Opportunity for Restaurant/Retail Industry to Accelerate Refresh/Remodel Deductions
By Ryan J. Vaughan
January 8, 2020
On December 20, 2019, President Trump signed into law The Further Consolidated Appropriations Act (H.R. 1865, PL 116-94), (the “Act”), which included several technical corrections to the Tax Cuts and Jobs Act of 2017 (the “TCJA”).
Notably, the Act did not include a technical correction to the TCJA addressing the drafting error which classified Qualified Improvement Property as 39-year property, as opposed to the previous 15-year property treatment. However, there is an opportunity for retail and restaurant taxpayers to accelerate the deductions related to refresh and remodel costs. Under Revenue Procedure 2015-56, a safe harbor election related to the Tangible Property Regulations creates an opportunity for retail, restaurant, and property owners in these industries to deduct 75% of remodel/refresh costs immediately as repair costs and depreciate the remaining 25% over the depreciable life (39 years).
This safe harbor applies to retail, restaurants, and owners of qualified property leased by taxpayers with applicable financial statements incurring qualified refresh and remodel costs. A remodel/refresh project means a planned undertaking by a qualified taxpayer on a qualified building to alter its physical appearance and/or layout.
A qualified building means each building unit of property used by a qualified taxpayer for selling merchandise to customers at retail, or primarily for preparing and selling food or beverage to customers for immediate consumption on- and/or off-premise.
Remodel/refresh costs are amounts paid by a qualified taxpayer for remodel, refresh, repair, maintenance, or similar activities performed on a qualified building as part of a remodel/refresh project. A qualified taxpayer is taxpayer who has applicable financial statements; is in the trade or business of retail, preparing and selling meals, snacks, or beverages, and/or leases a qualified building to a retail business or restaurant; and conducts business under the applicable NAICS codes 44, 45, or 722.
Example: A qualified taxpayer owns 10 qualified retail locations. Upon review, the client anticipates spending $100,000 in qualified remodel/refresh costs for each location for each of the next 10 years.
For year 1, taxpayer would prepare Form 3115 to adopt the safe harbor under Rev Proc 2015-56 resulting in $75,000 in deductions, with the remaining $25,000 to be capitalized and depreciated over 39 years. This results in an accelerated tax deduction of approximately $73,000 in year one. The accelerated deductions of $73,000 would repeat for each of the next nine years.
Mazars USA LLP can help determine the applicability of Rev Proc 2015-56 to your situation, prepare Form 3115 to adopt the safe harbor, and prepare the applicable calculation to support the safe harbor each year.
Please contact your Mazars USA LLP professional for additional information.