Retailer and restaurant remodel-refresh safe harbor: frequently asked questions.

• Author: Miller, Marla K.

On Nov. 19, 2015, the IRS issued Rev. Proc. 2015-56, which provides certain retailers and restaurants a safe-harbor method of accounting for remodel or refresh expenditures on qualified buildings. Historically, the treatment of remodel and refresh costs has been a contentious examination area. The revenue procedure is intended to reduce disputes over which costs are required to be capitalized and depreciated over time and which costs can be expensed currently as a repair.

Through the adoption of the safe harbor, retailers and restaurants with an applicable financial statement (qualified taxpayers) are able to take 75% of qualified costs as an immediate deduction. The remaining 25% of qualified costs is capitalized and depreciated over time. This revenue procedure is effective immediately for tax years beginning on or after Jan. 1, 2014. Taxpayers have had significant questions regarding the safe harbor. Below are some of the most frequently asked questions:

Q: Do all retailers and restaurants qualify for the safe harbor?

A: Traditional retailers (North American Industry Classification System (NAICS) codes beginning with 44 and 45) and restaurants (NAICS codes within 722) generally qualify. However, certain industries have been specifically excluded, including automotive dealers, gas stations (including attached convenience stores), manufactured home dealers, nonstore retailers, hotels, amusement parks, theaters, casinos, country clubs, caterers, and mobile food services. Determinations are made on the basis of the taxpayer's primary activity.

Q: What buildings qualify under the safe harbor?

A: The safe harbor applies to buildings primarily used for selling merchandise to retail customers and buildings used to prepare and sell food or beverages to customer order for immediate on-premises and/or off-premises consumption. This category excludes administrative office buildings, distribution centers, and off-premises food preparation facilities. Leased buildings can qualify for lessors and lessees.

Q: What are qualified costs?

A: Qualified costs are a qualified taxpayer's remodel-refresh costs less a qualified taxpayer's excluded remodel-refresh costs.

Q: What costs are excluded remodel-refresh costs?

A: Specifically excluded remodel and refresh costs include, but are not limited to, the following: Sec. 1245 property, intangibles (including software), land, land improvements, initial acquisition or lease of the qualified building, rebranding...