,000
• Net operating income: $50,000

First-year results:

• Tax savings: $67,320
• Construction "profit": $55,000
• Net rental income: $50,000
• Total first-year benefit: $172,320

Less: Down payment and carrying costs, but net positive cash flow from day one

Five years later:

• Building appreciated to $725,000
• Tenant renewed lease (rent increased to $7,800/month)
• Owns valuable asset generating passive income
• Can sell via 1031 exchange to defer taxes

The strategy: Use your construction expertise to create wealth through real estate ownership, not just contracting income.

Cost Segregation for Contractor-Developers

If you're building restaurant/retail space to hold as investment:

Hire qualified cost segregation specialist:

• Detailed engineering study
• IRS-compliant documentation
• Maximizes accelerated depreciation
• Cost: $5,000-$15,000 (depending on building size)

ROI: Typically 10:1 or better (study costs $8,000, generates $80,000+ tax savings)

Critical: Must be done in first year of service or when major renovations completed. Can't go back retroactively without complex procedures.

Learn about real estate tax strategies.

Tax Strategy #2: Section 179D Energy-Efficient Commercial Building Deduction

Section 179D provides immediate tax deductions for commercial buildings meeting energy efficiency standards.

2026 Rules:

• Up to $5.65/sq ft for buildings meeting 50% energy savings
• Deduction available to building owner OR (special rule) contractor if government building
• Partial deductions for HVAC, lighting, or envelope improvements

Why Restaurant/Retail Qualifies

Restaurants and retail often make significant energy efficiency investments:

• High-efficiency HVAC (required for cooking exhaust)
• LED lighting (retail requires extensive lighting)
• High-performance envelope (climate control critical)
• Energy management systems

These investments qualify for Section 179D if designed to meet standards.

Real Application: East Village Restaurant

Project: 3,800 sq ft restaurant in Des Moines East Village

Energy-efficient components:

• High-efficiency HVAC with kitchen exhaust: $65,000
• LED lighting throughout: $18,000
• Improved insulation and windows: $22,000
• Energy management system: $8,000

Engineering certification: Building meets 50% energy savings vs. baseline

Section 179D deduction: 3,800 sq ft × $5.65 = $21,470

Tax savings (36% bracket): $7,729

Plus: Building owner (or tenant, depending on who pays) captures regular depreciation on top of 179D deduction

For contractors: If you're doing the buildout, suggest energy-efficient options and mention the 179D benefit to owners. This can:

• Win you bids (offering tax strategy advice)
• Justify higher construction costs (offset by tax benefits)
• Create goodwill and repeat business

The Contractor Specialization Opportunity

Some Des Moines contractors are positioning themselves as "energy-efficient commercial buildout specialists":

Strategy:

• Partner with engineers who do 179D certifications
• Design builds to meet energy standards
• Market the tax benefit to building owners
• Charge premium for specialized expertise

Results:

• Winning bids against lower-cost competitors
• Higher profit margins (justified by expertise)
• Repeat business from property owners
• Referrals based on tax savings delivered

Johnston commercial contractor implemented this strategy in 2024:

• Completed 8 restaurant/retail buildouts
• Average project: $280,000
• Average 179D benefit to owner: $18,500
• Marketing angle: "Our builds pay for themselves through tax savings"
• Results: 73% win rate on bids (vs. 45% previously)

The lesson: Tax strategy expertise is a competitive advantage.

Tax Strategy #3: Qualified Improvement Property (QIP) and Bonus Depreciation

Qualified Improvement Property (QIP) includes interior improvements to nonresidential buildings made after the building is placed in service.

Key characteristics:

• 15-year depreciation (instead of 39-year)
• Eligible for bonus depreciation
• Applies to interior renovations

What Qualifies as QIP

For restaurant/retail buildouts:

Qualifies:

• Interior walls, ceilings, flooring
• Electrical and plumbing (interior)
• HVAC (interior)
• Fire protection systems
• Security systems

Doesn't qualify:

• Structural components (foundations, exterior walls, roof)
• Enlargement of building
• Elevators/escalators
• Internal structural framework

Why this matters:

Most restaurant/retail buildout work IS interior improvements = QIP = 15-year property eligible for bonus depreciation.

The 2026 Bonus Depreciation Impact

Bonus depreciation schedules:

• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

For 2026 restaurant/retail buildouts:

$300,000 in QIP:

• Bonus depreciation (20%): $60,000
• First-year regular depreciation: $16,000
• Total first-year deduction: $76,000

2027 same project:

• Bonus depreciation: $0
• First-year regular depreciation: $20,000
• Total first-year deduction: $20,000

The 2026 opportunity: Last year with ANY bonus depreciation. Accelerate buildouts into 2026 to capture 20% bonus vs. 0% in 2027.

Planning Strategy: Timing Matters

For property owners planning buildouts:

Complete in 2026:

• Capture 20% bonus depreciation
• $300,000 buildout → $60,000 bonus deduction
• Tax savings: $21,600

Wait until 2027:

• No bonus depreciation
• Same $300,000 buildout → $0 bonus deduction
• Lost savings: $21,600

For contractors: Market the timing benefit to potential clients. "Complete your buildout in 2026 to capture $20,000+ in tax savings vs. waiting until 2027."

This urgency can help you:

• Close deals in 2026
• Fill your schedule
• Justify premium pricing (clients saving taxes)

Tax Strategy #4: Business Structure for Restaurant/Retail Contractors

Your entity structure affects how you're taxed on restaurant and retail work.

S-Corp Optimization for Commercial Work

Commercial contractors often have different economics than residential:

Typical patterns:

• Larger average project size ($150,000-$500,000 vs. $30,000-$80,000 residential)
• Longer project timelines (8-16 weeks vs. 2-6 weeks)
• More sophisticated clients (landlords, developers vs. homeowners)
• Better payment terms (progress billing, larger deposits)

S-Corp salary optimization:

Ankeny commercial contractor doing $1,200,000 in restaurant/retail work annually:

Salary determination factors:

• Role: Project management, client relations, some hands-on work
• Hours: 2,000/year managing 12-15 projects
• Market comparable: Commercial construction PM $95,000-$125,000
• Reasonable salary: $115,000

Optimal structure:

• Salary: $115,000
• Distributions: $385,000 (after expenses)
• Payroll tax savings: $26,185 vs. Schedule C

But: Can also contribute more to retirement based on higher reasonable compensation

Trade-offs:

• Lower salary: More payroll tax savings, less retirement contribution room
• Higher salary: Less payroll tax savings, more retirement contribution room

Our approach: Model both scenarios, optimize for client's retirement goals and risk tolerance.

Learn about S-Corp strategies.

Multi-Entity Structure for Mixed Work

Some contractors do both:

• Restaurant/retail buildouts (commercial)
• Residential remodeling
• New construction

Strategy: Separate entities by work type

Entity A (S-Corp): Commercial Work

• Restaurant/retail buildouts
• Tenant improvements
• Higher margins, longer projects
• Professional clients

Entity B (S-Corp or LLC): Residential Work

• Homeowner projects
• Smaller, faster jobs
• Different risk profile

Benefits:

• Liability isolation (commercial claims don't affect residential business)
• Specialized marketing (different brands for different markets)
• Separate financials (track profitability by segment)
• Tax optimization (different salary structures if appropriate)

Costs:

• Additional entity fees ($1,000-2,000/year per entity)
• More complex accounting
• Requires proper inter-company documentation

Worth it if: Revenue exceeds $1.5M-$2M and work types are significantly different.

Des Moines-Specific Restaurant/Retail Opportunities in 2026

Where the action is:

East Village Continued Growth

Current development:

• Multiple new restaurant concepts planned
• Existing space renovations ongoing
• Mixed-use developments adding retail

Contractor opportunities:

• Tenant improvement work
• Restaurant equipment installation
• Adaptive reuse projects (converting old buildings)

Average project size: $200,000-$450,000

Western Gateway Development

Major growth area:

• New apartment buildings with ground-floor retail
• Stand-alone restaurant buildings
• Entertainment district development

Contractor opportunities:

• Ground-up restaurant buildings
• Multi-tenant retail strips
• Adaptive reuse of existing structures

Average project size: $350,000-$800,000

Ingersoll Avenue Revitalization

Ongoing transformation:

• Historic building renovations
• New restaurant concepts
• Retail space upgrades

Contractor opportunities:

• Historic restoration work (special tax credits available)
• Interior buildouts maintaining historic character
• Modern amenities in old buildings

Average project size: $150,000-$350,000

Bonus: Historic preservation tax credits (up to 20% federal, 25% Iowa) if buildings qualify.

Jordan Creek Corridor (West Des Moines)

Continued expansion:

• Restaurant additions
• Retail pad sites
• Entertainment venues

Contractor opportunities:

• Ground-up construction
• Tenant improvements in existing buildings
• Expansion projects

Average project size: $400,000-$1,200,000

Grimes Gateway District

Rapid development:

• Mixed-use with retail/restaurant
• Pad sites along Gateway Drive
• Medical/professional with ground-floor retail

Contractor opportunities:

• New construction
• First-time tenant buildouts
• Owner-occupied restaurant buildings

Average project size: $250,000-$600,000

Learn about Grimes development opportunities.

Tax Trap #1: Improper Job Costing for TI Work

Tenant improvement (TI) work has unique accounting requirements:

The Problem

Generic accounting treatment:

• Record total contract amount as revenue
• Record total costs as expenses
• Calculate profit at completion

Misses critical details:

• Landlord contribution (TI allowance) vs. tenant-paid
• Reimbursable vs. fixed-price elements
• Retention holdbacks
• Landlord approval delays affecting payment

The Correct Approach

Track job costs by funding source:

Example project: $400,000 restaurant buildout

Funding sources:

• Landlord TI allowance: $180,000
• Tenant contribution: $220,000

Job costing structure:

• Code costs by area (kitchen, dining room, bar, bathrooms)
• Track against budget by funding source
• Separate invoicing for landlord vs. tenant payments
• Monitor approved change orders by payor

Why this matters:

• Landlord payments often slower (approval process)
• Tenant may run out of money mid-project
• Need to track who owes what
• Affects cash flow projections

Contractors who don't track this:

• Can't explain why they're not getting paid
• Don't know who to chase for payment
• Can't identify overruns by funding source
• Make poor decisions on change orders

Tax Trap #2: Sales Tax on Restaurant Equipment

Iowa sales tax on restaurant buildouts is complex:

The Rules

Subject to sales tax:

• Restaurant equipment (ovens, ranges, refrigerators)
• Furniture (tables, chairs, booths)
• Some fixtures (if not affixed to building)

Exempt from sales tax (if contractor is installing):

• Materials incorporated into real property
• Labor to install materials
• Built-in millwork and cabinetry

The Gray Areas

Booth seating:

• Built-in booths: Real property (exempt)
• Freestanding booths: Furniture (taxable)

Bar:

• Custom-built bar as part of building: Real property (exempt)
• Purchased bar equipment: Taxable

Kitchen equipment:

• Built-in (hood, plumbing connections): Real property (exempt)
• Free-standing (ranges, ovens): Taxable

The Contractor Mistake

Wrong approach:

• Treat entire contract as labor/materials (exempt)
• Don't collect sales tax
• Iowa finds out during audit
• Contractor is liable for uncollected tax + penalties

Right approach:

• Separate contract into real property vs. tangible property
• Collect sales tax on taxable portions
• Maintain clear documentation
• Issue separate invoices if needed

Example:

$300,000 restaurant buildout:

• Construction/installation: $240,000 (exempt)
• Equipment and furnishings: $60,000 (taxable)
• Sales tax due: $4,200 (7% Iowa)

Contractor must collect $4,200 from client and remit to state.

If contractor doesn't:

• Iowa assesses $4,200 tax against contractor
• Plus penalties (5-25%)
• Plus interest
• Total bill: $5,040-$6,300

Learn about sales tax compliance.

Tax Trap #3: Payment Application and AIA Billing

Restaurant/retail projects often require AIA billing format.

What It Is

AIA G702/G703:

• Standardized application for payment
• Required by most landlords, lenders, architects
• Breaks down costs by category
• Tracks stored materials, completed work, retention

The Tax Implications

Proper AIA billing affects:

• Revenue recognition timing
• Job cost accuracy
• Cash flow projections
• Financial statement accuracy

Example problem:

Contractor bills $100,000 on AIA application:

• Completed work: $85,000
• Stored materials: $15,000
• Less 10% retention: -$10,000
• Net amount due: $90,000

Generic accountant records:

• Revenue: $100,000
• Cash received: $90,000
• Thinks: "Why is cash $10,000 short?"

Correct treatment:

• Revenue (percentage of completion): Depends on total contract and work done
• Retention (accounts receivable): $10,000 separate tracking
• Cash received: $90,000 (correct)

If not tracked correctly:

• Financial statements wrong
• Tax return wrong
• Can't explain cash position
• Don't know when retention will be released

Tax Trap #4: Related Party Transactions

Some contractors work with family or partner developers:

The Scenario

Contractor's brother-in-law owns commercial buildings. Contractor does all his restaurant/retail buildouts.

Potential problems:

• Below-market pricing (IRS issue)
• Above-market pricing (if building owner deducting costs)
• No written contracts
• Casual payment terms
• Mixed business and personal transactions

The Rules

IRS scrutinizes related party transactions:

• Must be at arm's length (market rates)
• Must have written agreements
• Must have proper documentation
• Can't shift income to lower-tax family members inappropriately

Example problem:

Contractor does $180,000 buildout for brother's restaurant:

• Market rate: $180,000
• Actual charge: $120,000 (helping out family)
• IRS: "That's a $60,000 gift subject to gift tax"

Or worse:

Contractor charges $240,000 for $180,000 work:

• Brother deducts $240,000 (overstated)
• Contractor reports $240,000 revenue (inflated)
• Both at risk for audit

The Solution

Always use market rates with related parties:

• Get competitive bids to establish market pricing
• Document everything in writing
• Maintain arm's length transactions
• Keep business and personal completely separate

The Performance Financial Restaurant/Retail Contractor Service

We specialize in helping Des Moines commercial contractors maximize profitability on restaurant and retail projects.

What We Provide

Job Costing Excellence:

• Proper TI allowance tracking
• Funding source accounting
• Progress billing optimization
• Retention monitoring

Tax Strategy Implementation:

• Cost segregation analysis
• Section 179D coordination
• QIP and bonus depreciation optimization
• Multi-entity structuring if beneficial

Sales Tax Compliance:

• Proper classification of equipment vs. real property
• Sales tax calculation and collection
• Audit defense documentation
• Compliance with Iowa rules

Cash Flow Management:

• AIA billing support
• Draw schedule coordination
• Retention release tracking
• Landlord/tenant payment timing

Strategic Planning:

• Contractor-as-developer analysis
• Real estate investment opportunities
• Entity structure optimization
• Exit and succession planning

Our Des Moines commercial contractor services extend throughout the metro including West Des Moines, Ankeny, Johnston, Clive, and Grimes.

Learn from successful commercial contractors like Des Moines Commercial Builders, Metro Restaurant Contractors, Retail Space Solutions, Gateway Commercial Construction, and Iowa Tenant Improvement Specialists who optimize their restaurant and retail work for maximum profitability and minimum taxes.

Don't treat restaurant/retail work like residential remodeling. Capture the specialized tax benefits available to commercial contractors.

Schedule your commercial contractor tax strategy session today →

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