IRS offers safe harbor for store repairs, eliminating tax compliance confusion

The Retail Industry Leaders Association on Thursday welcomed a safe harbor rule from the Internal Revenue Service regarding the deduction and capitalization of expenditures related to store remodels, repairs, and refreshes.



The rule, Revenue Procedure 2015-56, comes after more than four years of negotiations between RILA, its members and the IRS. It is aimed at eliminating the substantial confusion that exists about which costs of store remodels and refreshes should be expensed and deducted immediately, or must be capitalized and depreciated over time.




Under the new safe harbor, retailers are now able to apply a percentage (75%) to a base dollar amount of expenditures. The resulting amount will be considered deductible immediately while the remaining percentage (25%) will be capitalized and depreciated over time.



“Retailers welcome this safe harbor rule, which helps to ensure that federal tax policy better reflects the real world realities for retail businesses that undergo store remodels and repairs,” said Christine Pollack, VP for government affairs, RILA. “The repair regulations are key to determining how expenditures made to refresh or remodel stores should be expensed.”



The group noted that retailers have substantial tangible property investment in the form of improvements to their stores, such as replacing floor and ceiling tiles, updating hardware and displays, and repainting and plastering walls. Because most retailers refresh their stores every five to 10 years, major retailers may refresh dozens if not hundreds of store locations each year with expenditures that could easily run into the tens of millions of dollars.



The safe harbor rule applies immediately to tax filings for 2014 and tax years beyond.