Polished Concrete Floor Depreciation

[ksf]

I have a lessee who did polished conrete floor instead of carpeting in his offices. Does this qualify for 7 year depreciation and or sec 179 deduction?

I can't find anything about depreciation relating to polished concrete flooring in the TTB or IRS website.

Thanks for you help.

KSF

[ChEAr$]

A concrete floor, unpolished or not, is part of the building. So this facts tells us how to depreciate it.

[Nashville]

Whooaaa!!

C'mon guys. He doesn't even own the building and can't depreciate it.

Was there a carpet there when he began the lease? I assume from the OP that the lessee chose to finish the concrete and paid for it with his own money.

If so, I'm leaning toward Leasehold Improvements - SL over the remainder of the lease or minimum of 3 yrs. No s.179

Also, last fall in seminars heard a great deal about "building components" - capitalizing repairs instead of expensing them so the IRS can collect more $$. Don't know how they did this without changing the law [It's a miracle!! We'll make millions!!]. But I think this applies to a building owner instead of a lessee.

In other words if a 78-year-old owner wants to do major foundation repairs for $39,000 then he can take $1000/yr until he is 117 years old.

[Roberts]

I have a lessee who did polished conrete floor instead of carpeting in his offices. Does this qualify for 7 year depreciation and or sec 179 deduction?

So the lessee paid for the improvement?

Was this improvement in lieu of rent payments? If so it is an immediate expense as if he paid rent.
If not, depreciate it over the life of the signed lease or the expected life of the improvement (whichever is shorter). Seems to me it would be safe to assume the life of the polish is 7 years for a business property.

[ChEAr$]

C'mon guys. He doesn't even own the building and can't depreciate it.

Was there a carpet there when he began the lease? I assume from the OP that the lessee chose to finish the concrete and paid for it with his own money.

If so, I'm leaning toward Leasehold Improvements - SL over the remainder of the lease or minimum of 3 yrs. No s.179

Also, last fall in seminars heard a great deal about "building components" - capitalizing repairs instead of expensing them so the IRS can collect more $$. Don't know how they did this without changing the law [It's a miracle!! We'll make millions!!]. But I think this applies to a building owner instead of a lessee.

In other words if a 78-year-old owner wants to do major foundation repairs for $39,000 then he can take $1000/yr until he is 117 years old.

Ron, any such "leasehold improvement" takes on the same character as it would for the owner. I didn't catch the fact that he leased the building, but since he did, the improvements are in the nature of added rent, and therefore the owner must capitalized said expenditure.

[Gary2]

Ron, any such "leasehold improvement" takes on the same character as it would for the owner. I didn't catch the fact that he leased the building, but since he did, the improvements are in the nature of added rent, and therefore the owner must capitalized said expenditure.

I thought they were only treated as added rent if they're actually characterized as such in the lease. Otherwise the landlord gets no income, no basis, and no depreciation - essentially paying the tax on the increased value due to the improvements when it's sold.

[ChEAr$]

I thought they were only treated as added rent if they're actually characterized as such in the lease. Otherwise the landlord gets no income, no basis, and no depreciation - essentially paying the tax on the increased value due to the improvements when it's sold.

The renter of course will add everything into the 1099-misc.

[Gary2]

The renter of course will add everything into the 1099-misc.

I disagree. First, the 1099-misc isn't determinative of whether something is or isn't rent (just like a box 7 entry isn't proof that the recipient was engaged in a business). Second, one of the effects of treating it as rent is that the lessee has converted an item that normally would be depreciated into a current expense for them, bypassing any limits on 179 or bonus depreciation; this is an issue independent of how the lessor handles it.

From the little I've found on the subject, it seems clear that there is a question of whether leasehold improvements paid by the lessee can be considered rent. But other than the obvious cases (e.g. a lease with an explicit provision "lessee will spend $10K on a new air conditioner, for which lessor will credit $2000/month in lieu of rent for the first five months"), I've found little guidance on how it must be structured to avoid considering it rent.

So here's a concocted example: Computer company leases an office building from the owner. The lease specifies $10,000/month rent, and allows the lessor to redo wiring as needed to support their computer systems. They discover, after signing the lease, moving in, and maybe after a couple of years experience that they need to upgrade the main panel, which would be a capital improvement. While the lease allows the tenant to make improvements, it never required this one, nor did it anticipate it in any way. You simply can't argue that the tenant can say "Oh, by the way, we upgraded your electric panel so I'm telling the IRS I paid you an extra $5K in rent more than required by the lease." Nor can the tenant say "Oh, by the way, we spent $5K to upgrade the electric system because we needed it, so we're deducting that from our lease payments to you."

It seems to me that this is purely a leasehold improvement by the tenant, and is treated as such by the tenant for tax purposes, while the landlord recognizes neither current income nor basis changes. I haven't found much on the gotchas - what type of lease provisions would either ensure or prevent this treatment - but I'm leaning towards believing this is a perfectly valid situation, until I find a sound argument against it.