Economic Stimulus Package Makes Surprising Come Back
In a surprise and sudden move, the economic stimulus package sprang back to life, sailed through the House and Senate on huge bipartisan votes and was signed in the Rose Garden on Saturday, March 9, 2002.
Under the bill, 30% of the costs of leasehold improvements made between 9/11/01 and 9/11/04 may be deducted in the year the improvements are placed in service. The remaining 70% will be recovered over the remaining 38 years on the property. Notably, however, the so-called “close-out” provisions of current law will continue to apply. Thus, if a lease terminated before the 38-year period has elapsed, any remaining balance in the depreciation account may be deducted in the year the property is taken out of service. A transition rule will permit the 30% deduction for property placed in service between 9/12/04 and 1/1/05, so long as a binding contract was in place for the property as of 9/11/04.
Code Section 168 (k) (2) (A) (i). Qualified leasehold improvement property is any improvement to an interior portion of a building that is nonresidential real property, as long as the improvement is made under or pursuant to a lease either by the lessee or sublessee or the lessor of that portion of the building. The improved portion must be occupied exclusively by the lessee or sublesee, and the improvement must be placed in service more than three years after the building was first placed in service. Code Section 168 (k) (3) (A). Such property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building. Code Section 168 (k) (3) (B). A commitment to enter into a lease is treated as a lease, and the parties to the commitment are treated as the lessor and lessee. A lease between related persons, however is not considered a lease. Members of an affiliated group and persons with a relationship described in Code Section 267 (b), but with 80 percent or more substituted for the more than 50 percent criteria in that section, are considered related. Code Section 168 (k) (3) (C). See Section 51.2 for a discussion of the definition of related persons.
For more information, contact your accounting firm.