The Internal Revenue Service has provided retailers and restaurateurs with a safe harbor of accounting for expenditures related to repairs, remodeling and refreshes.
Revenue Procedure 2015-56 provides certain taxpayers engaged in the trade or business of operating a retail establishment or a restaurant with a safe harbor method of accounting for determining whether expenditures paid or incurred to remodel or refresh a qualified building are deductible, must be capitalized as improvements, or must be capitalized as the costs of property produced by the taxpayer for use in its trade or business. The revenue procedure also provides procedures for obtaining automatic consent to change to the safe harbor method of accounting permitted by this revenue procedure.
Under the safe harbor, retailers are now able to apply a percentage (75 percent) to a base dollar amount of expenditures. The resulting amount will be considered deductible immediately while the remaining percentage (25 percent) will be capitalized and depreciated over time.
The safe harbor rule applies immediately to tax filings for 2014 and tax years beyond.
The Retail Industry Leaders Association, a trade group representing the retail industry, welcomed the safe harbor. The release of the revenue procedure concludes more than four years of negotiations between RILA, its member companies and the IRS aimed at eliminating the confusion about which costs of store remodels and refreshes should be expensed and deducted immediately, or must be capitalized and depreciated over time.
The group noted that retailers have substantial tangible property investment in the form of improvements to their stores, such as replacing floor and ceiling tiles, updating hardware and displays, and repainting and plastering walls. Because most retailers refresh their stores every five to 10 years, major retailers may refresh dozens if not hundreds of store locations each year with expenditures that could easily run into the tens of millions of dollars.
“Retailers welcome this safe harbor rule, which helps to ensure that federal tax policy better reflects the real world realities for retail businesses that undergo store remodels and repairs,” said RILA vice president for government affairs Christine Pollack in a statement. “The repair regulations are key to determining how expenditures made to refresh or remodel stores should be expensed. RILA members have engaged in a constructive dialogue with the IRS for several years and we’re pleased to finally see this safe harbor become law.”
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