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Allocating Leasehold Improvements or New Building Costs for Your Best Tax Position

All items that are modular units, or desks, chairs etc – all items that are moveable – that is, transportable within the office, or could be moved to a new office – all such items are considered equipment and not leasehold improvements, and therefore create a greater up front deduction.

You would want to break down that cost into reasonably allocated items for tax reporting purposes, and for the personal property tax annual report.

Demolition cost , labor, hauling and such should be separated and is 100% deductible.

Ground preparation, parking lots, fencing, and such are land improvements, not building or leasehold improvements, and the cost should be separated accordingly, and by type of land improvement.

Cabinets are considered equipment if they can be screwed into the wall, and unscrewed and moved. Built-in cabinets are considered leasehold improvements because you could not move them readily without destroying or damaging a wall or partition.

After all that has been separated out, then all the rest would likely be actual changes or additions to the permanent structure (walls and such), and are deductible as leasehold improvements (which is generally 39 years, but there are several accelerated options which we will handle at tax time and you really don’t need to bother yourselves with knowing that part of it. (I’ll makes sure you have your best situation from the information you provide)

However, some seemingly leasehold improvements in some cases are actually part of the equipment. For example, if any special wiring is done for a particular piece of equipment (X-ray, for example) or a partition or lead wall, then those items become part of the cost of the equipment (better for you), rather than a leasehold improvement. Whereas regular wiring in walls is a leasehold improvement.

The cost for electrical panels, junctions and such that regulate the electrical are equipment assets, not leasehold improvements, and can be broken out separately for an improved deduction.

Lighting fixtures that can be removed and relocated to function elsewhere are considered equipment. Those that cannot are considered leasehold improvements.

Some parts of a leasehold improvement may simply be a repair. In the context of improving your premises, a repair might be something that is unrelated to the overall leasehold improvement. For example, the leasehold improvement is in the NE corner of the space, but the front door is repaired. The cost to fix the front door may be separated and deducted currently as a repair expense.

The other item to check for when remodeling or building is ADA credits – improvements that give access to disabled persons which previously did not meet ADA guidelines, or original construction. There are both deductions and credits associated with ADA improvements. Break out all ADA items separately from other construction or remodel costs, listing each item specifically.

Your order of preference for your best tax position when improving your premises, or constructing a building:

1) allocations to ADA improvements

2) allocations to repair (including demolition)

3) allocations to equipment, furniture and fixtures

4) allocations to land improvements

5) allocation to leasehold improvements

It is always best if your contractor can break out the dollar amounts and information on invoices for such items mentioned above. It has also been helpful if you take notes as you go about repair or ADA items, and such as discussed herein.

By presenting such detailed information to us, we can best allocate your constructions costs for your best overall benefit.

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