Rev. Proc. 2015-56

Remodel Safe Harbor Rule: A Tax Incentive for Multi-Unit Restaurants and Retailers

If you own a restaurant or retail business, remodeling your store when the time is right is often a good investment. It can not only attract more customers to come in and spend money, it can also help you improve efficiency and even increase the value of your business and the building it operates in.

But a remodeling project is also a major logistical undertaking. It often means temporarily closing down – putting a pause on revenue. There might also be other inconveniences like laying off your staff, obtaining construction permits, and managing the contractors doing the work.

And then there is the cost. Projecting how much an entire remodel will cost can be hard to do. Unexpected problems happen, deadlines get missed, and plans and budgets often go by the wayside. Because of concerns like these, many business owners decide the bad outweighs the good and decide to put off remodeling for too long.

After lobbying efforts from the National Restaurant Association and other organizations, the IRS recently lessened the financial burden of a remodel by issuing the remodel safe harbor rule in Rev. Proc. 2015-56.

The rule, which only applies to businesses that are publicly held or have audited financial statements, allows for up to 75 percent of remodel costs to be immediately deducted in the same tax year. The other 25 percent is capitalized and depreciated over time.

This means that multi-unit businesses and franchises now have a big incentive to remodel their stores. Prior to this rule, depreciation was the only way to write off remodel costs on your taxes. However, fully depreciating an asset like property can take as long as 39 years, meaning costs are incrementally recovered each year. Under the remodel safe harbor rule, you can remodel your stores now and deduct the majority of the total cost on your taxes the same year.