Setting up an asset account for leased space buildout - Capital expenditure

BUNKER · ‎February 04, 2023

We are doing renovations on a new 5 year lease for a retail space we are moving into and I have a few questions. On some of the leases I'll get reimbursed back by the landlord on some of the buildout through 2 different methods, 1/2 of the reimbursement will go towards partial rent reduction and the other half will go to a one time cash reimbursement back to me.

1. When setting up the asset account, what should I list for Tax form section. Leaseholder Improvements or Accumulative Deprecation or something other?

2. If I am paying for permanent fixtures, such as lighting, slatwalls, etc and providing them to the contractor, I am assuming I will code this under that fixed asset? Labor + materials on painting, drywall, framing, refinishing floors, etc. These fixtures will stay with the property when we leave.

I was going to name the asset account the property address such as 123 anywhere st. etc for each location and have it under fixed assets.

Thanks.

Rustler · ‎February 04, 2023

The improvements are a fixed asset as you say, but they are not a fixed asset until the work is done and the improvements are placed in service. At that time the fixed asset starts its depreciation schedule. I typically set it up like this
fixed assets:
>> 123 some street
>> >> cost 123 some street
>> >> accum deprec 123 some street

Create a service item called rent reduction and link it to the rent expense account. Use that item on the rent check after the full amount is listed under rent. Set the qty to negative one and enter the amount, then pay the balance due.

Rainflurry · ‎February 04, 2023

@BUNKER

You really should get with your CPA on both of these questions. Since you will be receiving ''leasehold incentives" for the leasehold improvements, the accounting treatment is generally different. In your case, it sounds like the improvements are the lessor's assets, not yours. However, you need to confirm this with a competent CPA.

In terms of the equipment, you can record them all as fixed assets in your books, but there are options regarding their tax treatment. Most FF&E can be fully expensed using Section 179 in the year they are put into service. Also, the IRS has a de minimis safe harbor that eliminates the need to capitalize any costs under $2,500, either at the invoice level or line-item level on an invoice. Knowing this upfront can save time at year-end by preventing you from having to track down your FF&E invoices.

BUNKER · ‎February 04, 2023

Thank you I'll certainly check with them. I think I found a good article about this. https://www.accountingtools.com/articles/how-do-i-account-for-leasehold-improvements.html#:~:text=Wh....

https://answerconnect.cch.com/topic/4dfddcf47c6b10009e7290b11c18c90202/leasehold-improvements#:~:tex....

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Setting up an asset account for leased space buildout - Capital expenditure