Sharon S Heinz

256-489-1478
3315 Memorial Parkway SW
SharonSHeinz@Comcast.net
SharonHeinzAccounting.com

Majority of Costs to Remodel or Refresh Restaurant and Retail Stores Are Deductible Under
Safe Harbor Accounting Method
Retail stores and restaurants regularly incur expenses to remodel or refresh the establishment in order to stay competitive and remain attractive to customers. However, because
these projects often involve repairs and improvements to many different building components, analyzing what costs can be deducted and what should be capitalized can be a complicated task. Therefore, in Rev. Proc. 2015-56, the IRS is permitting taxpayers engaged in the
trade or business of operating a retail establishment or a restaurant to use a safe-harbor
method of accounting for determining whether expenditures paid or incurred to remodel or
refresh a qualified building are deductible under Sec. 162(a) or must be capitalized under
Sec. 263(a) or 263A.
Under the safe harbor, a qualified taxpayer will treat 75% of qualified costs paid during
the tax year as deductible under Sec. 162 and the remainder 25% as 15-year property costs
for improvements to a qualified building under Sec. 263(a) and as costs for the production of
property for use in the qualified taxpayers trade or business under Sec. 263A.
A qualifying taxpayer must have an applicable financial statement and is defined as being in
the trade or business of (1) selling merchandise to customers at retail (but excluding car dealers, gas stations, manufactured home dealers, and nonstore retailers), (2) preparing and selling meals, snacks, or beverages to customers for immediate on-premises and/or off-premises
consumption (but excluding hotels, civic or social organizations, amusement parks, theaters,
casinos, country clubs, and special food services, such as caterers and mobile food services),
or (3) owning or leasing a qualified building to a taxpayer qualifying under (1) or (2).
Qualified costs are costs incurred in remodel/refresh projects, which include projects to
maintain a contemporary and attractive appearance; locate retail or restaurant functions and
products more efficiently; conform the space to current retail or restaurant standards and
practices; standardize consumer experience if the qualified taxpayer operates more than one
building; offer the most relevant and popular goods within the industry; or address changes
in demographics by changing product or service offerings and their presentations. Remodel/
refresh costs are costs incurred to remodel, repair, refresh, or maintain a building as part of a
project. Rev. Proc. 2015-56 provides a nonexclusive list of 18 types of costs incurred as part
of a remodel/refresh project that are eligible for the safe harbor. These costs include
painting; relocating departments within the existing footprint; making nonstructural changes
to the exterior; and replacing or adding walls, doors, windows, and lighting and plumbing fixtures within the existing footprint of the qualified building. To qualify for the safe harbor, a
taxpayer must have an Applicable Financial Statement and conduct activities within NAICS
codes 44, 45 or 722 with some specific exceptions such as gas stations, automotive dealers
and caterers. In general, a taxpayer may not take partial disposition losses and must also
make a general asset account election for the applicable buildings. Remodel-refresh costs are
amounts paid for remodel, refresh, repair, maintenance or similar activities performed on a
qualified building as part of a remodel-refresh project. Examples include: ! Painting, polishing
or finishing interior walls ! Adding, replacing, repairing, maintaining or relocating permanent
floor, ceiling or wall coverings or kitchen fixtures ! Adding, replacing or modifying signage or
fixtures ! Relocating or changing the square footage of departments, eating areas, checkout
areas, kitchen areas, beverage areas, management space or storage space within the existing
footprint of a qualified building ! Moving, constructing or altering walls within the existing
footprint of a building ! Adding, relocating, removing, replacing or re-lamping lighting fixtures ! Making non-structural changes to exterior facades ! Repairing, maintaining or replacing the roof or a portion of the roof within the existing footprint of a qualified building.
To take advantage of this safe harbor, taxpayers must file Form 3115, Application for Change
in Accounting Method. Taxpayers that adopt this method must use it for all qualifying costs
and cannot change it without the IRSs consent to use another method. In addition, the revenue procedure has special rules for taxpayers that want to adopt the safe harbor and have
elected partial disposition treatment for the same qualifying property under the repair regulations.
The safe harbor rule applies immediately to tax filings for 2014 and tax years beyond. The
safe harbor with over 50 pages of rules may seem a bit overwhelming at first, but this longawaited guidance for retailers and restaurant operators provides an approach that may resolve controversy regarding the analysis of complicated factors related to remodel/refresh
projects for these taxpayers.