Maximizing the Tax Benefits of Leasehold Improvements

Maximizing the Tax Benefits
of Leasehold Improvements


Problem

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


Approach & Solution

Many times, an examination of the IRS code and new tax legislation leads to the discovery of strategies 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 company’s financial reporting process in order to provide the data for further analysis.

Hart Vida and Partners’ annual review for the client revealed that their former tax preparer had not taken advantage of depreciation laws relating to leasehold improvements. Research showed that a number of the leasehold improvements, based on provisions in the American Jobs Creation Act of 2004, could be depreciated over a 15-year recovery period, rather than the typical 39- year life. This allowed the company to accelerate the depreciation schedule, resulting in larger tax deductions over a shorter period. Further analysis identified which of the leasehold improvements qualified for the shorter depreciation life.

The tax advantage that results from maximizing the depreciation of leasehold improvements parallels the optimizing of cash flow. Hart Vida & Partners’ 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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