6A — May 11 - 24, 2018 — Financial Digest — M id A tlantic

Real Estate Journal


F inancial D igest

By Beverly Jenkins, EA, MST, and Travis Klein, CPA, MBA Tax planning for tenant improvement allowances


t is common practice for commercial real property trade or businesses to offer

the timeline and, most impor- tantly, who will pay for the im- provements. It is pertinent to

of getting the improvements completed themselves, and the tenant pays out of pocket expenses that exceed the bud- get. The tenant improvements are depreciated over a given useful life, as set forth in In- ternal Revenue Service (IRS) technical guidance. The other way TI allowances can be handled is when the property owner gives the ten- ant cash and the tenant goes out and contracts the improve- ment work themselves under guidelines and parameters set forth in the lease agreement. In this instance, there is a dif- ferent tax treatment on those

payments, for both the prop- erty owner and the tenant. The property owner amortizes the costs over the life of the lease. Since the costs are amortized over the life of the lease, there is no accelerated depreciation eligible on this property for the property owner. While the tenant can control the process in-house and depreciate the improvements, they must pick up the cash as taxable income in the year the cash is received. When the property owner provides the cash allowance to the tenant, there is a way to avoid the unfavorable treat- ment. Internal Revenue Code

(IRC) Sec. 110 allows the tenants to exclude the cash received from income and the property owner depreciates the improvements over the useful life. In order to get this favorable treatment, the lease agreement must mention the safe-harbor under Sec. 110 or that the improvements are for real property only. In this situ- ation, these costs are eligible for accelerated depreciation by the property owner. Sec- tion 110 requires a disclosure with a taxpayer’s timely filed tax return, including exten- sions, by both the property owner and the tenant. The disclosure should include the name and address, tax iden- tification number, location of the property and the amount of the construction allowance that qualifies under Sec. 110. When executing a lease, it is pertinent for the prop- erty owner and the tenant to be aware of the use of Sec. 110, and to specify within the lease agreement that their TI allowance will be used to improve qualified long-term real property for a short-term retail lease not to exceed 15 years. For the purposes of Sec. 110, the term “retail lease” has a very broad definition and includes tenants that sell services to the public. Small details within the lease agree- ment when receiving cash to perform tenant improvements can be the difference between picking up income and the ac- celeration of cash-less deduc- tions in the current year for tax purposes. Beverly Jenkins, EA, MST is a principal in El- lin & Tucker’s tax depart- ment and leader for many of Ellin & Tucker’s most prominent commercial and residential real es- tate engagements. She has more than two decades of expertise in tax reporting, compliance and manage- ment advisory services for real estate firms, business owners and investors. Travis Klein, CPA, MBA is a manager in the tax department and is a well- respected advisor for many of the firm’s commercial and residential real estate engagements. Travis has a strong grasp of the complex real estate tax planning, consulting, and compliance matters facing real estate business owners. 

new, prospec- tive or long- standing ten- ants a tenant improvement (TI ) a l l ow- ance. These costs are used to help offset the tenant’s

properly re- view all lease agreements for pitfalls and leasing issues hidden beneath the legal jargon. Normally, a real proper-

Beverly Jenkins

Travis Klein

cost of moving into the space and/or retrofitting the space to meet industry guidelines or unique needs. The lease agreement outlines who will complete the design, the work,

ty trade or business (property owner) will give a tenant a set budget or a maximum amount they are willing to spend on the improvements. Typically, the property owner is in charge

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