In the past, if you needed to refresh your retail store or restaurant, you faced a complicated task of figuring out which costs needed to be capitalized and which were able to be deducted. A new safe harbor reported by The Tax Adviser is changing that.
IRS is allowing qualified taxpayers with a retail store or restaurant to treat 75% of qualified costs paid during the tax year as deductible under Sec. 162 and the remainder as costs for improvements to a qualified building under Sec. 263(a) and as costs for the production of property for use in the qualified taxpayer’s trade or business under Sec. 263A.
Are you a “qualified taxpayer”? Qualified taxpayers are defined as having an applicable financial statement and being in the trade or business of (1) selling merchandise to customers at retail (but excluding car dealers, gas stations, manufactured home dealers, and nonstore retailers), (2) preparing and selling meals, snacks, or beverages to customers for immediate on-premises and/or off-premises consumption (but excluding hotels, civic or social organizations, amusement parks, theaters, casinos, country clubs, and special food services, such as caterers and mobile food services), or (3) owning or leasing a qualified building to a taxpayer qualifying under (1) or (2).
Are your costs “qualified costs”? Qualified costs are defined as costs incurred in remodel/refresh projects, which include projects to maintain a contemporary and attractive appearance; locate retail or restaurant functions and products more efficiently; conform the space to current retail or restaurant standards and practices; standardize consumer experience if the qualified taxpayer operates more than one building; offer the most relevant and popular goods within the industry; or address changes in demographics by changing product or service offerings and their presentations. Remodel/refresh costs are costs incurred to remodel, repair, refresh, or maintain a building as part of a project. Note that costs to solely repaint or clean the building are not included.
If you want to take advantage of this new safe harbor, be sure to file Form 3115, Application for Change in Accounting Method.