Capital Improvement

[Matthew Bigelow]

Hi, I have a client (LLC) that owns and leases a warehouse. Under the terms of the lease agreement, the LLC pays the cost of any capital improvements. However, subject to the language of the agreement, the lessee pays 1/144^th of the cost of said improvement along with the monthly rent either until the lease terminates or 144 months go by. The lessor also has the option to terminate the lease immediately. Assuming the do not exercise that option, my thought is that the 1/144^th payment is simply booked as additional rent and the LLC places the improvement on their books, taking appropriate depreciation on the asset. Does anyone see any issues with this treatment?

 

Matthew Bigelow, E.A.

JLZ Business Services, Inc.

Ph. (805) 643-3295, Fax: (805) 643-3297

email: mbig...@jlzinc.com

Web: www.jlzinc.com

Office Hours: M – TH 9 AM – 5 PM, F 9 AM – 2 PM

 

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[Lee Reams]

I agree with that. Improvements of that type are simply to accommodate the lessor’s needs so the lessor is simply paying additional rent for that improvement.  

Lee

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	Lee Reams Sr., BSME, EA Chief Content Officer CountingWorks Pro | CountingWorks | TaxBuzz | TaxCPE p: 1.800.442.2477 x240 w: www.countingworkspro.com/  e: lee....@countingworks.com
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