Discussion:Lessor pays lessee cash to do leasehold improvements
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Discussion Forum Index --> Tax Questions --> Lessor pays lessee cash to do leasehold improvements
| 25 July 2008 | |
| How does the leasee record the cash it receives from the leasor for leasehold improvements. It uses the cash to do the leasehold improvements
The cash is not in place of rent. Leasee then owns the improvements | |
| 25 July 2008 | |
| Does a lessee ever really own the improvements? We probably need more facts. My guess is that if the lessee includes this money as income, it could then depreciate the improvements as lessee improvements. I would think landlord is taking this as a repair expense (rightly or wrongly) and overall, it's probably not a great deal for your client, but it's better than nothing, I guess. | |
| 25 July 2008 | |
| section 110 says the leasee does not have to report the cash it receives from the leasor for he LHI but my question is if tennant gets cash and Dr it what is the opposite Cr
and then then the cash is spent it will cr cash what is Dr | |
| 25 July 2008 | |
| Dr Cash and Cr a current liability account when cash received and Cr Cash and Dr currently liability when cash is spent. It is a wash in the end. The lessee does not own or depreciate the improvement.
It seems to me Reg. 1.110-1(c)(2)(3)(ii) is more important than the internal debits and credits. | |
| 25 July 2008 | |
| does the leasor depreciate them improvements for how long and then what happens when leasee moves out | |
Grammarpolice (talk|edits) said: | 25 July 2008 |
| How does an educated, accomplished person who is a "... CPA in Ohio and also a professor at two universities" learn to spell?
LESSOR LESSEE | |
| 25 July 2008 | |
| "does the leasor depreciate them improvements for how long and then what happens when leasee moves out"
The lessor must use non-residential MACRS (39 years). When the lessee moves out the lessor says goodbye. | |
| 25 July 2008 | |
| If the improvement is a qualified LH improvement or qualified restaurant improvement, the applicable MACRS recovery period would be 15 years if the improvement is placed in service before January 1, 2008. | |
RoyDaleOne (talk|edits) said: | 25 July 2008 |
| I did not research my comment, but that never stopped me or Crow. LOL
1. Lessor - the amount is an improvement to the building, depreciate over applicable class life. 2. Lessee - the leasehold improvements should be reduced by the amount of the allowance and the remaining cost depreciate using the applicable class life, or over the lease term, if that rule is still in affect. Note that restaurants are not the only type of building structure afforded a shorter class life. For what it is worth, please note that my iSpell gives lessor and lessee as acceptable spelling variations. | |
| 25 July 2008 | |
| RoyDaleOne
are you saying that if the lessor give the lessee 5K, the Lessor amortizes the 5K as incentive to get the tennant of the life of the lease and it options and the Lessee if they put in carpet, interior walls, wall paper, etc and it only costs them 5K there is no depreciation? the lessee walks away after the lease period and lessor owns the improvements. Who depreciates and what is the basis for depreciation? Neil | |
RoyDaleOne (talk|edits) said: | 25 July 2008 |
| The following is a quote from:
http://www.thespaceplace.net/articles/hennigh200503.htm Used here under the fair doctrine for short quotations. Author: Mark S. Hennigh Quote: Landlord-Owned Improvements Under current law, when cash is given to a tenant to construct leasehold improvements that the landlord will own, the tax treatment is straightforward. The landlord must depreciate the improvements over the statutory 39-year depreciation period for nonresidential real property, even if the lease is for a term of less than 39 years, except for those exceptions created by the Small Business Job Protection Act of 1996 [2]. See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, Sec. 1120, 110 Stat. 1766 (1996) ; §168(i)(8) [3]. Although the tenant receives cash from the landlord, this cash is not treated as income to the tenant. The tenant is treated as a conduit for the landlord's cash. In re Elder-Beerman, 97-1 U.S.T.C. ¶50, 391, p. 87, 939, 207 B.R. 548 (Bankr. S. Dist. W. Div. OH). Tenant-Owned Improvements When the landlord does not own the improvements, the landlord is not required to use the 39-year depreciation schedule and, therefore, can "write off" the allowance ratably over the lease term. Bonwit Teller & Co. v. Commissioner, 17 B.T.A. 1019, 1026 (1929), rev'd, 53 F.2d 381 (1931) [4]. If the lease includes option periods, the allowance is "written off" over the initial term plus option periods if "reasonable certainty" exists at the time of lease execution that the option will be exercised. Joseph Neel Co. v. Commissioner, 22 T.C. 1083, 1091 (1954); Westinghouse Broadcasting Co. v. Commissioner, 36 T.C. 912 (1961). Determination of whether "reasonable certainty" exists is dependent upon a facts and circumstances analysis that examines whether the economic terms of the lease make the exercise of the option likely. Joseph Neel Co., 22 T.C. at 1091; Westinghouse Broadcasting Co., 36 T.C. at 918. Because most options are exercisable at market rates, option terms are rarely added to the period over which the allowance is written off. When cash is given to a tenant to construct leasehold improvements and the tenant owns the improvements, the cash received by the tenant is income in the year received because it "enhances" a tenant's wealth by enabling it to acquire or construct suitable facilities. John B. White v. Commissioner, 55 T.C. 729 (1971). Further, because the tenant owns the improvements it must depreciate the improvements constructed with the allowance over 39 years. End Quote There are more factors that also can come in to play when determining the correct position to take relative to leasehold improvements. Anyone interested in the correct treatment should read this article. | |
| 25 July 2008 | |
| I won't really add to the tax discussion, but just add the GAAP difference: for GAAP (FTB 88-1 for those reference snobs) you should report the leasehold improvements at full cost and report the cash received as a liability and write it off straight line over the term of the lease. It is a very common GAAP error for people to net the cash and the improvements but if GAAP financials are needed that is incorrect. This does lead to different GAAP vs. tax accounting for deferred tax purposes.
Like has been stated for tax purposes if the landlord ultimately owns the improvements it is not income and I believe that the correct treatment is netting the cash against the leasehold improvements. I started a discussion on this early this year and was pointed to a pretty good article on the tax rules - do a search and it should show up. | |
| 25 July 2008 | |
| Thanks RoyDaleOne
I have that article but I think it is obsolete with the passage of IRC 110 for 15 year depreciation and was wandering if anything else is different due to the new section. Also how about if if is considered movable such as shelves, carpet, etc why can't it be depreciated over shorter periods Neil | |
RoyDaleOne (talk|edits) said: | 25 July 2008 |
| Huh? The article contains a Section on 110 and 118 etc.... | |
RoyDaleOne (talk|edits) said: | 25 July 2008 |
| Quote:
"As to the second prong, "qualified long term real property" is property that for depreciation purposes has a class life of greater than 27.5 years and is not nonresidential property with an accelerated cost recovery schedule (e.g. tangible personal property, in tax nomenclature this property is section 1245 property). Id. at §1.110-1(b)(2)(i)." End Quote: Property that is not part of the building structure could be subject to a shorter GDS recovery period. Note the use of the terms, I am slowly tried to use the new terminology. I guess the term "deprecation life" has been incorrect for over twenty years. | |
