Leasehold Improvements

by Sharon
(Canada)

What constitutes a leasehold improvement?

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

Sharon,

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

Lighting
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.

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Businessdirectory.com 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?".

Oct 20, 2015

AC Unit Leasehold Improvement
by: Krystal

Hello,

One of my clients lease a building and the landlord refused to repair/replace their AC unit this summer. Being that they are a store, they really needed the AC during our insanely hot summer so they purchased it and paid to have it installed themselves.

I have allocated those costs to leasehold improvements but am not sure how often I should be expensing it. It was about $5000.00.

Do I need to ask the supplier how long this item should be in existence and break down the costs accordingly? Do I expense it out over the length of the lease? Help. Thanks so much.

Oct 21, 2015

Krystal
by: Lake

Capitalized leasehold improvements should be amortized over the remaining term of the lease or the useful life of the fixed asset ... whichever is less.

Be aware that, as this is a leasehold improvement, ownership of air conditioning unit reverts to the landlord at the end of the lease if it can't be removed without damaging the property.

Apr 27, 2016

Signs
by: Anonymous

Are Store signs considered Leasehold Improvement?

Apr 27, 2016

Store Signs
by: Lake

CRA classifies outdoor store signs under CCA class 8 ...

"Class 8 with a CCA rate of 20% includes certain property that is not included in another class. Examples include furniture, appliances, tools costing $500 or more per tool, some fixtures, machinery, outdoor advertising signs, refrigeration equipment, and other equipment you use in business.

Photocopiers and electronic communications equipment, such as fax machines and electronic telephone equipment are also included in Class 8. Also include in Class 8 data network infrastructure equipment and systems software for that equipment acquired before March 23, 2004. If acquired after March 22, 2004, include it in Class 46."

source: CRA website

Mar 21, 2017

Leased Vehicle Additions
by: Anonymous

Hi,
I am a self employed who leased a Mercedes sprinter Van and make improvements to it.

Can the extra parts installed on a leased vehicle/ Mercedes Sprinter Van such as lather rack and inside shelving/drawers be treated as a Leasehold improvement and included in class 13 for CCA?

If not, would you be so kind to advise the best procedure.

Thank you.

Aug 06, 2017

Leased Vehicle Additions
by: Laura

Without doing any research, I'd guess no. There are very specific and rigid rules for vehicles ... particularly luxury vehicles.

Your subject title probably most accurately describes what you are doing. If it is an addition, it would be added to cost of the vehicle.

Mar 29, 2018

Leasehold Improvement of business purchased
by: Inah

I purchased an existing business and they have done improvements on the leased property - e.g. wall paintings, window bars. How should I value it in my books? And how long should I amortize it?

The business name was changed and new accounting books is being prepared.

Thanks.

Apr 07, 2018

Inah
by: Lake

You need to see your accountant. There is nothing worse than seeing a set of books that were not setup properly at the start of the business ... the setup errors carry through and muck everything up.

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