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National Restaurant Association - New IRS rules simplify remodeling deductions

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New IRS rules simplify remodeling deductions

Confused about how federal tax law treats your spending on restaurant repairs, remodels and refreshes?

A new Internal Revenue Service announcement will make it easier for qualified restaurants to figure out whether you can expense and deduct the spending immediately, or capitalize and depreciate it over time.

After years of discussions with the National Restaurant Association, restaurant companies and retailers, the IRS last month issued IRS Revenue Procedure 2015-56.  The procedure provides a safe harbor method of accounting for costs incurred by qualified restaurateurs and retailers during their business’ remodels, repairs and refresh projects. The new method allows businesses to deduct 75 percent of qualified costs and capitalize the remaining 25 percent over time.

The changes should cut costs and confusion, tax experts say.

"The recent IRS guidance should be welcome news for many restaurant businesses,” said Patrick Heck of Capitol Tax Partners, a tax regulatory and legislative consulting firm in Washington, D.C. He said the previous process was overly complicated and often expensive for both the taxpayer and the IRS. The new safe harbor will simplify the process and provide more certainty to qualified restaurant businesses.

Until now, restaurateurs have had to do extensive factual analysis to try to understand whether refresh-remodel expenditures should be treated as repairs, maintenance or replacements.

Joshua Brady, a corporate tax attorney at Washington, D.C.-based Morgan, Lewis & Bockius LLP, said remodeling costs have been a point of controversy between taxpayers and the IRS for years. He noted that the new rules apply to such extensive fixes as kitchen remodels, dining-area refreshes and replacements of walls, doors, windows and HVAC systems. Restaurateurs who are planning refreshes and remodels can use the new rules immediately, and even apply for costs they’ve incurred since Jan. 1, 2014.

“Restaurateurs should analyze the costs they’ve incurred on recent remodeling projects and the costs they anticipate from future ones,” he said. “If the costs are subject to the new 75-percent deduction rules, they should consider electing into them.”

Consult your tax advisor to see if you can take advantage of the new accounting method. Certain restrictions apply. For example, restaurant companies must have an “applicable financial statement” to qualify, and will be required to file a new Form 3115 with the IRS.

Philip Hofmann, senior tax director for finance consultant BDO USA, notes that the rules apply only to spending on building or property fixes, rather than personal property or land improvements. Restaurateurs must follow certain standards for documentation, he said.

The National Restaurant Association was instrumental in getting the IRS to examine the rules as part of the agency’s “Industry Issue Resolution” process. Restaurants typically renovate every six to eight years, according to NRA research.

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