New retail and restaurant remodel/refresh safe harbor for determining repairs.

• Author: Kay, Sharon A.

A new safe harbor allows retail and restaurant taxpayers to deduct 75% of qualifying expenditures paid or incurred to remodel or "refresh" qualified buildings, and capitalize just 25%. This offers a simple computation for taxpayers that would otherwise need to analyze complicated facts to determine what portion of a remodeling project may be deducted as a repair and what must be capitalized as an improvement. The safe-harbor revenue procedure also covers the application of Sec. 263A, the disposition rules, and general asset account elections for the restaurant and retail locations.

Background

The final tangible property regulations include rules regarding when costs incurred to acquire, produce, or improve tangible property must be capitalized or may be deducted (T.D. 9636), and rules regarding full and partial dispositions of tangible depreciable property and general asset account elections (T.D. 9689). The final regulations generally are effective for tax years beginning on or after Jan. 1, 2014.

Retail and restaurant taxpayers regularly incur expenditures to remodel or refresh retail or restaurant buildings to remain competitive and to improve the customer experience. The new revenue procedure, Rev. Proc. 2015-56, provides a remodel/refresh safe-harbor method for applying the improvement criteria in the tangible property regulations to these projects. The safe harbor is effective for tax years beginning on or after Jan. 1, 2014.

The Safe Harbor

Under the remodel/refresh safe-harbor method, a qualified taxpayer treats 75% of its qualified costs paid during the year as Sec. 162 repair expenses and treats the remaining 25% of the qualified costs as an improvement under Sec. 263(a) and Sec. 263A that is to be depreciated under Sec. 168.

To be qualified, a taxpayer must have an applicable financial statement as defined in Regs. Sec. 1.263(a)-1(f)(4). Therefore, taxpayers without audited financial statements are generally not eligible. Qualified taxpayers include those:

* In the trade or business of selling merchandise to customers at retail that conduct activities within North American Industry Classification System (NAICS) codes beginning with 44 or 45 (but excluding certain NAICS codes such as automotive dealers, motor vehicle dealers, gas stations, manufactured home dealers, and nonstore retailers);

* In the trade or business of preparing and selling meals, snacks, or beverages to customer order for immediate on-premises and/or...