Lessee construction allowances.

Tax Adviser, The, October, 2005 by Barranca, Steven C.

A landlord may induce a prospective tenant to lease space by arranging to reimburse the tenant for costs incurred to make leasehold improvements or build-outs ("lessee construction allowances"). The most critical tax issue that arises is whether the allowance payments should be included in the tenant's income. A lesser issue is determining who (landlord and/or tenant) may depreciate such costs as commercial real property, or amortize them as lease acquisition costs.

Exclusion

In determining whether the allowances may be excluded from the tenant's gross income, many tax advisers mistakenly rely solely on Sec. 110. In general, Sec. 110 precludes a tenant from including in gross income certain lessee construction allowances associated with certain...

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