Modifying an Agreement and Improvements You Make…How in the World Do I Record This?

Yesterday, Crystal learned how she needed to record the cost of getting the lease.  Now that she has it, she would like to change some of the stipulations.  The lessor is willing to change some of the terms, but for a price!

Crystal has agreed to the price of $3,000 to change certain costs in the lease to fixed amounts with annual caps.  She will capitalize this amount and amortize it over the 12 remaining years of the lease.  Her amortization deduction will be $250 ($3,000 / 12) a year.  She cannot deduct this cost as additional rent, even if the agreement refers to it as additional rent.  Crystal is so happy that she decided to have a CPA on her team.  She thought that all these expenses could be deducted on her current year taxes.  She has saved herself from a run in with the IRS.  Here’s what she learned:

Improvements to the space are also part of Crystal’s plan.  If the changes are permanent, Crystal will need to depreciate these costs over the life of the item/change, using the modified accelerated cost recovery system (MACRS).  She spent $50,000 and the life of the changes will be 10 years.  She can deduct $5,000 in 2017, $9,000 in 2018, $7,200 in 2019 and the following 7 years will also be different amounts.  This calculation can be done by your CPA or a MACRS calculator.

If you are in this situation and need help, contact us at info@excerebus.com or 407-988-5647.

Categories: Tax Information

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