NEW 75/25 TAX WRITE-OFF PLAN HELPS RESTAURANTS AND RETAIL STORES REFRESH AND REMODEL
Confronting complaints about the complexity of the “repair regs”, the IRS announced that restaurants and retail stores may now deduct 75% of remodeling costs and capitalize the other 25% under a “safe harbor” rule. The new remodeling cost rule also has a retroactive effective date, allowing taxpayers to apply it for taxable years beginning on or after January 1, 2014. Why did the IRS make the change? The application of the existing capital improvement rules “can be complex because remodel/refresh projects vary so much in frequency, quality, and degree,” the IRS noted. As a result, the IRS and taxpayers are spending too much time trying to sort out whether the costs for upgrading a building should be characterized as repairs, maintenance, or an improvement.
Deduction v. Capitalization
Taxpayers may deduct amounts paid for repair and maintenance of business property but must capitalize amounts paid to “improve” a unit of property, such as walls, floors, partitions, and ceilings. The repair regulations define “improvement” as a betterment, restoration, or adaptation of the property to a new or different use. Specifically, the regulations distinguish between refreshing property, which is deductible, versus remodeling property, which must be capitalized and depreciated over time. For example, cosmetic and layout changes to a store’s interiors, relocating lighting, moving walls, repainting and cleaning would be deductible repairs. On the other hand, rebuilding interior and exterior facades, replacing vinyl floors with ceramic flooring, rebuilding walls, and installing new lighting fixtures would be considered capital improvements.