The IRS has recently issued relief for the restaurant and retail industries in complying with the Tangible Property Regulations.

Revenue Procedure 2015-56 has simplified the application of the tangible property regulations to remodel-refresh projects implemented by taxpayers in the restaurant and retail industry.  It is common for entities in these industries to regularly undertake projects that intend to enhance the customer experience through updates and remodels.  While going through the remodels, there is often a question as to whether the costs should be characterized as repairs and maintenance and expensed or capitalized as an improvement to the taxpayer’s property.

A vast majority of updates to a taxpayer’s building will qualify for the safe harbor, and the taxpayer is not required to own the building that is being remodeled.  Projects that would not be included would be initial build-outs or rebranding within two years of an initial build-out.  However, generally taxpayers in this industry will be able to claim favorable 481(a) adjustments by making this election.  Taxpayers who elect the safe harbor will be required to apply it for all of its qualified remodel costs.

In making the election, a taxpayer would be able to use a simplified method to deduct 75% and capitalize 25% of all qualifying remodel costs.  The capitalized portion will be depreciated as non-residential building or leasehold improvement property.  Because the remodel-refresh safe harbor is considered a change in method of accounting, affected taxpayers will have to file a Form 3115 to make the election.

The change must be made in the first or second taxable year beginning on or after January 1, 2014.  If not already adopted, a taxpayer making this election may also have to make a late election to adopt the general asset accounts (GAA).

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Minimizing your tax footprint can be a significant advantage, especially in competitive industries such as food service and retail. If you would like more information or want to learn how your company can take advantage of this and many more tax benefits, Barnes Dennig wants to help. For additional information, please call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon!