If you work in the retail or restaurant industry, you are probably familiar with the Internal Revenue Service's Industry Issue Resolution (IIR) project that has been underway for the past several years. This long-awaited guidance was released on November 19, 2015, and is intended to provide taxpayers in the restaurant and retail industries with simplified procedures to use in applying the new tangible property regulations and to reduce controversy between taxpayers and the IRS.
What the Guidance Addresses
This guidance addresses the treatment of the remodel-refresh costs for repair, depreciation, and disposition purposes. The guidance provides a safe harbor for treating a portion of a qualified building's remodel or refresh costs as currently deductible. "Remodel-refresh costs" are amounts paid to remodel, refresh, repair or maintain a qualified building as part of a remodel-refresh project. "Remodel-refresh projects" are planned projects to alter a building's physical appearance or layout for one or more purposes such as maintaining an attractive appearance, relocating functions or products, conforming to current market practices, standardizing the customer experience throughout multiple locations, offering the most relevant goods or products within the industry, or addressing a change in demographic by either changing products or presentations. However, while many common projects may be included, the guidance specifically states that solely repainting or cleaning a building is not considered a remodel-refresh project eligible for the safe harbor.
You may qualify to use this safe harbor if you have an Applicable Financial Statement (defined as a financial statement prepared in accordance with U.S. GAAP standards that could be filed with the Security and Exchange Commission; a certified audited financial statement accompanied by a report from an independent CPA firm used for reporting, credit or other significant non-tax purpose; or a financial statement provided to a federal or state agency) and meet one of these two requirements:
You may also qualify if you own or lease a qualified building to a taxpayer engaged in a retail or restaurant business, and that building is used primarily for selling merchandise and/or food or beverages.
Applying for Safe Harbor
To take advantage of the safe harbor, you must first determine if you qualify and then, if qualified, fill out a Form 3115 (Change in Accounting Method) for the first year the safe harbor is to be applied. Once the safe harbor method of accounting is adopted, you must continue to apply the safe harbor to all qualified remodel costs incurred in future years. Because the safe harbor also addresses the disposition and depreciation treatment of qualified buildings, you may be required to make additional elections and method changes to comply with the requirements for accounting for buildings and other assets subject to the safe harbor.