Where Is Leasehold Improvements?
Leasehold Improvements
Leasehold improvements are alterations and additions to a leased property made by the tenant (lessee) or the owner of the leased space (lessor). The alterations may be as simple as repainting the walls and ceiling or as elaborate as constructing new office suites in an existing building.
Leases typically spell out that the landlord owns Leasehold Services improvements. Landlords make such alterations to encourage tenants to rent the leased spaces for longer periods and to maintain them. In some instances, they may even provide tenants with monthly discounts on their rent if they agree to pay for certain improvements themselves.
Leasehold improvements, also known as build-outs, are the interior alterations made to a rented space that are intended to benefit the tenant. Examples of these alterations include installing carpeting, paint, and electrical or plumbing upgrades, and building in furniture and built-in cabinetry.
Where Is Leasehold Improvements?
The tax treatment of a leasehold improvement depends on whether the improvements were paid for by the tenant (lessee) or by the lessor. Both parties may deduct the cost of the alterations made to a leased space, but only the way the alterations were paid for determines who receives the tax benefit.
When the improvements are paid for by the tenant, they are deemed capital expenditures and are subject to corporate capitalization limits. If the expenditures do not exceed this cap, they are accounted for as expenses and amortized over the lesser of the useful life of the improvement or the remaining tenure of the lease, if it is longer than that period.
If the landlord fully owns the improvements, they are categorized as qualified leasehold improvements and can be depreciated over 39 years or 15 years depending on how long the tenant has been in the leased space. In 2013, the IRS extended this 15-year depreciation option to commercial buildings.
A leasehold improvement does not necessarily add value to the business unless it is done with the goal of increasing profitability. For example, if a business has moved into a building that has not been updated for many years, the tenant may be interested in having the property renovated to better reflect their business needs and brand.
Leasehold improvements generally add to the value of a leased property. Adding new equipment or fixtures, for instance, can increase the value of the leased space and make it more appealing to future potential tenants.
If a leasehold improvement is not paid for by the tenant, it is considered an intangible asset. It is not a tangible asset that can be seen or touched and therefore cannot be depreciated on the books of the lessee.
A leasehold improvement is an improvement to the leased space that improves the property’s overall function or appearance. For example, if a medical clinic moves into an office space, it may need to be renovated to meet the specific needs of its patients. The renovation might involve adding new restrooms, a lobby or additional offices.