On November 19, 2015, the Internal Revenue Service (IRS) issued industry-specific guidance under Revenue Procedure (Rev. Proc.) 2015-56 for the retail and restaurant industries as it relates to the application of the Tangible Property Regulations. This guidance includes a safe harbor method of accounting in determining whether expenditures paid or incurred by a qualified taxpayer in remodeling or refreshing a qualified building are deductible under § 162(a) or must be capitalized as improvements under § 263(a) or § 263(A). If the qualified taxpayer is employing the safe harbor for the remodel-refresh of a qualified building, the taxpayer may allocate 75% of the costs as a current deduction and 25% to a capital account to be depreciated.
A taxpayer has to be a qualified taxpayer and be performing the remodel-refresh on a qualified building. As such, qualified taxpayers with qualified buildings will have the option of employing the remodel-refresh safe harbor without having to go through the arduous task, a factual intensive analysis and oftentimes controversial between the taxpayer and IRS, of determining whether the expenditures are capital in nature or an expense in light of the improvement standards (i.e., betterment to the unit of property, restore a unit of property, or adapt a unit of property to a new or different use).
The remodel-refresh safe harbor is elected by filing an accounting method change and will apply to all qualified costs incurred within the tax year.
Partial Disposition Elections
If a taxpayer made a partial disposition election for the building in the past, the partial disposition election must be revoked before the safe harbor may be adopted for prior year costs. The partial disposition election may be revoked by filing an amended return (if the statute is open) or an accounting method change for the first or second taxable year beginning after December 31, 2013. If the partial disposition election is not revoked, the safe harbor election may be adopted on a cut-off method (i.e., No § 481 adjustment).
Rev. Proc. 2015-56 is effective for tax years beginning on or after January 1, 2014. The automatic accounting method change (Form 3115) to adopt the Rev. Proc. must be filed with the first or second tax year after December 31, 2013.
Because many retailers and restaurants have already filed “repair” and disposition method changes, these taxpayers will need to carefully weigh their own situation against the remodel-refresh safe harbor in deciding if they are better off with or without it.
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