In order to reduce disputes regarding the deductibility or capitalization of remodel-refresh costs incurred by qualified retail and restaurant businesses, the IRS issued Revenue Procedure 2015-56 on November 19, 2015. For tax years beginning on or after January 1, 2014, qualified retail establishments and restaurants have the opportunity to take advantage of a safe-harbor method to determine if remodel-refresh expenditures are deductible under IRC §162, or capitalized under IRC §263 or IRC §263A.
If the safe harbor applies, 75% of qualifying remodel-refresh costs are deductible and the remaining 25% of costs must be capitalized.
To qualify for this safe-harbor, taxpayers must have audited financial statements, place the building in a MACRS general asset account (GAA) and may not make a partial disposition election.
Additionally, because the safe harbor applies to the entire building unit, the improvement rules do not need to be applied to each building structure or each building system as required in the tangible property regulations.
An automatic accounting method change might be required and other restrictions apply.