Leasehold Improvements

by Sharon

What constitutes a leasehold improvement?

What is the advantage to record something as leasehold improvement versus operating expense?

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Leasehold improvements are improvements made to a leased/rented premise such as renovating the leased space to meet the business's needs prior to moving in.

By nature, they have a value lasting more than one year. Usually it includes things such as painting, laying carpet, installing a coffee center for employees, hanging window treatments, or changing light fixtures.

Depending on the contract, leasehold improvements can be removed at the end of the lease if it does not harm the premises.

Leasehold improvements must be capitalized and not expensed. This means they sit on the balance sheet and are depreciated / amortized over time, matching the expenses with revenues.

Comments for Leasehold Improvements

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Mar 06, 2013
Leasehold Improvements
by: Penny

I am wondering, would you consider the act of painting the leased space a leasehold improvement? It does not fall under the category of "remove at the end of the lease if it causes no damage to the space".

I just wasn't sure painting was a good example of leasehold, I would consider a coat of paint maintenance.

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Penny, leasehold expenses generally include things that improve or alter a rented/leased property or some costs related to the lease itself such as extending a lease or subletting.

Materiality would also play a role here.

So if the cost of the paint were under say $500 and you (the tenant) were going to do the painting, then I would expense it under maintenance and repairs.

However, if you bought paint and were paying someone to paint the premises and the cost of the material and labor combined was over $500 , I'd capitalize it to leasehold improvements.

It is important to note for tax purposes, you cannot claim your own labor related to the maintenance and repair of property.

Mar 07, 2013
Leasehold Improvements
by: Penny

Thank you very much for your reply and I agree with you 100%. It is nice to be able to bounce ones thoughts off someone else to be sure there is validity to it. I appreciate your site immensely. Keep up the great work.

May 08, 2013
by: Anonymous

We are looking into the cost of improved flourescent bulbs and glare cutting screens on our 50 hanging fixtures. I don't think the bulbs would be considered a leasehold improvement....but what about the lenses/screens. The cost is close to $3K.

section divider defines leasehold improvements as follows:

"Improvements performed on a leased property, such as additions, alterations, remodeling, or renovations.

For accounting purposes, all leasehold improvements are capitalized (recorded as an asset with a corresponding liability) and amortized over the remaining life of the lease term or the life of the improvement (whichever is shorter). Upon termination of the lease, such improvements normally become the property of the owner (lessor) without any cost or obligation."

Given the above definition, I think the question you should ask is, "Will I be able to take it with me when the lease is over or the business moves to another location?".

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