The Retail Industry Leaders Association (RILA) today welcomed a safe harbor rule from the Internal Revenue Service (IRS) regarding the deduction and capitalization of expenditures related to store remodels, repairs, and refreshes.
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.
The release of the retail/restaurant industry issue resolution (IIR) revenue procedure (Rev. Proc. 2015-56) concludes more than four years of negotiations between RILA, its member companies and the IRS aimed at eliminating the substantial confusion about which costs of store remodels and refreshes should be expensed and deducted immediately, or must be capitalized and depreciated over time.
Under the safe harbor, retailers are now able to apply a percentage (75 percent) to a base dollar amount of expenditures. The resulting amount will be considered deductible immediately while the remaining percentage (25 percent) 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, RILA vice president for government affairs. "The repair regulations are key to determining how expenditures made to refresh or remodel stores should be expensed. RILA members have engaged in a constructive dialogue with the IRS for several years and we're pleased to finally see this safe harbor become law," Pollack continued.
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.
RILA is the trade association of the world's largest and most innovative retail companies. RILA members include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales, millions of American jobs and more than 100,000 stores, manufacturing facilities and distribution centers domestically and abroad.