42.14 Leasehold Improvements

For qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property placed in service in 2010 or 2011, up to $250,000 of cost ($250,000 combined for all three types) was deductible under first-year expensing (42.3). When this book went to press, Congress was considering proposals to extend the expensing rules to qualified improvements placed in service in 2012; see the e-Supplement at jklasser.com .

Qualified leasehold improvements qualify for bonus depreciation (42.21).

Qualified leasehold, restaurant, and retail improvements placed in service before 2012 were depreciable under MACRS over a 15-year period; see the e-Supplement at jklasser.com for an update on proposals to extend the 15-year recovery period to qualified improvements placed in service in 2012. Other leasehold improvements are depreciated under the MACRS rates for buildings shown at 42.12. The term of the lease is ignored under MACRS. If the lease term is shorter than the MACRS life and you do not retain the improvements at the end of the term, the remaining undepreciated basis is a deductible loss.

Qualified improvements eligible for first-year expensing and 15-year recovery.

If the expensing and 15-year recovery rules for qualified improvements are extended to 2012 (see the e-Supplement at jklasser.com ), the following eligibility rules would continue to apply. A qualified leasehold improvement must be made to an interior part of a building that is nonresidential realty. Leasehold, restaurant, and retail improvements must be placed in service more than three years after the date that the building was first placed in service. For restaurant improvements, more than 50% of the building’s square footage must be devoted to the preparation of meals and seating for on-premise consumption of prepared meals. For retail improvements, the portion of the building must be open to the general public and used in the retail trade or business of selling tangible personal property to the general public. See the Form 4562 instructions for further details.