Lessee Remodeling

[KBTS]

Client owns a gym and moved to a new location in a commercial building last year. They paid a little more than $12,000 to remodel the area before moving in - carpeting, fixtures, etc. The landlord agreed to give them a $10,000 "rent credit" toward the remodeling costs. I have a couple questions:

1. Since the landlord agreed to consider $10K of the remodel as rent, can my client deduct this amount in full in 2013?

2. What about the remainder of the cost? I am confused on the leasehold improvement rules - or if this even qualifies as such. TTB indicates they are eligible for Sect 179 deduction, the 50% bonus depreciation, and a 15 year recover period. Other places I have read that the improvements are amortized over the shorter of the remaining term of lease or the useful life of the improvement.

Any help is appreciated.

[AJsTax]

Leasehold improvement

I believe those are all leasehold improvements. They will just have a lower rent expense for that year.
The leasehold improvements do have a special treatment for 2013. all as you listed: Sect 179 if they want, then bonus 50% of any left, then 15 years on balance.

[Burke]

Leasehold improvements must be designated in the lease, so be sure this is part of it. If the lease terminates before the 15-yr write-off period and the lessee vacates the building, the entire remaining amt is deducted.

[ttbtaxes]

The building must also be older than three years otherwise the improvements do not meet the definition of qualified leasehold improvements.

[Burke]

Yes, that is correct. Also, I should have noted, this 15-yr write off expired for years after 2013 and has not yet been extended for 2014 or later, although it is "on the table" for discussion, I understand.

[JON]

I am missing something??

If the landlord says deduct the first $10,000 of your rent against your leasholds why not do that. Credit leaseholds and debit rent. amortize the balance. If the rent is startup or regular operating that is still better than leasheold amortization. It sounds like all of this is in the lease or amendments to it.

[TaxGuyBill]

The landlord agreed to give them a $10,000 "rent credit" toward the remodeling costs.

I agree with Jon. Isn't this $10,000 of rent and $2,000 of leasehold improvements?