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The IRS has attempted to mitigate disputes under the new Tangible Property Regulations (TPR) by coming out with Revenue Procedure 2015-56 for retail & restaurant remodel-refresh projects. Under the new procedure's safe harbor, eligible taxpayers are permitted to deduct, in the year of remodel or refresh, 75% of all eligible costs and capitalize the remaining 25%. This can be done without further analysis under the tangible repair regulations (TPRs). The safe harbor applies to all eligible costs and must be used going forward on all eligible costs incurred unless and until IRS approval is obtained for an accounting method change.
Although favorable to many taxpayers, the TPRs have increased complexity and uncertainty for many. This safe harbor hopes to alleviate some of this as it applies to the entire building and eliminates the need to apply the rules separately to each building structure and each building system. No analysis is required to determine if the project adapts the property to a new or different use as long as the new or different use is limited to less than 20% of the building. It also eliminates the need for a separate Code Sec. 263A analysis to determine if the remodel-refresh costs and interest need to be capitalized as the 25% is automatically determined to be subject to 263A.
Under the safe harbor, a remodel-refresh project is defined as a planned undertaking to alter a building’s physical appearance and/or layout. This includes activities to maintain an attractive appearance, more efficiently locate functions and products, conform to current building standards, standardize the consumer experience among locations, offer the most relevant and popular goods within the industry, or to address changes in demographics by changing product or service offerings and their presentations.
Please note some common costs will not qualify under this procedure. For instance, costs associated with section 1245 personal property (cabinets, counters, etc.), adapting more than 20% of the building to a new or different use, rebranding activities within two years, the initial build-out of a leased building for a new lessee, the initial acquisition or lease of a building, or costs to correct a material defect that existed prior to acquisition.
To see if your retail or restaurant business is eligible and qualifies for the new safe harbor procedures, please contact your RINA representative.