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The IRS Giveth, the IRS Limiteth, and the IRS Taketh Away – Retail/Restaurant Remodel-Refresh Safe Harbor

Posted by Robert J. Bauer CPA

Nov 10, 2016 2:56:00 PM

Rev. Proc. 2015-56 established an automatic accounting method change to adopt a safe-harbor method of accounting for remodel-refresh expenditures for qualified taxpayers primarily engaged in retail or restaurant businesses (including certain landlords).  This safe harbor allows qualifying taxpayers to immediately deduct 75% and capitalize 25% of their qualifying remodel-refresh costs.  Sounds great!  But there are several limitations:
  • A business or landlord is a qualified taxpayer only if it has an applicable financial statement (generally, this means an audited financial statement or a 10-k filed with the SEC).
  • A qualifying taxpayer must conduct its activities under specific NAICS codes:
    • 44 or 45; however, automotive/motor vehicle dealers, gas stations, manufactured home dealers, and non-store retailers are excluded.
    • 722; however, hotels/motels, civic organizations, amusement parks, country clubs, and any taxpayer within code 7223 (food service contractors, caterers, and mobile food trucks) are excluded.
  • Landlords qualify if the building they own or lease is leased or sub-leased to a taxpayer that operates under the above NAICS codes.
  • In addition to these major limitations, the Rev. Proc. also contains approximately two pages of specific exclusions.

Huh?

With all of these exclusions and with the tangible property regulations (remember those?) being relative new, there were obviously many questions surrounding this Rev. Proc.  In response, the IRS released fourteen frequently asked questions to help clarify these provisions.  One important aspect of the Rev. Proc. that was explained in the FAQ’s was related to the potential tangible property regulation method changes that would have to be adjusted in order to utilize the remodel-refresh safe harbor method.  Specifically, a taxpayer desiring to make this change is required to revoke and not use partial disposition elections on qualifying property, place certain capitalized costs in general asset accounts (GAAs), adopt the safe-harbor method on a timely filed 3115, and appropriately classify capitalized costs under § 168(e). While these FAQ’s are helpful in providing additional guidance related to this Rev. Proc., for most taxpayers who have not already adopted the safe-harbor method these FAQ’s come too little, too late:

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Topics: tangible assets and repairs, tars, tangible property regulations, tangible property, irs, remodel refresh safe harbor, Rev. Proc. 2015-56





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