Leasehold improvements

[JG EA]

What is your opinion:

If a long time self employed taxpayer who sold his product to retail stores, went into the retail business himself this year, rented a store in his same type of business, then decided he wanted to go back to his old way of doing business and sold his lease to someone else.... what does he do with his leasehold improvements in the store?

Would those leasehold expenses be like a new failed business and therefore a capital loss or would it be straight expense on his Schedule C?

[Bees Knees]

Pub 535, page 16 says:

If you add buildings or make other permanent
improvements to leased property, depreciate
the cost of the improvements using the modified
accelerated cost recovery system (MACRS).
Depreciate the property over its appropriate re-
covery period. You cannot amortize the cost
over the remaining term of the lease.
If you do not keep the improvements when
you end the lease, figure your gain or loss based
on your adjusted basis in the improvements at
that time.

[Golden Rocket]

Appropriate Time

Glad this subject came up.

One of my clients, with a government contractor for hurricane cleanup, rented a building in Katrina-ravaged Mississippi. $50,000 in leasehold improvements which could not be removed, or cost-prohibitive to do so. Verbal contacts at FEMA indicated the operation would remain under contract for 3 years.

After 9 months, FEMA jerked the contract, and negotiated a settlement with the contractor. Some things were covered, some things weren't. The leasehold improvements were not. The building lease was 18 months, and the rent was covered and forwarded to the property owner.

What is the "appropriate time" for length of leasehold depreciation? Since the improvements were abandoned, how is the tax loss deducted for the unamortized value?

[JG EA]

Thanks Bees.

GR

Since the improvements were abandoned, how is the tax loss deducted for the unamortized value?

GR I think (but not entirely clear) he answered that in the quote:

If you do not keep the improvements when
you end the lease, figure your gain or loss based
on your adjusted basis in the improvements at
that time.

So that sounds like a 4797 sale.