Lease+hold+improvement

@http://www.investopedia.com/terms/l/leaseholdimprovement.asp

What is a 'Leasehold Improvement'
A leasehold improvement consists of alterations made to rental premises in order to customize it for the specific needs of a tenant. [|Leasehold] improvements, such as painting, installing partitions, changing the flooring, or putting in customized light fixtures can either be undertaken by [|landlords], who may offer to do so to increase the marketability of their rental units, or by the tenants themselves. While the useful [|economic life] of most leasehold improvements is 5 to 10 years, the [|Internal Revenue Code] requires that [|depreciation] for such improvements occur over the economic life of the building or 15 years.

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What is a 'Leasehold Improvement'
A leasehold improvement consists of alterations made to rental premises in order to customize it for the specific needs of a tenant. [|Leasehold] improvements, such as painting, installing partitions, changing the flooring, or putting in customized light fixtures can either be undertaken by [|landlords], who may offer to do so to increase the marketability of their rental units, or by the tenants themselves. While the useful [|economic life] of most leasehold improvements is 5 to 10 years, the [|Internal Revenue Code] requires that [|depreciation] for such improvements occur over the economic life of the building or 15 years. 

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BREAKING DOWN 'Leasehold Improvement'
Landlords may pay for leasehold improvements to encourage tenants to rent spaces for longer durations. For example, a business owner is leasing a building for her disc golf shop. The landlord adds four walls to the leased area and creates built-in displays and storage areas for the discs. These alterations are considered leasehold improvements.

Ways a Landlord Pays for Leasehold Improvements
A landlord may pay for commercial leasehold improvements through a tenant improvement allowance (TIA). The landlord allows a set budget for improvements, typically $5 to $15 per square foot, and oversees the project. The tenant controls the renovation process, which may be time-consuming. In addition, if project budgets are exceeded, the tenant covers the balance. Rent discounts may be offered for leasehold improvements as well. The landlord offers the tenant free or reduced rent for a set number of months, such as one free month per year on the lease, as a means of the tenant saving for space alterations. The tenant typically oversees the project and has control over the lease improvements. The tenant is also responsible if costs exceed the budgeted amounts. In addition, rent may be raised at a later date, causing the tenant to pay more for the space long term. <span style="background-color: #ffffff; font-family: 'Source Sans Pro',sans-serif; font-size: 16px;">Another type of leasehold improvement is a building standard allowance. The tenant may decide among various selections the landlord provides, such as one of four colors of paint. These items might not meet the tenant’s needs, and he might not be satisfied with the results. Additional improvements are covered by the tenant. The landlord oversees the project.

<span style="background-color: #ffffff; color: #362f2d; font-family: 'Source Sans Pro',sans-serif; font-size: 22px;">Internal Revenue Service Alterations to Leasehold Improvement Rules
<span style="background-color: #ffffff; font-family: 'Source Sans Pro',sans-serif; font-size: 16px;">In December 2015, congress passed the Protecting Americans from Tax Hikes (PATH) Act. The Act modified, extended and made permanent many tax provisions related to depreciation, including leasehold improvements. <span style="background-color: #ffffff; font-family: 'Source Sans Pro',sans-serif; font-size: 16px;">For leased space in use before Jan. 1, 2016, bonus depreciation became available for property with specific requirements. The leasehold improvements had to be made to the interior of the building, and made under a lease with only that tenant occupying the space. The landlord and tenant may not be related, and the leasehold improvement must be completed after three years of the building first being occupied for service. Under the Act, building enlargements, elevators, escalators, structural components in a common area and structural framework in the building are not considered leasehold improvements. <span style="background-color: #ffffff; display: block; font-family: 'Source Sans Pro',sans-serif; font-size: 16px;">

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=<span style="font-family: AdelleBasic-Bold,serif; vertical-align: baseline;">The GAAP Rules of Leasehold Improvement Depreciation = by Eric Bank <span style="color: #222222; display: block; font-family: inherit; font-size: 14px; vertical-align: baseline;"> Leases are agreements that transfer the right to use property, a plant or equipment from one contracting party to the other. Leases are temporary in scope, and the property rights revert to the lessor unless the leaseholder purchases or otherwise takes possession of the property at the end of the lease. You can amortize the cost of leasehold improvements, but the amortization period requires interpretation. Generally accepted accounting principles, or GAAP, offer direction.

<span style="font-family: AdelleBasic-Bold,serif; font-size: 15px; vertical-align: baseline;">Capital vs. Operation Leases
<span style="color: #222222; display: block; font-family: inherit; font-size: 14px; vertical-align: baseline;">Operating leases are rental agreements. The lessee rents property for a specified period, after which the property reverts to the lessor. A capital lease provides the lessee the opportunity to purchase the leased property at a bargain price. You can improve property under either type of lease, but the amortization periods may differ. A leasehold improvement adds value to the leased property. For example, you might lease an empty building and then install store fixtures.

<span style="font-family: AdelleBasic-Bold,serif; font-size: 15px; vertical-align: baseline;">Amortization Period
<span style="color: #222222; display: block; font-family: inherit; font-size: 14px; vertical-align: baseline;">Because the lessee doesn’t own the leased property during the life of the lease, the benefits from leasehold improvements are intangible. Amortization is the periodic expensing of intangible assets, whereas depreciation applies to tangible assets you own. Although sometimes referred to as depreciation, you amortize leasehold improvements for the lesser of the improvement’s useful life or the lease term. The term of a lease depends on the circumstances surrounding lease expiration. If the cost of the lease is less than the lessee’s capitalization limit, the lease is expensed completely in the first year.

<span style="font-family: AdelleBasic-Bold,serif; font-size: 15px; vertical-align: baseline;">Lease Term
<span style="color: #222222; display: block; font-family: inherit; font-size: 14px; vertical-align: baseline;">For purposes of amortization, the lease period might extend beyond the lease expiration date. According to the Financial Accounting Standards Board, which oversees GAAP, the effective lease period is extended if the lease provides a bargain-priced renewal option or a penalty for failure to renew. Extending the lease term results in a longer amortization period, smaller annual amortization expenses and higher net income. If the leased property transfers to the lessee at the end of a capital lease, the former lessee depreciates the remaining value of the property for the remainder of its useful life. The lessee should select an amortization method -- straight line or declining balance -- that best reflects the improvement’s loss of value over time. For 2013 tax accounting, leasehold improvements can qualify for 50 percent amortization in the first year. Some improvement might qualify for Section 179 expensing up to an annual limit.

<span style="font-family: AdelleBasic-Bold,serif; font-size: 15px; vertical-align: baseline;">Accounting Entries
<span style="color: #222222; display: block; font-family: inherit; font-size: 14px; vertical-align: baseline;">The annual amortization expense for a leasehold improvement is the cost of the improvement divided by the lesser of the improvement’s useful life or the lease term, assuming straight-line amortization. Carry the cost of the improvement in the noncurrent asset account “leasehold improvements.” Create accounting adjustments at year-end to recognize amortization of the improvements. Debit amortization expense and credit accumulated amortization for the annual amount. Accumulated amortization is a contra-asset account that reduces the net value of the leasehold improvement. <span style="background-color: #ffffff; display: block; font-family: RobotoRegular,arial,sans-serif; font-size: 12px; vertical-align: baseline;"> <span style="background-color: #ffffff; display: block; font-family: RobotoRegular,arial,sans-serif; font-size: 12px; vertical-align: baseline;">