IRS Releases Remodel Safe Harbor for Restaurants and Retailers

On November 19, 2015, the IRS issued Revenue Procedure 2015-56, which provides a safe-harbor method of accounting for most retailers and restaurants that incur refresh or remodel expenditures on qualified buildings. This procedure is significant as restaurants and retailers can now expense 75 percent of qualified expenses, as opposed to depreciating the costs over 15 or 39 years. 

Deductible expenses include everything from painting interior walls to making changes to exterior facades. Additional examples include:
  • 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

In general, most restaurant and retail buildings are eligible, including leased spaces; however, a remodel must meet certain criteria to qualify for the safe harbor. The project must alter the physical appearance and/or layout of a qualified building for an eligible purpose, such as maintaining a contemporary and attractive appearance or standardizing the consumer experience across multiple units. 

The Revenue Procedure is a welcome safe harbor to address unique remodel issues and challenges in the retail and restaurant industries. Taxpayers can start taking advantage of this change for tax years beginning on or after January 1, 2014. 

For more information, read BDO’s Federal Tax Alert or reach out to Phil Hofmann at phofmann@bdo.com. And be sure to follow us on Twitter at @BDORestaurant to keep up with the practice's latest thoughts.
 

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