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Tax Law Roundup current law developments in U.S. taxation

Tax Incentives for Post-Holiday Facelifts

Posted in Accounting Methods, Real Estate

Goulston_calculator and pencils-109484-mThis week is a big week for the retail industry: its results can predict the overall success of an important shopping period. If stores perform well, this week can contribute significantly toward a successful quarterly earnings report. Given the potential of these few shopping days, retailers are understandably focused on what happens from the time the doors swing open in the dark early morning and tired shoppers race to claim their Black Friday bargains to the end of the night when the registers shut down. However, some industry-watchers are already planning for what happens beyond the 2015 holiday season and anticipating what improvements they can make for a strong showing in 2016.

The IRS recently introduced Revenue Procedure 2015-56, the much anticipated Industry Issue Resolution that provides a capitalization safe harbor percentage for retail and restaurant store remodels. The safe harbor provides qualifying taxpayers the opportunity to deduct 75% and capitalize 25% of qualifying remodel costs. Detailed here, the Revenue Procedure may be a boost to an industry that is often at the mercy of a fickle consumer base and under pressure to provide a continuously improving customer experience.  The revenue procedure is effective for taxable years beginning on or after January 1, 2014.

As we’ve mentioned in previous posts on our sister blog, the Retail Law Advisor, consumers demand a lot from their retail experience. They want an omnichannel approach, technology on demand, and a personalized experience. In response, retailers continue to blend shopping and entertainment, including food and hospitality services, into the shopping experience.

This approach isn’t cheap: retailleader.com outlines the cost of several different types of capital improvements and which ones provide the most ROI. According to analysts, most remodels are fueled by competition and what will create most excitement in a community. A fresh look can increase foot traffic but even small changes, such as the installation of sustainability solutions to product displays, can make existing customers take notice.

Retailers need to approach the process with goals, timelines and a thorough plan. Embarking on a capital improvement project, no matter how large or small, has potential to affect daily operations and thus the overall customer experience. In addition, if a retail or restaurant establishment wants to use the new safe harbor, it will be treated as a change in method of accounting, implicating Form 3115, Application for Change in Accounting Method. And, as with any major adjustment, enhancement or expansion to a business, owners and operators should consult their team of advisors to ensure they are not just compliant with regulations but positioned to maximize their investment.