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New Safe Harbor for Retail & Restaurant Industry Could Ease the Compliance Burden Provided by the Tangible Property Regulations

On November 20, 2015, the IRS released Revenue Procedure 2015-56, providing a safe harbor accounting method for costs incurred for remodeling and refreshing restaurant and retail space. The safe harbor is applicable to qualified taxpayers who operate a restaurant or retail establishment and have an applicable financial statement (i.e. Audited Financial Statement).

How does the safe harbor work?

The safe harbor is specific to costs incurred towards remodel-refresh projects on restaurant or retail property. The rules will allow taxpayers to immediately deduct 75% of the “qualified” amount towards remodel-refresh projects while the remaining 25% of the costs will be required to be capitalized and depreciated. Qualified costs generally include all amounts paid during a remodel-refresh project except:

  • Section 1245 property (i.e. tables, chairs)
  • Intangible property or Land
  • The initial acquisition, build-out, production or lease of a qualified building
  • A restoration related to a casualty event, amongst other excluded costs

How the new safe harbor can be a game changer?

When the tangible property regulations became effective for tax years beginning in 2014, it brought many opportunities and challenges for those operating in the restaurant and retail industry. On one hand, there were many new tax deduction opportunities for remodel and refresh projects that are so common in the industry. Such benefits came at the cost of additional procedures and documentation necessary to comply with the regulations. The new safe harbor provides the best of both worlds. Under these new rules taxpayers can deduct 75% of qualified costs associated with refresh-remodel projects without having to undergo a detailed analysis that is both time consuming and costly. The end result is an opportunity for taxpayers to save both time and tax dollars.

Effective Dates

The safe harbor must be made for the qualified taxpayer’s first or second taxable year beginning after December 31, 2013.

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  • Kaz Unalan
  • Director, Tax & Business Advisory Services
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  • Cassie Shearer
  • Director, Tax & Business Advisory Services
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