SECTION 6. EXAMPLES

The following examples illustrate the application of this revenue procedure. In each example, it is assumed that V, W, X, and Y are qualified taxpayers within the scope of this revenue procedure, that V, W, X, and Y file their federal income tax returns on a calendar year basis, that they have not elected to apply the de minimis safe harbor under § 1.263(a)–1(f) during such taxable year, and that, unless otherwise stated, they use the remodel-refresh safe harbor method of accounting. It is also assumed that § 110 does not apply to the amounts paid by V, W, X, and Y, that any amounts paid by V, W, X, and Y that qualify as capital expenditures are depreciated under §§ 167 and 168, and that section 5.02(4) and section 5.02(5) do not apply to any of V ’s, W ’s, and Y ’s qualified buildings. The following examples do not address the requirement or computation of the § 481(a) adjustment, if applicable, for purposes of changing the qualified taxpayers’ methods of accounting under section 7 of this revenue procedure. Example 1 . (i) V is in the trade or business of operating a nationwide chain of retail stores that sell a variety of retail goods to customers. To maintain a contemporary and attractive environment, to continue to offer the most relevant and popular products, and to reflect the changing demographics of its customers, V periodically undertakes planned projects whereby it incurs amounts to alter the physical appearance and layout of the buildings it uses for its retail sales. These projects often include the remodel, refresh, repair, and maintenance of § 1250 property that is comprised of V ’s qualified buildings and § 1245 property that is located within these qualified buildings. Each project includes activities such as relocating or changing the square footage of certain departments, check-out areas, storage spaces, and dressing rooms within the footprint of the existing buildings; removing, constructing, and altering walls within the footprint of the existing buildings; moving lighting and replacing lighting fixtures with more efficient lighting; replacing bathroom fixtures with more updated and efficient fixtures; replacing or reconfiguring display tables and racks; patching and repainting interior walls and exterior structures; and replacing floor tiles, ceiling tiles, and signage. These projects also include changes to the electrical systems, HVAC systems, and plumbing systems within the buildings’ existing footprints to accommodate the structural changes, new product offerings, and bathroom upgrades. V ’s retail stores remain open to customers during the project, although parts of the store buildings are closed at different times during the process. In Year 1, V pays $3 million for these activities to be performed on one of its qualified buildings and places the related property into service. Of the $3 million, V pays $1 million for § 1245

property, including new display tables and racks, information kiosks, check-out counters, and other equipment. For Year 1, V files a change in method of accounting to use the remodel-refresh safe harbor method of accounting.

(ii) V ’s $3 million project on its building is a remodel-refresh project as described in section 4.03 because V pays amounts to alter the physical appearance and layout of its retail sales building to maintain a contemporary and attractive environment, to continue to offer the most relevant and popular products, and to reflect the changing demographics of its customers. Of the $3 million remodelrefresh costs paid for the project, $1 million was paid for § 1245 property, which is treated as excluded remodel-refresh costs under section 4.06(1). Accordingly, under section 4.07 V incurs $2 million of qualified costs ($3 million remodelrefresh costs less $1 million excluded remodel-refresh costs). Under the remodel-refresh safe harbor method of accounting: (A) V treats 75% of the $2 million qualified costs ($1,500,000,00) as amounts deductible under § 162 in Year 1, the taxable year the improvements to the qualified building are placed in service, and V treats the remaining 25% of the $2 million qualified costs ($500,000) as improvements to the qualified building that must be capitalized in Year 1 under §§ 263(a) and 263A; (B) V depreciates the $500,000 of improvements under §§ 167 and 168, and classifies the $500,000 of improvements under § 168(e) in accordance with section 5.02(3)(b)(ii); and (C) V makes a general asset account election to include the $500,000 of improvements in a general asset account (or multiple general asset accounts if the costs are for improvements with different recovery periods). Because Year 1 is the first taxable year that V uses the remodel-refresh safe harbor method of accounting, V also must make a late general asset account election to include in general asset accounts all assets that are MACRS property that comprise the qualified building, that are placed in service by V before Year 1, and that are owned by V at the beginning of Year 1. Because the qualified building (including the structural components) is in a general asset account, V would not recognize a loss for, and would continue to depreciate, the amounts allocable to the portions of the building and building systems re

December 7, 2015 834 Bulletin No. 2015–49

moved as part of the remodel-refresh project. Finally, to determine the tax treatment of the $1 million it paid for excluded remodel-refresh costs (costs for § 1245 property), V must analyze these costs under §§ 162, 263, and 263A, and the corresponding regulations.

Example 2 . Assume the same facts as Example 1, except during V ’s remodel-refresh project, a portion of the $2 million paid for the project is for constructing an addition to the back of the qualified building to increase its storage and unloading space. This addition materially increases the square footage of the qualified building. The work also involves adding extensions to the electrical system and the HVAC system of the building to provide lighting, power, and ventilation throughout the new space. As part of the material addition to the qualified building, the extensions of the electrical system and HVAC system also constitute material additions. Thus, the amounts paid for these additions, including related removals costs for the previously existing wall and any removed HVAC and electrical system components, are excluded remodel-refresh costs under section 4.06(8) and, as such, are excluded from the qualified costs for purposes of applying the remodel-refresh safe harbor.

For purposes of applying the remodelrefresh safe harbor, V must exclude from qualified costs the amount paid for constructing the addition to the back of the qualified building and extending the electrical and HVAC systems through this addition, and these excluded costs must be analyzed separately under §§ 162, 263, and 263A, and the corresponding regulations, and be treated in accordance with those provisions (or any other applicable provisions). However, V may apply the remodel-refresh safe harbor method to the amounts in Ex- ample 1 that are qualified costs ($2 million less the amount paid for constructing the addition to the back of the qualified building and extending the electrical and HVAC systems through this addition). In addition, because the qualified building (including its structural components) is in a general asset account, V would not recognize a loss for, and would continue to depreciate, the amounts allocable to the portions of the building, electrical system, and HVAC system removed as part of the remodel-refresh project.

Example 3 . Assume the same facts as Example 1, except during V ’s remodel-refresh project, V pays $100,000 (of the $3 million total) to reinforce the foundation of the qualified building by sealing cracks and adding additional structural support to the building’s basement. Beginning prior to the date V acquired the qualified building, the building began shifting and sinking as a result of inadequate foundation support. The sealing and addition of structural support in the building’s basement consist of activities that ameliorate the inadequate foundation support, a material condition

or defect that existed prior to V ’s acquisition of the building. Accordingly, the amounts paid by V for this work constitute excluded remodel-refresh costs under section 4.06(7) of this revenue procedure and are not included in determining qualified costs for purposes of applying the remodel-refresh safe harbor.

Thus, V must exclude the $100,000 paid to reinforce the foundation of the qualified building from qualified costs, and these excluded costs must be analyzed under §§ 162, 263, and 263A, and corresponding regulations, and treated in accordance with those provisions (or any other applicable provisions). However, V may still apply the remodel-refresh safe harbor method to the $1,900,000 of qualified costs ($3,000,000 less $1,100,000). In addition, because the qualified building (including its structural components) is in a general asset account, V would not recognize a loss for, and would continue to depreciate, the amounts allocable to the portions of the qualified building removed by reason of this work.

Example 4 . Assume the same facts as Example 1, except V is in the trade or business of operating a nationwide chain of hardware stores that sell a variety of home maintenance and home improvement goods to customers. As a part of V ’s remodel-refresh project on its qualified building, V pays $80,000 (of the $3 million total) in Year 1 to add an office suite that uses 20% of the square footage of the qualified building’s existing footprint, measured prior to beginning the remodel-refresh project. V intends to use this suite to offer home design and architectural services that will be provided in addition to V’ s primary business of selling retail hardware goods.

Because the addition of the new office suite is part of V’ s remodel-refresh project and consists of adding rooms within the existing footprint of the building, the amounts paid to construct the office suite constitute remodel-refresh costs under sections 4.04 and 4.05. Moreover, because the addition of the new suite does not expand or extend the square footage of the qualified building and does not adapt more than 20% of the floor space of the qualified building to a new or different use under § 1.263(a)–3(l), the amounts paid to construct the office suite do not constitute excluded remodel-refresh costs under section 4.06(10). Therefore, provided that no other exclusion under section 4.06 applies, the amounts paid to construct the office suite are part of the $2 million of qualified costs under the remodelrefresh safe harbor method. In addition, because the qualified building (including its structural components) must be placed in a general asset account, V would not recognize a loss for, and would continue to de

preciate, the amounts allocable to the portions of the building and building systems removed as part of the remodel-refresh project.

Example 5 . W is in the trade or business of operating several restaurants that prepare and sell meals, snacks, and beverages to customer order for immediate on-premises and/or off-premises consumption. W periodically undertakes remodelrefresh projects of the buildings it uses for its restaurants. For these projects, which W performs every 5 years, W qualified for and adopted the remodelrefresh safe harbor method in Year 1. W completed the last remodel-refresh project on qualified building A in Year 1 and applied the remodel-refresh safe harbor to that remodel-refresh project’s qualified costs. In Year 3, W experiences climate control problems in the dining area of its qualified building A and consults with a contractor to determine the cause. The contractor recommends that W replace one of the two roof mounted HVAC units that provide heating and cooling to qualified building A . In Year 3, W pays amounts to replace one of the HVAC units as recommended by the contractor. Because the replacement of components of the HVAC system in qualified building A is not undertaken by W to alter the physical appearance or layout of qualified building A, the amounts paid for the HVAC component replacement are not remodel-refresh costs as defined under section 4.04. Accordingly, the remodel-refresh safe harbor method does not apply to the amounts paid by W to replace the HVAC unit. Rather, W ’s costs must be analyzed separately under §§ 162, 263, and 263A, and the corresponding regulations, and treated in accordance with those provisions (or any other applicable provisions). In addition, because qualified building A and its structural components are in general asset accounts, W would not recognize a loss for, and would continue to depreciate, the remaining adjusted basis of the HVAC unit replaced.

Example 6 . X is in the trade or business of operating a nationwide chain of retail stores that sell a variety of retail goods to customers. X periodically undertakes remodel-refresh projects for the buildings it uses for its retail sales. With its federal tax return for the taxable year ended December 31, 2012, X filed a Form 3115 to change its method of accounting for dispositions to be in accord with § 1.168(i)–8T(c)(4) and to recognize a loss upon the disposition of the roof of qualified building B . In 2015, X pays for a remodelrefresh project on qualified building B . For the 2013 through 2015 taxable years, X did not file a Form 3115 to change its method of accounting to be in accord with § 1.168(i)–8. With its federal tax return for the taxable year ending December 31, 2015, X files a Form 3115 to begin using the remodel-refresh safe harbor. Pursuant to section 5.02(5)(b), X cannot apply the remodelrefresh safe harbor to the amounts paid for any remodel-refresh project on qualified building B before the year of change applicable to a Form 3115 filed by X to change its method of accounting to be in accord with § 1.168(i)–8. Therefore, the remodel-refresh safe harbor does not apply to the costs paid in 2015 for the 2015 remodel-refresh project on qualified building B . Example 7 . The facts are the same as in Example 6, except that X files a Form 3115 with its federal tax return for the taxable year ending December 31, 2016, to change its method of accounting to be in accord with § 1.168(i)–8 and takes the entire amount

Bulletin No. 2015–49 835 December 7, 2015

of the net positive § 481(a) adjustment into account in computing its taxable income for that taxable year. Also, in 2019, X pays for a new remodel-refresh project on qualified building B . Pursuant to section 5.02(5)(b), X cannot apply the remodel-refresh safe harbor to the amounts paid for any remodel-refresh project on qualified building B before the year of change applicable to a Form 3115 filed by X to change its method of accounting to be in accord with § 1.168(i)–8. Therefore, the remodel-refresh safe harbor does not apply to any costs paid before 2016 for any remodel-refresh project on qualified building B. However, X filed the applicable Form 3115 in 2016 and took the entire amount of the net positive § 481(a) adjustment into account in computing its taxable income for that taxable year. Therefore, the remodel-refresh safe harbor applies to the costs paid in 2019 for the 2019 remodel-refresh project on qualified building B.

Example 8 . The facts are the same as in Example 6, except X filed a Form 3115 with its federal tax return for the taxable year ended December 31, 2014, to change its method of accounting to be in accord with § 1.168(i)–8 and to make a late partial disposition election for the roof of qualified building B . For the 2015 taxable year, X has not revoked such partial disposition election. Pursuant to section 5.02(4)(c), X cannot apply the remodel-refresh safe harbor to the amounts paid for any remodel-refresh project for qualified building B that are paid before the taxable year in which X changes its method of accounting to utilize the remodel-refresh safe harbor. Therefore, the remodelrefresh safe harbor does not apply to the costs paid before 2015 for any remodel-refresh project on qualified building B but does apply to the costs paid in 2015 and subsequent taxable years for any remodel-refresh project on qualified building B .

Example 9 . The facts are the same as in Example 8, except X files a Form 3115 to begin using the remodel-refresh safe harbor with its federal tax return for the taxable year ending December 31, 2016. Pursuant to section 5.02(4)(c), X cannot apply the remodelrefresh safe harbor to the amounts paid for any remodel-refresh project for qualified building B that are paid before the taxable year in which X changes its method of accounting to utilize the remodel-refresh safe harbor. Therefore, the remodel-refresh safe harbor does not apply to the costs paid before 2016 for any remodelrefresh project on qualified building B but does apply to the costs paid in 2016 and subsequent taxable years for any remodel-refresh project on qualified building B .

Example 10 . Y is in the trade or business of operating two restaurants that prepare and sell meals, snacks, and beverages to customer order for immediate on-premises and/or off-premises consumption. The two restaurant buildings that Y uses for preparing and selling food are qualified building E and qualified building F . Y acquired both buildings and placed them in service in March 2007. In February 2010, Y completed a remodel-refresh project on qualified building E and paid $8 million in qualified costs for that project. At the same time, Y also completed a remodel-refresh project on qualified building F and paid $4 million in qualified costs for that project. With its federal tax return for the taxable year ended December 31, 2015, Y filed a Form 3115 to begin using the remodel-refresh safe harbor. As a result, for the February 2010 project for qualified building E, Y treats 75% of the $8 million qualified

costs ($6 million) as amounts deductible under § 162 and treats the remaining 25% of the $8 million qualified costs ($2 million) as improvements to qualified building E that must be capitalized under §§ 263(a) and 263A. In addition, for the February 2010 project for qualified building F, Y treats 75% of the $4 million qualified costs ($3 million) as amounts deductible under § 162 and treats the remaining 25% of the $4 million qualified costs ($1 million) as improvements to qualified building F that must be capitalized under §§ 263(a) and 263A. On the same Form 3115, Y made a late general asset account (GAA) election to include in general asset accounts the original cost of qualified building E and its $2 million of improvements and the original cost of qualified building F and its $1 million of improvements. Qualified buildings E and F and their improvements are nonresidential real property for purposes of § 168. In accordance with section 5.02(6)(c) and § 1.168(i)–1(c)(2), Y establishes three general asset accounts: one for the original cost of qualified building E (GAA #1), one for the original cost of qualified building F (GAA #2), and one for the improvements in the total amount of $3 million to qualified buildings E and F (GAA #3).

Example 11 . The facts are the same as in Exam- ple 10, except Y sells qualified building F to an unrelated party in 2016. This transaction is a qualifying disposition under § 1.168(i)–1(e)(3)(iii)(B)( 3 ) and section 5.02(6)(f). Also, because GAA #2 includes only one asset, the original qualified building F, Y has disposed of all of the assets in GAA #2. As a result, Y may do the following: (A) elect to apply § 1.168(i)–1(e)(3)(ii) to terminate GAA #2 and recognize gain or loss for GAA #2; and (B) elect to apply § 1.168(i)–1(e)(3)(iii) to remove the improvements for qualified building F (original cost of $1 million) from GAA #3 and to put such improvements into a single asset account under § 1.168(i)–7, as of January 1, 2016. If Y makes the election under § 1.168(i)–1(e)(3)(iii), Y will recognize gain or loss for the improvements for qualified building F under § 1.168(i)–8.