SECTION 5. — Internal Revenue Bulletin 2015-49

SAFE HARBOR METHOD OF ACCOUNTING

.01 In general . This section 5 provides the remodel-refresh safe harbor method of accounting for a qualified taxpayer within the scope of this revenue procedure. This safe harbor determines the amount of the qualified costs that are deducted under § 162 and the amount of such costs that are required to be capitalized under §§ 263(a) and 263A. The safe harbor also provides for the treatment of the capitalized amount for depreciation and disposition purposes. Except as provided in section 5.02(4)(c) or 5.02(5)(b), the remodelrefresh safe harbor applies to all of the qualified taxpayer’s qualified costs paid

(within the meaning of section 4.04) during the taxable year. Except as provided in section 5.02(4)(c) or 5.02(5)(b), a qualified taxpayer within the scope of this revenue procedure who uses the remodelrefresh safe harbor is required to use the method for all of its qualified costs (defined in section 4.07) until the qualified taxpayer secures permission from the IRS to use another method of accounting.

.02 Remodel-refresh safe harbor . To use the remodel-refresh safe harbor, the qualified taxpayer is required to comply with sections 5.02(1), 5.02(2), 5.02(3), 5.02(4), 5.02(5), and 5.02(6). (1) Allocation of qualified costs . The qualified taxpayer must treat 75% of its qualified costs paid during the taxable year as amounts deductible under § 162(a) (“the deduction portion”) and must treat the remaining 25% of its qualified costs paid during the taxable year as costs for improvements to a qualified building under § 263(a) and as costs for the production of property for use in the qualified taxpayer’s trade or business under § 263A (“the capital expenditure portion”).

(2) Documentation requirements . A qualified taxpayer utilizing the remodelrefresh safe harbor provided in this section 5 must document its qualified costs in a manner substantially similar to the standard set forth in Appendix A to this revenue procedure.

(3) Treatment of the capital expendi- ture portion.

(a) Capitalized amounts . The capital expenditure portion must be charged to capital account.

(b) Depreciation of capitalized amounts .

(i) General rule . The capital expenditure portion for each qualified building is a separate asset (or separate assets if the remodel-refresh project produces property qualifying under §§ 168(e)(2)(B) and 168(e)(6), (e)(7), or (e)(8)) for depreciation purposes and is depreciated under §§ 167 and 168 beginning when the capital expenditure portion is placed in service by the qualified taxpayer, taking into account the applicable convention under § 168(d). The qualified taxpayer must make an election to include the capital expenditure portion in a general asset account under § 168(i)(4) and § 1.168(i)–1.

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See section 5.02(6) for the general asset account election.

(ii) Classification under § 168(e) . For purposes of determining the appropriate classification under § 168(e), the capital expenditure portion is treated as qualified leasehold improvement property (as defined in § 168(e)(6)) under § 168(e)(3)(E)(iv), as qualified restaurant property (as defined in § 168(e)(7)) under § 168(e)(3)(E)(v), or as qualified retail improvement property (as defined in § 168(e)(8)) under § 168(e)(3)(E)(ix), as applicable, only to the extent that the qualified taxpayer can substantiate that the capital expenditure portion is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, as applicable. The remaining capital expenditure portion is classified as nonresidential real property under § 168(e)(2)(B). Also, if § 168(e)(3)(E)(iv), (v), or (ix), as applicable, is not in effect when the qualified taxpayer places in service the capital expenditure portion, the capital expenditure portion is classified as nonresidential real property under § 168(e)(2)(B).

(c) Disposition of capitalized amounts . The capital expenditure portion for each qualified building is a separate asset (or separate assets if the remodel-refresh project produces property qualifying under §§ 168(e)(2)(B) and 168(e)(6), (e)(7), or (e)(8)) for disposition purposes. See § 1.168(i)–1(e)(2)(viii)(B)( 4 ).

(4) Limitation on partial disposition elections .

(a) General rule . A qualified taxpayer must not make the partial disposition election under § 1.168(i)–8(d)(2), Prop. Reg. § 1.168(i)–8(d)(2), section 6.33 of the Appendix of Rev. Proc. 2011–14, or section 6.33 of Rev. Proc. 2015–14 for any portion of an original qualified building or any portion of any improvement or addition to an original qualified building.

(b) Revocation of partial disposition election made in a prior year .

(i) General rule . If a qualified taxpayer made the partial disposition election under § 1.168(i)–8(d)(2), Prop. Reg. § 1.168(i)– 8(d)(2), section 6.33 of the Appendix of Rev. Proc. 2011–14, or section 6.33 of Rev. Proc. 2015–14 for any portion of an original qualified building, or any portion of an improvement or addition to an orig

inal qualified building, prior to the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor, the qualified taxpayer must revoke that partial disposition election.

(ii) Time and manner of revoking prior year’s partial disposition election . If, under section 5.02(4)(b)(i), a qualified taxpayer must revoke a partial disposition election, the Commissioner grants the qualified taxpayer consent to revoke that election provided the qualified taxpayer makes this revocation within the time and in the manner described in this section 5.02(4)(b)(ii). The qualified taxpayer may revoke the partial disposition election by filing either:

(A) An amended federal tax return for the taxable year for which the partial disposition election was made if the period of limitations on assessment under § 6501(a) for that taxable year has not expired before the date stated in the next sentence. This amended return must be filed no later than the due date, including extensions, of the qualified taxpayer’s federal tax return for the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor. This amended return must include the adjustment to taxable income for the revocation of the partial disposition election and any collateral adjustments to taxable income or to tax liability (for example, allowable depreciation in that taxable year for the portion of the asset to which the revocation pertains). Such collateral adjustments must also be made on amended federal tax returns for any affected succeeding taxable year; or

(B) A Form 3115, Application for Change in Accounting Method, with the qualified taxpayer’s timely filed original federal tax return for the qualified taxpayer’s first or second taxable year beginning after December 31, 2013. The revocation of the partial disposition election under this section 5.02(4)(b)(ii)(B) will be treated as a change in method of accounting only during this limited period of time. The manner of making this revocation is described in section 7.02(1). This Form 3115 must include under § 481(a) the adjustment to taxable income for the revocation of the partial disposition election and any collateral adjustments to taxable income (for example, allowable depreciation in that taxable year for the portion of

the asset to which the revocation pertains). The qualified taxpayer must take the entire amount of the § 481(a) adjustment into account in computing its taxable income for the year of change.

(c) Qualified taxpayer does not revoke the partial disposition election . If, under section 5.02(4)(b)(i), a qualified taxpayer must revoke a partial disposition election but the qualified taxpayer does not make this revocation within the time and in the manner provided in section 5.02(4)(b)(ii), then the change in method of accounting to utilize the remodel-refresh safe harbor is made on a cut-off basis for the qualified building to which the unrevoked partial disposition election pertains.

(5) Disposition of a component of a qualified building .

(a) General rule . This section 5.02(5) applies to a qualified taxpayer that recognized a gain or loss upon the disposition of a component of a qualified building, a structural component of a qualified building, or a component of such structural component (i) under § 1.168(i)–1T or § 1.168(i)–8T, as applicable, and that component or structural component is not an improvement or addition as described in § 1.168(i)–1T(e)(2)(viii)(B)( 5 ) or § 1.168(i)–8T(c)(4)(ii)(E), as applicable, or (ii) in a taxable year beginning before January 1, 2012, and that component or structural component is MACRS property (as defined in § 1.168(b)–1(a)(2)). If the qualified taxpayer or the IRS changed the qualified taxpayer’s method of accounting to be in accord with § 1.168(i)– 1(e)(2)(viii) or § 1.168(i)–8(c)(4) (determination of asset disposed of), as applicable, and to make a partial disposition election for such disposition under § 1.168(i)–1, § 1.168(i)–8, Prop. Reg. § 1.168(i)–1, Prop. Reg. § 1.168(i)–8, section 6.33 of the Appendix of Rev. Proc. 2011–14, or section 6.33 of Rev. Proc. 2015–14, as applicable (thereby, for example, changing from recognizing gain or loss under § 1.168(i)–1T or § 1.168(i)– 8T, as applicable, to recognizing the gain or loss under § 1.168(i)–1 or § 1.168(i)–8, as applicable, for the partial disposition), section 5.02(4) applies instead of this section 5.02(5).

(b) Change in method of accounting . If this section 5.02(5) applies, the qualified taxpayer must (i) change its present

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method of accounting to be in accord with § 1.168(i)–1(e)(2)(viii) or § 1.168(i)– 8(c)(4) (determination of asset disposed of), as applicable, on or before the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor, and (ii) take the entire amount of the § 481(a) adjustment into account in computing the qualified taxpayer’s taxable income for that year of change. See sections 6.38(3)(a) and 6.38(8)(a) of Rev. Proc. 2015–14, 2015–5 I.R.B. 450 (or its successor) (building or structural component), and sections 6.40(3)(a) and 6.40(6)(a) of Rev. Proc. 2015–14 (general asset account). A qualified taxpayer that does not comply with these conditions is not eligible to use the remodel-refresh safe harbor for any qualified costs paid prior to the year of change (for a change made by the qualified taxpayer or the IRS under section 6.38(3)(a) or 6.40(3)(a) of Rev. Proc. 2015–14, as applicable) for the qualified building to which the gain or loss pertains.

(6) Requirement to use general asset accounts .

(a) General rule . A qualified taxpayer must make a general asset account election under § 168(i)(4) and § 1.168(i)–1(l) to include in a general asset account any asset that is MACRS property and that comprises a qualified building. Thus, a qualified taxpayer must include in general asset accounts:

(i) The capital expenditure portion; (ii) Existing qualified buildings (including their structural components) that are MACRS property (see section 5.02(6)(d) for making a late general asset account election); and

(iii) Prior years’ improvements that are MACRS property and made to a qualified building (even if the qualified building is not MACRS property) (see section 5.02(6)(d) for making a late general asset account election).

(b) Exception . If a qualified taxpayer is not eligible to use the remodel-refresh safe harbor for certain qualified costs pursuant to section 5.02(4)(c) or section 5.02(5)(b), the qualified taxpayer is not required to include in general asset accounts:

(i) The existing qualified building (including its structural components) to which those qualified costs pertain; and

(ii) Improvements made to that qualified building and placed in service prior to the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor.

(i) General rule . In establishing a general asset account, all assets that are MACRS property, that comprise qualified buildings, that are placed in service in the same taxable year, and that meet the requirements in § 1.168(i)–1(c)(2), must be grouped in the same general asset account. However, see section 5.02(6)(c)(ii) for an exception to this general rule.

(ii) Original qualified buildings (in- cluding their structural components) . A qualified taxpayer may include in one general asset account the original cost of an original qualified building, including its original structural components, if such building and structural components are MACRS property and meet the requirements in § 1.168(i)–1(c)(2). If a qualified taxpayer has multiple qualified buildings, the qualified taxpayer may have separate general asset accounts for the original cost of each original qualified building, including the original structural components of that building. Any improvement made to a qualified building cannot be included in the general asset account or accounts permitted under this section 5.02(6)(c)(ii).

(d) Late general asset account election. A qualified taxpayer must make a late general asset account election under § 168(i)(4) and § 1.168(i)–1 to include in a general asset account any asset that is MACRS property, that comprises a qualified building, that was placed in service in a taxable year prior to the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor, and that is owned by the qualified taxpayer at the beginning of the first taxable year that the qualified taxpayer uses the remodelrefresh safe harbor. The qualified taxpayer must make this late election on its original federal tax return for the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor. The IRS will treat the making of the late general asset account election under this section 5.02(6)(d) as a change in method of accounting under § 446(e). The manner of

making this change in method of accounting is described in section 7.02(2).

(e) Effect of late election . By making the general asset account election under section 5.02(6)(d), the qualified taxpayer consents to, and agrees to apply, all of the provisions of § 1.168(i)–1 to the assets included in a general asset account. See § 1.168(i)–1(l)(1). Accordingly, if the qualified taxpayer’s present methods of accounting are not in accord with § 1.168(i)–1, the qualified taxpayer must change to the methods of accounting permitted under § 1.168(i)–1 no later than the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor. For example, if the qualified taxpayer’s present method of accounting is not in accord with § 1.168(i)–1(e)(2)(viii) (determination of asset disposed of), the qualified taxpayer must change to the appropriate asset as determined under § 1.168(i)–1(e)(2)(viii) by making the change specified in section 6.40(3)(a) of Rev. Proc. 2015–14 no later than the first taxable year that the qualified taxpayer uses the remodel-refresh safe harbor. But if the qualified taxpayer recognized a gain or loss under § 1.168(i)–1T, § 1.168(i)– 8T, or in a taxable year beginning before January 1, 2012, as applicable, on the disposition of a portion of the asset (as determined under § 1.168(i)–1(e)(2)(viii)) in a taxable year prior to the year of change, see section 5.02(5)(b).

(f) Qualifying dispositions . The cessation, termination, or disposition of an entire qualified building, other than by transfer to a supplies, scrap, or similar account, is a qualifying disposition under § 1.168(i)–1(e)(3)(iii)(B)( 3 ), provided that all other requirements in § 1.168(i)– 1(e)(3)(iii)(B) are met. If a lessee terminates the lease for an entire qualified building and irrevocably disposes of or abandons the leasehold improvements associated with that qualified building other than by transfer to a supplies, scrap, or similar account, such disposition is a qualifying disposition under § 1.168(i)– 1(e)(3)(iii)(B)( 3 ), provided that all other requirements in § 1.168(i)–1(e)(3)(iii)(B) are met. However, the disposition of an improvement as a result of a remodelrefresh project does not constitute a qualifying disposition under § 1.168(i)– 1(e)(3)(iii)(B)( 3 ).

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.03 Applicability of § 263A . Amounts paid to which the qualified taxpayer applies the remodel-refresh safe harbor are not capitalized separately under § 263A(a)(1)(B) and (b)(1) as a direct or indirect cost of producing property used in the qualified taxpayer’s trade or business. However, a qualified taxpayer that produces for sale or acquires for resale property described in § 1221(a) must capitalize separately under § 263A the direct costs of producing or acquiring such property and the property’s properly allocable share of indirect costs. See §§ 1.263A–2 and 1.263A–3.

.04 Treatment of excluded remodel- refresh costs . Excluded remodel-refresh costs under section 4.06 are not eligible for the remodel-refresh safe harbor. Accordingly, excluded remodel-refresh costs must be deducted or capitalized in accordance with the provisions of the Code and regulations that are otherwise applicable. See, for example, § 1.162–4 (repairs); § 1.263(a)–2 (amounts paid to acquire and produce tangible property); § 1.263(a)–3 (costs to improve units of property); and § 263A (capitalization and inclusion in inventory costs of certain costs). For depreciation and dispositions of excluded remodel-refresh costs that are capital expenditures, see § 168 and §§ 1.168(i)–1 and 1.168(i)–8, as applicable.

.05 Coordination with other safe har- bor methods and elections .

(1) Treatment of amounts eligible for safe harbor for small taxpayers under § 1.263(a)–3(h) . A qualified taxpayer that uses the remodel-refresh safe harbor may not elect to apply the safe harbor for small taxpayers under § 1.263(a)–3(h) to amounts paid for repair, maintenance, improvement, or similar activities related to a remodel-refresh project during the taxable year.

(2) Treatment of amounts eligible for the safe harbor for routine maintenance . A qualified taxpayer that uses the remodel-refresh safe harbor may not utilize the safe harbor for routine maintenance under § 1.263(a)–3(i) for amounts paid for qualified costs that are subject to the remodel-refresh safe harbor method. This rule does not apply to amounts paid for excluded remodel-refresh costs or amounts not incurred in a remodel-refresh project.