Maximizing the Tax Benefits of Leasehold Improvements

Maximizing the Tax Benefits of Leasehold Improvements


Problem

Over the years, a privately held real estate company invested almost $1.9 million to improve the various properties they were leasing. Traditionally, these leasehold improvements are depreciated over a life of 39 years. In most cases, this 39 year depreciation life is longer than the lease term itself. This significant disparity between lease term and depreciation life was costly for the company, and resulted in negative cash flow.

Approach

Many times, an examination of the IRS code and new tax legislation leads to the discovery of tax strategies and solutions that allow a company to avoid and defer taxes, reduce spending, and ultimately maximize cash flow. Additionally, an annual review must be incorporated into a companies’ financial reporting process, in order to provide the data for further analysis.

Solution

Our annual review of the client revealed that their former tax preparer had not taken advantage of the relevant depreciation laws, as they relate to leasehold improvements. Our research showed that a number of the leasehold improvements based on provisions in the American Jobs Creation Act of 2004 were able to be depreciated over a 15 year recovery period, instead of the typical 39 year life. This allowed the company to accelerate the depreciation schedule, resulting in larger tax deductions over a shorter period of time. Further analysis revealed exactly which of the leasehold improvements qualified for the shorter depreciation life.

Outcome

The tax benefits of maximizing the depreciation of leasehold benefits goes hand-in-hand with maximizing cash flow. Our detailed study of the leasehold improvements revealed that the company was eligible for a catch-up provision of over $480,000 in depreciation in the first year. The tax savings were in excess of $200,000.

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