If a Lessee spends $100,000 in leasehold improvements, but the lessor gives the lessee $11,000 (basically a partial re-imbursement), how does the lessee account for all of this? Would they depreciate the 100k, or the 89k, over the term of the lease? This is a real life question that is frustrating me because my CFA studying can’t help me answer it!! I’m open to any feedback! Thanks in advance…
I don’t know the accounting rules on this and, of course, they could be wacky. However, it seems to me that the lessee’s basis in the building goes up by $100k because he owns all those improvements. The lessor has paid for some of them because he needs the improvements and is willing to pay up for them. The $11K seems like prepaid rent to be amortized over the period of the lease. That seems like such a natural way to do it, I wouldn’t even bother looking up the real rules.
It might even be the case that 89K should be the initial carrying amount for the asset because that was essentially the price paid for the improvement. Debit Cash 11K Credit A/P 100K Debit Leashold Improvement 89K Ask an accountant.
Similar to a capitalized land improvement, you capitalize the net leasehold improvement and depreciate it over 15 years. See IRC 1245, or the 124x section of the code. On the other hand, leasehold interest is depreciated over the life of the lease term.
You capitalize the amount you spent on leasehold improvements and amortize over their useful life or the lease term whichever is shorter. Any tenant allowances are recognized as deferred rent (liability) on the balance sheet and recognized as a reduction of rental expense over the life of the lease.