Accounting for remodel and refresh expenditures can now be easier for certain retailers and restaurants, thanks to IRS Revenue Procedure 2015-56. Effective since January 1, 2014, the procedure provides a safe-harbor method of accounting for remodel/refresh expenditures for qualified buildings.
In the past, distinguishing remodel/refresh costs to be capitalized and depreciated over time from those to be expensed as repairs and maintenance was a contentious process for restaurants and retail establishments. This action by the IRS has helped minimize disputes and simplify accounting for taxpayers. Be aware, however, that applying the safe harbor is an accounting method change, which must be filed accordingly. With its adoption, the safe harbor will apply to all remodeling/refreshing done by the taxpayer. Taxpayers who want to apply the remodel-refresh safe harbor on a project-by-project basis must secure permission to use another method of accounting from the IRS.
Through adoption of the safe harbor, retailers and restaurants with an applicable financial statement (qualified taxpayers) are able to take 75 percent of qualified costs as an immediate deduction.
The remaining 25 percent of qualified costs is capitalized and depreciated over time. The depreciable life of this portion can be 15-year real property under qualified leasehold improvements, qualified restaurant property, or qualified retail property, to the extent the taxpayer can substantiate that the capital expenditure qualifies as one of these types of property. Otherwise, the balance is treated as 39-year nonresidential real property. Smaller taxpayers without applicable financial statements should instead apply tangible property regulations.
Traditional retailers and restaurants typically qualify for the safe harbor. Exclusions can include some of the following examples: automotive dealers, gas stations and attached convenience stores, manufactured home dealers, non-store retailers, hotels, amusement parks, theaters, casinos, country clubs, caterers, and mobile food services.
So, is this safe harbor right for you?
By applying this safe harbor, as a retail or restaurant taxpayer you can deduct 75 percent of qualifying expenditures paid or incurred to remodel or refresh qualified buildings. The computation is a simple one: you will not need to analyze facts to determine what portion of a remodeling project may be deducted as a repair and what must be capitalized as an improvement.
To elect the method, you must file accounting method change number 222. If you need an audit and frequently have refresh/remodel expenses, then we recommend you first contact your CPA to determine if you want to apply this safe harbor.