"Nothing is certain except for death and taxes," Benjamin Franklin.
It's tax season. I don't want to speak for you, but I want the most deductions as possible. How about you? With commercial leases, a big question is - how do I depreciate tenant improvement costs?
In three easy steps, we're going to dive into what questions to ask your CPA to get the most depreciation possible for your tenant improvement.
Question 1: Is my renovation considered a tenant improvement?
A tenant improvement is an improvement that is either done by the landlord or tenant. The improvement needs to be contained in the wall and only be for one tenant. For example, extending HVAC into another room is a tenant improvement and can be written off, but painting the walls cannot.
Question 2: Who gets the deduction?
Who paid for the tenant improvement? The general rule of thumb is that the landlord pays for the tenant improvements in what is known as a tenant improvement allowance or a leasehold allowance.
If the landlord pays for the tenant improvement, he or she gets to write it off on their taxes. If the tenant provides the funds to pay for the TI, then he or she will take the deduction.
Question 3: How many years can I depreciate my tenant improvement?
Pre-tax overhaul, depreciation of building improvements was over 39 years (or less for certain property types and improvements) and qualified lease improvements were eligible for a 15-year cost recovery with a Section 179 expensing.
The 2018 Tax Cuts and Jobs Act (TCJA) Changes to Tenant Improvement Depreciation
Originally, building improvements, leasehold improvements, qualified restaurant property, and qualified retail improvement were all treated differently. Now, they are rolled into one: qualified improvement property (QIP). Something to note, the 15-year depreciation bonus is missing in the new tax law. At this time, depreciation takes place over 20 or more years. Make sure to ask your CPA the length of time you need to depreciate your TI.