A blog post

Major Tax Deductions Now Available for Landlords and Tenants

Posted on the 30 May, 2013 at 1:07 pm Written by in Business, Loans, Taxes

As either a commercial property owner or a commercial property tenant you may take advantage of qualified leasehold improvements before midnight December 31, 2013.

 What will the qualified leasehold improvements mean for you in 2013 and 2014?

 In 2013, you’ll be able to take a 15-year depreciation, a Section 179 deduction of up to $250,000 and a 50% bonus depreciation.

 In 2014, you’ll be able to take a 39-year depreciation.

 $1,000,000 in leasehold improvements applied to 2013 tax year’s 15-year schedule rather than 2014’s 39-year schedule allowing a $24,610 deduction confers these huge savings:

  1.     $250,000 deduction straight from the top

  2.     $375,000 bonus depreciation

  3.     $12,488 additional via IRS’s first year midyear convention on the 15-year depreciation

 Adding it all up, you’ll be writing-off $637,488 versus $24,610!

 What sort of leasehold improvements qualifies under the 2013 rules?

 1.     The improvement is made under or pursuant to a lease by the lessee (or sublessee) of the building’s interior portion, or by the lessor of that interior portion.

 2.     The interior portion of the building is to be occupied exclusively by the lessee (or sublessee) of that interior portion.

 3.     The improvement is placed in service more than three years after the building was first placed in service by anyone.

 Under Section 168(k)(3)(B), the qualified leasehold improvement property does not include any expenditures:

 .                 To enlarge the building

 .                 To any elevator or escalator

 .                 To any structural component benefiting a common area

 .                 To the internal structural framework of the building

  Improvements qualifying under the 2013 rules include among others these:

 .                 Utilities

 .                 Framing

 .                 Walls

 .                 Doors

 .                 Windows

 .                 Pipes and Fittings

 .                 Plumbing Fixtures

 .                 Fire Protection

 .                 HVAV

 .                 Permanent Interior Finishes

 .                 Permanent Floor Coverings

 .                 Millwork and Trim

Other qualifying improvements include movable partitions or carpeting that is not part of the property’s structure.  Such improvements will not qualify as leasehold improvements under 2014’s 39-year rules and are generally depreciable over five to seven years.

Cost-segregation is a good way to look at faster depreciation deductions for qualified leasehold improvement property.  These depreciations are tax law-approved.

Using cost-segregation, you’ll first pay the cost-segregation fees necessary to obtain the cost-segregation study.  The study will show whether or not your cost-segregation passes IRS muster.  Qualified leasehold property improvements require no such study and it’s relatively easy to identify property qualifying for the tax breaks.

 Putting qualified leasehold improvements in practical terms, imagine the case of a lessee who’s made improvements to the HVAC serving a stand-alone commercial building used for retail sales.  The improvements serve only the space occupied by the lessee and the HVAC improvements:

 1.     Do not benefit a common area.

 2.     Are not part of the building’s internal framework and structure?

 3.     Do not enlarge the building.

 4.     Placed in service more than three years after the building first entered service.

Per the IRS, the HVAC improvements qualify as either 39-year property or as tax-favored 15-year qualified leasehold improvements.  Neither the IRS nor the lessor put forward an accelerated five-year personal property depreciation claim on the HVAC improvements.

Per the IRS, the HVAC improvements do not qualify as leasehold improvements made by the lessor as they’re located on the building’s rooftop and are not located within the building’s interior.

 The taxpayer in the example above unfortunately undertook the costly HVAC improvements without good tax advice.  Had the taxpayer received knowledgeable advice first, he’d have perhaps considered installing the HVAC upgrades within the leased space.

 Landlords and tenants:  Remember to take a good look at qualified leasehold improvements.  Keep in mind the property in question must have been in service for at least three years and the improvements must be in service before midnight December 31, 2013

Call Kruse and Crawford to assure you get this done correctly.