The IRS today released an advance version of Rev. Proc. 2015-56, providing a “safe harbor” method of accounting for taxpayers engaged in the trade or business of operating either a retail establishment or a restaurant for purposes of determining whether expenditures paid or incurred to remodel or refresh a qualified building are:
Rev. Proc.2015-56 [PDF 180 KB] also provides procedures for obtaining automatic consent of the IRS Commissioner to change to the safe harbor method of accounting permitted by this revenue procedure.
The following provides an initial brief discussion of the safe harbor measures as provided in the revenue procedure.
Rev. Proc. 2015-56 aims to reduce disputes regarding the deductibility or capitalization of remodel-refresh costs incurred by members of the retail and restaurant industries. The costs eligible for the safe harbor are those incurred in a typical remodel-refresh project for section 1250 property that often are subject to controversy regarding the proper treatment for federal income tax purposes.
Significantly, however, the safe harbor is inapplicable to other industries that incur similar costs, including those primarily involved in operating hotels, casinos, theaters, theme parks, and country clubs.
The safe harbor permits a current deduction of 75% of the “qualified costs” incurred by a “qualified taxpayer” in the course of performing a “remodel-refresh project” on a “qualified building,” as those terms are defined in the revenue procedure. The taxpayer must capitalize and recover through depreciation the remaining 25% of the project costs. This safe harbor applies for purposes of both sections 263(a) and section 263A, meaning the taxpayer need not separately apply the uniform capitalization rules after applying the safe harbor to determine the deductible portion of the remodel-refresh costs.
Rev. Proc. 2015-56 provides a detailed, non-exclusive listing of the “qualified costs” eligible for the safe harbor, as well as a listing of those that are not. Among the exclusions are costs incurred during a “temporary closing,” defined as the closing of a qualified building during normal business hours for more than 21 consecutive calendar days.
The revenue procedure contains a number of conditions for using the remodel-refresh safe harbor method of accounting (including documentation requirements), as well as specific rules regarding the interaction of the safe harbor with the disposition rules contained in the regulations under sections 167 and 168.
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