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Updating Your Retail or Restaurant Space? What You Need to Know About IRS Revenue Procedure 2015-56

Retail|Tax

By Carl Scharf

It appears that everywhere we look businesses operating in the retail and restaurant industry are remodeling or refreshing their space in order to stay competitive and attractive to customers.  And because these remodeling projects often involve making improvements to many different building components, analyzing what costs can be deducted vs. capitalized can be a complicated task.  As a result, the IRS recently released Revenue Procedure 2015-56, aiming to reduce disputes by creating a safe harbor (or simplified) method for deducting and capitalizing remodel-refresh costs.

How the safe harbor works:

IRS Revenue Procedure 2015-56

The safe harbor permits a qualified retailer or restaurant to deduct 75% of the qualified costs incurred while performing a remodel-refresh project on a qualified building; the remaining 25% of the project costs must be capitalized and recovered through depreciation.

The revenue procedure also provides detailed definitions and nonexclusive lists of the terms above, as well as the following notable exceptions:

  • The safe harbor does not apply to auto dealers, other motor vehicle dealers or gas stations;
  • Qualified costs exclude costs incurred during a temporary closing for more than 21 consecutive days;
  • A remodel-refresh project does not include adapting more than 20% of the total square footage of your building for a new or different use;
  • A remodel-refresh project does not include costs incurred to rebrand a building within two years following an acquisition

In addition to the detailed definitions and nonexclusive listings of eligibility, the revenue procedure contains numerous conditions for implementing the accounting method change. 

Contact us to better understand how this revenue procedure may help your business and the implementation process required and visit the Our Thoughts On blog for more articles pertaining to the retail industry

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