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Did the IRS issue new TPR compliance safe harbor rules governing the retail and restaurant industries?

Revenue Procedures Tangible Property Regs
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Peter J. Scalise
Yes, on November 20, 2015, the Internal Revenue Service (hereinafter the “Service”) issued new administrative authority governing the Tangible Property Regulations (hereinafter “TPR”) in connection to the safe harbor rules for the retail and restaurant industries. More specifically, the newly released Revenue Procedure 2015-56 (hereinafter “Rev. Proc. 2015-56) provides 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:

 Deductible pursuant to I.R.C. § 162(a);
 Requires capitalization treatment as an improvement pursuant to I.R.C. § 263(a); or
 Requires capitalization treatment as the costs of property produced by the taxpayer for use in its trade or business meets the requirements as set forth under I.R.C. § 263A.

Clearly, the scope and application of Rev. Proc. 2015-56 is to reduce disagreements regarding the deductibility or capitalization treatment of remodel-refresh costs incurred by members of the retail and restaurant industries. However as a caveat, the applicability of the safe harbor rules under Rev. Proc. 2015-56 excludes other industries that incur similar costs including but not limited to hotels, casinos, theaters, theme parks, and country clubs.

The safe harbor rules permit 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 defined within Rev. Proc. 2015-56. The taxpayer must then capitalize and recover through depreciation deductions the remaining 25% of the project costs. Furthermore, Rev. Proc. 2015-56 provides a detailed, non-exclusive listing of the “qualified costs” eligible for the safe harbor along with a listing of those costs that are not “qualified costs”.

The Retail Industry Leaders Association (hereinafter the “RILA”) enthusiastically welcomed the new safe harbor rules from the Service regarding the deductibility treatment for qualified costs in connection to store remodels, repairs, and refreshes. Christine Pollack, the Vice President of Government Affairs at RILA indicated that "retailers welcome this safe harbor rule, which helps to ensure that federal tax policy better reflects the real world realities for retail businesses that undergo store remodels and repairs."

For the complete scope and application of Rev. Proc. 2015-56, please utilize the subsequent link to access this form of administrative authority at: www.irs.gov/pub/irs-drop/rp-15-56.pdf
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