Friday, November 13, 2009
Did you know? - Taxes on TIs
I received the below email from my accountant friend Marty Reitinger:
Hi Bruce,
In recent Tax Court case (TC Memo 2009-107), the court held that leasehold improvements made by a tenant in lieu of rent were fully deductible as rent expense when the improvement were clearly and contractually a substitute for rent.
In effect, where a lessee places improvements on real estate that consitute a substitute for rent, the improvements made in lieu of rent is rental income to lessor and rental expense to the lessee. Whether the value of improvements constitutes rent turns upon the intent of the parties of the lease.
This tax provision may be of benefit to a lessee if in lieu of rent he would agree to make the improvements and thereby get a current period deduction for the expense as opposed amortization of the cost over a longer period.
From the lessors perspective, in lieu of giving a rent free space-he is putting the burden of a buildout-onto the lessee.
While I am not giving you tax advice and/or a tax opinion, I am just passing on a tax law provision I bumped into recently.
If you do sell this concept, you should consult a tax advisor for further information. For example, the intent of the parties of the lease is controlling in this type of agreement.
Talk to you soon.
Marty.
Martin J. Reitinger, CPA
1801 Murchison Drive, Suite 12
Burlingame, CA 94010
Voice: (650) 692-1415
Fax: (650) 692-1402
Hi Bruce,
In recent Tax Court case (TC Memo 2009-107), the court held that leasehold improvements made by a tenant in lieu of rent were fully deductible as rent expense when the improvement were clearly and contractually a substitute for rent.
In effect, where a lessee places improvements on real estate that consitute a substitute for rent, the improvements made in lieu of rent is rental income to lessor and rental expense to the lessee. Whether the value of improvements constitutes rent turns upon the intent of the parties of the lease.
This tax provision may be of benefit to a lessee if in lieu of rent he would agree to make the improvements and thereby get a current period deduction for the expense as opposed amortization of the cost over a longer period.
From the lessors perspective, in lieu of giving a rent free space-he is putting the burden of a buildout-onto the lessee.
While I am not giving you tax advice and/or a tax opinion, I am just passing on a tax law provision I bumped into recently.
If you do sell this concept, you should consult a tax advisor for further information. For example, the intent of the parties of the lease is controlling in this type of agreement.
Talk to you soon.
Marty.
Martin J. Reitinger, CPA
1801 Murchison Drive, Suite 12
Burlingame, CA 94010
Voice: (650) 692-1415
Fax: (650) 692-1402
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