Depreciating Leasehold Improvements - You Need a Masters Degree in Taxation to form It Out

Insurance Jobs - Depreciating Leasehold Improvements - You Need a Masters Degree in Taxation to form It Out

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You would think a easy thing like how to depreciate leasehold improvements would an easy thing to answer. Unfortunately, Congress has made it a very complicated matter. There is no one, single recipe for depreciating leasehold improvements. And there is no one single estimate of years in which the life of leasehold improvements (L/I) may be depreciated.

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For example, depending on the facts and circumstances, L/I may be required to be depreciated under the straight line method, or eligible for 50% bonus depreciation, or eligible for 100% bonus depreciation or eligible to be expenses (called section 179 Depreciation Method). Further, a L/I may be required to be depreciated over 39 years, or 15 years or 1 year.

Why? Why has such a easy matter as depreciating L/I become so complex? 2010 tax legislation is interfering with other tax pre-2010 tax legislation and made a mess of things. In 2010 alone there were six major pieces of tax legislation, the last one being the Tax Relief, Unemployment guarnatee Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) (P.L. 111-312), which was passed on December 17, 2010.

Tom Corley to the rescue. I will, as usual, turn the incredibly complicated into the incredibly simple. So easy that even Forest Gump would be able to understand. So here we go....

How to depreciate leasehold improvements:
1. Cost 100% of your L/I in one year - You may qualify for what they call section 179 expensing on mighty leasehold improvements. In order to qualify you cannot simultaneously be the landlord and the tenant (called the "related party rule"), you must have a profit, your deduction is slight to your profit, your deduction cannot exceed 0,000 and the L/I must be any correction to an interior part of a building that is nonresidential real property in the United States, if all the following requirements are met:

The correction is made under or according to a lease;

* That part of the building is to be occupied exclusively by the lessee;

* The correction is placed in aid more than 3 years after the date the building was first placed

in aid by any person;

* The correction is section 1250 property (think "real estate property" as opposed to computers,

furniture etc);

A mighty leasehold correction does not contain any correction for which the expenditure is attributable to any of the following:

* The enlargement of the building;

* Any elevator or escalator;

* Any structural component benefiting a coarse area;

* The internal structural framework of the building.

2. Cost 100% of your L/H in one year - You may qualify for what they call 100% Bonus Depreciation. In order to qualify you cannot simultaneously be the landlord and the tenant (called the "related party rule"), the improvements were made after September 8, 2010 and before January 1, 2012 and the improvements were "qualified leasehold correction property" (see definition above);

3. Cost 50% of your L/H in one year - You may qualify for what they call 50% Bonus Depreciation. In order to qualify you cannot simultaneously be the landlord and the tenant (called the "related party rule"), the improvements were made in 2010 and the improvements were "qualified leasehold correction property" (see definition above);

4. straight line depreciation over a 15 year duration for "qualified leasehold correction property" (see definition above). In order to qualify you cannot simultaneously be the landlord and the tenant (called the "related party rule"), the improvements were made in 2009 or 2010 and the improvements were "qualified leasehold correction property" (see definition above);

5. straight line depreciation over a 39 year duration for normal L/I property that does not qualify under items 1 straight through 4 above. This default rule is required in instances where you are both the landlord and the tenant of the leased property. In these cases L/Is can never be treated as mighty L/I property. To make things even simpler for you, always assume your leasehold correction must be depreciated under the straight line recipe over 39 years unless it meets the definition of "qualified leasehold correction property" in which case this 39 year normal rule would not be required to apply.

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