Leasehold Improvements & Depreciation Life | McGuire Sponsel (2024)

FAQs

What is the useful life of depreciation on leasehold improvements? ›

While the useful economic life of most leasehold improvements is anywhere between five and 10 years, the Internal Revenue Code (IRC) requires that depreciation for such improvements to occur over the economic life of the building.

“Qualified leasehold improvement property,” like qualified improvement property is depreciated over 15-years using the straight-line method under MACRS and qualifies for bonus depreciation and section 179 expensing.

Leasehold improvements shall be amortized over the shorter of the useful life of those leasehold improvements and the remaining lease term, unless the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, in which case ...

ASC 842 requires disclosure of leasehold improvement information in the financial statements like the balance sheet and income statement . This includes a description of the improvement, the cost, the useful life, and the amortization expense recognized during the reporting period.

Depreciation and Amortization

As fixed assets, leasehold improvements can also be depreciated or amortized. Leasehold improvements provided by the landlord would be depreciated in the same way other assets are. However, leasehold improvements completed by a tenant would be amortized rather than depreciated.

Qualified Leasehold Improvements (QLI)

Any leasehold improvements made to an interior portion of a building after 2004 may qualify for 15-year straight-line depreciation, and it may additionally qualify for bonus depreciation if it was placed in service after October 22, 2004 and before January 1^st, 2018.

Qualified leasehold improvement property placed in service after October 22, 2004 and before January 1, 2018, is depreciated over a 15-year recovery period.

When you pay for leasehold improvements, capitalize them if they exceed the corporate capitalization limit. If not, charge them to expense in the period incurred. If you capitalize these expenditures, then amortize them over the shorter of their useful life or the remaining term of the lease.

The cost of leasehold improvements over the capitalization threshold of $500k should be capitalized. Examples of costs that would be included as parts of a leasehold improvement include: Interior partitions made up of drywall, glass and metal. Miscellaneous millwork, carpentry, lumber, metals, steel, and paint.

Depreciation is over the shorter of the useful life of the asset and the lease term, unless the title to the asset transfers at the end of the lease term, in which case depreciation is over the useful life.

Are leasehold improvements the same as tenant improvements? ›

Key Takeaways

Leasehold improvements are also called tenant improvements or buildouts. The property owner typically makes modifications to a commercial real estate space to accommodate the needs of the tenant. Leasehold improvements are applied to the interior space, such as the ceilings, walls, and floors.

According to U.S. GAAP, if a leasehold improvement's useful life is longer than the term of the lease, the depreciation should still be taken over the shorter lease term, unless there is assurance that the lease will be renewed.

Moveable equipment or office furniture not attached to the leased property is not considered a leasehold improvement. Leasehold improvements do not have a residual value.

Under ASC 842, leasehold improvements are not necessarily lease incentives. Lease incentives are payments made to or on behalf of the lessee by the lessor for expenses that would have otherwise been covered by the lessee in relation to the underlying asset and lease contract.

Depreciation Useful life: 40 years for new construction, 1 to 30 years for building purchases based on condition of building, 10 to 40 years for new building improvements depending on the existing life of the main building.

Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property are allowed a Section 179 deduction, even if the properties are related to a Schedule E (Form 1040) rental property, as long as the lessor considers the rental an active trade or business.

Qualified improvement property, when correctly identified, can be depreciated over 15 years. This is in contrast to the property that it is usually a part of, which would depreciate over 39 years.