Category: Deductions & Credits
Subject: Leasehold Improvements and Paving Costs
Title: Acceptable Cost Recovery Periods
IRC Sections: 168
Filename: 1318.html
Date Produced: 05/94 Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com Facts
Lessor made improvements to a building pursuant to the terms of
a lease. The building is leased to a franchisee of a national
chain, and the interior decor is specified by the franchisor.
At the termination of the lease, the interior decor of the building
would be useless to any other tenant, and the lessor would be
required to completely remodel in order to re-lease the property. Issue 1
Is it possible to recover the costs of the leasehold improvements
over a period shorter than the MACRS recovery period of the building? Answer 1/Discussion
The leasehold improvements made by the lessor must categorically
be recovered over the MACRS life of the building assuming the
improvements are considered part of the building as opposed to
personalty. §168(i)(6) provides that any MACRS deduction for an improvement
or addition to property shall be computed the same way as the
MACRS deduction for the property if the property had been placed
in service at the same time as the improvement or addition. Plain
reading of the statue indicates clearly that the taxpayer has
no options with respect to MACRS allowances for property improvements
or additions. The MACRS class of the underlying property controls
the MACRS life of the improvements or additions. The law makes
no allowances for special circumstances. The case of Henry F. Grinalds v. Commissioner, 65 TCM 1971,
addresses the exact issue in question here. The taxpayer made
various improvements to a leased building and wrote off the improvements
over the five-year term of the leases. The taxpayer argued that
the improvements were unique and could not be expected to be of
use to any other tenant. The court rejected the taxpayer's argument
citing the plain language of the statue as its support. Issue 2 What is the cost recovery period for paving? Answer 2/Discussion
The cost recovery period for paving costs is 15 years. Per §168(e)(1),
property with a class life of at least 20 but not more than 25
years is treated for MACRS purposes as 15-year property. Revenue
Procedure 87-56, 1987-2 C.B. 764, provides the listing of class
lives used for this purpose. Paving is not specifically addressed
under the Revenue Procedure; however, a class life of 20 years
is provided for depreciable land improvements such as roads and
sidewalks. It appears to me that this category is a sufficiently
close fit for this purpose. | 
