The IRS recently issued Revenue Procedure 2015-56, which gives operating retail or restaurant businesses a safe harbor method for deducting and capitalizing remodeling or refresh project costs on qualified buildings (owned or leased).
Effective for tax years beginning on or after January 1, 2014, this safe harbor method simplifies the previously issued Tangible Property Regulations by minimizing the need to perform a detailed factual analysis to determine whether costs incurred during a remodel-refresh project are repair and maintenance expenses, or capitalized improvements. In addition, because the safe harbor method is applied to the entire building as a single unit of property, it also eliminates the need to apply these rules separately to each building structure and each building system.
Per the Revenue Procedure, a “remodel-refresh project” is generally described as “a planned undertaking by a qualified taxpayer on a qualified building to alter its physical appearance and/or layout”… “to maintain a contemporary and attractive appearance, to more efficiently locate retail or restaurant functions and products, to conform to current retail or restaurant building standards and practices, to standardize the consumer experience if a qualified taxpayer operates more than one qualified building, to offer the most relevant and popular goods within the industry, or to address changes in demographics by changing product or service offerings and their presentations.”
Taxpayers who qualify for safe harbor treatment will be able to deduct 75% of qualified refresh-remodel project costs (including indirect costs) in the year they are incurred, with the remaining 25% being capitalized as improvements to the building. The safe harbor excludes tangible personal property, land, site work, and other specific improvements. Taxpayers are not allowed to perform partial asset dispositions in the same year as the safe harbor. Simply, this means capitalized building property disposed or abandoned as a result of the remodel-refresh project cannot be disposed for income tax purposes. The remaining adjusted basis of the relinquished assets may have otherwise generated a tax loss.
Under this Revenue Procedure taxpayers must file an automatic accounting method change to use the safe harbor for the first time. This Revenue Procedure may significantly benefit retail and restaurant businesses incurring remodel-refresh project costs on owned or leased property. Taxpayers should contact a Bennett Thrasher professional to evaluate if their business qualifies for the safe harbor and how to comply with its requirements.