Academic journal article Journal of Accountancy

Qualified Lessee Construction Allowances

Academic journal article Journal of Accountancy

Qualified Lessee Construction Allowances

Article excerpt

Under Sec. 110, certain businesses that are tenants of a retail space may exclude from gross income amounts received from the lessor of the space to construct or improve real property used in the taxpayer's trade or business. This safe harbor applies where the lease is for 15 years or less (including options to renew) and the property improved or constructed is nonresidential real property that is not Sec. 1245 property. The property must be part of, or present at, the retail space and revert to the lessor at the end of the lease.

"Retail" means selling tangible personal property or services, including professional services, to the general public.

PLANNING CONSIDERATIONS

Navigating Sec. 110 does not need to be daunting if advisers keep the following planning considerations in mind:

* Make sure the lease contains the appropriate language regarding construction of qualified long-term real property and its ownership (i.e., the landlord owns the improvements). To avoid any income recognition, the allowance can be paid in installments as costs are incurred, with a final "true-up" payment at the end of the project. Alternatively, the agreement can provide that the lessee will return any unused allowance to the lessor.

* If the construction or improvement includes personal property, the parties may wish to specifically allocate a portion of the allowance to it and agree that the tenant is acting as the landlord's agent with respect to the personal property.

* Tenants should maintain documentation of the amount of the allowance received and the expenditures made for qualified real property. Both parties must provide with their tax returns the information described in Sec. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.