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Tax Season 101 for Restaurants

March 2, 2016

IRS Provides Safe-Harbor Method of Accounting for Retailers and Restaurants

On November 20, 2015, the IRS released Revenue Procedure 2015-56, which provides a safe harbor method of accounting for retail and restaurant companies for purposes of determining the amount of "refresh/remodel" costs that are deductible under IRC §263(a) and under the recently released tangible  property  regulations.

Qualifying taxpayers that are permitted to use the safe harbor method include most restaurants and retailers. Qualified taxpayers must have an applicable financial statement (AFS) as defined in Reg. §1.263(a)-1 (f)(4).  Generally, an AFS is a certified audited financial  statement.

This revenue procedure provides retail and restaurant companies relief from the complicated facts and circumstances analysis that was otherwise required under the recently released tangible property regulations.  The revenue procedure is effective  for tax years beginning on or after January  1, 2014.


The Revenue Procedure's objective is to reduce disputes regarding the deductibility or capitalization of remodel-refresh costs. The safe harbor method minimizes the need to perform a detailed factual analysis to determine whether each remodel­ refresh cost incurred during a remodel-refresh project is for repair and maintenance or for an improvement.

A remodel-refresh  project is defined as a planned undertaking by a  qualified taxpayer on a qualified building to alter its physical appearance and/or layout for one  of the following purposes:

  • To maintain a contemporary and attractive appearance;
  • To more efficiently locate retail or restaurant functions and products;
  • To conform to current retail or restaurant building standards and practices;
  • To standardize the consumer experience if a qualified taxpayer operates more than one qualified building;
  • To offer the most relevant and popular goods within the industry; or
  • To address changes in demographics by changing product or service offerings and their presentations.

Section 4.05 of the revenue procedure provides detailed descriptions of various "remodel or refresh" costs. These costs include paining interior walls, adding permanent wall coverings, replacing kitchen fixtures, relocating kitchen areas, management space or similar areas, etc. The revenue procedure also defines excluded costs that must be capitalized.

Assuming the taxpayer qualifies to use the safe harbor method, the rules permit a taxpayer to deduct currently 75% of the qualified refresh-remodel costs incurred during the taxable year. The taxpayer must capitalize the remaining 25% of such costs. While a taxpayer would ordinarily have to separately calculate the amount of section 263A costs related to capitalizable projects, the safe harbor is applicable for purposes of both IRC §263(a) and §263A. Therefore, the taxpayer is not required to separately apply the uniform capitalization rules after applying the safe harbor to determine the deductible portion of the remodel-refresh costs. The ability to deduct 75% of refresh-remodel costs through a safe-harbor  procedure is an amazing benefit.

The change to the remodel-refresh safe harbor method is a change in accounting method and requires the taxpayer to use the automatic change procedures of Revenue Procedure 2015-13 and timely file a Form 3115. For taxpayers that previously adopted the tangible  property regulations, the revenue procedure  provides the ability for a taxpayer to file another accounting method change to adopt the safe harbor method for the taxpayer's first or second taxpayer year beginning  after December 31, 2013.

What  Does CohnReznick Think?

This Revenue Procedure provides an incredible opportunity for qualified taxpayers to: (1) reduce the complexity otherwise associated with the application of the tangible property regulations; (2) reduce potential IRS controversy by following a safe harbor methodology that

is "blessed" by the IRS; and (3) deduct a significant amount of annual costs related to

refresh/remodeling  activities.


For more information, please contact Richard Shevak, Director, at or 862-245-5029.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on  it.