USA Leasehold Improvements

[Laleda62]

Hello,

I work for a church that is renting their building. The landlord does not charge rent but makes us pay any building repairs that may come up. We are currently under going a mold remediation project, and I listed it as an expense. The board asked whether it should be an asset instead. I'm not very familiar with leasehold improvements. Should a mold remediation be an asset for the duration of the lease?

 

[DrStrangeLove]

That's an interesting question. I can't find anything specifically on point in the FASB codification that defines what distinguishes leasehold improvement from repairs. But I did find in tax regulations a law that appears to give some guidance.

Your mold remediation isn't a betterment or an improvement per se; that is, the mold remediation isn't expanding the capacity or range of available uses of the building you rent. It's a restoration, since it's meant to restore the building to its intended, useful, unimpaired condition. Reg. 1.263(a)-3(k) deals with when taxpayers have to capitalize restorations, and when they can deduct those expenses. In general, if:

• you're replacing a major component or substantial structural part
• you're restoring the building to like-new condition
• the damage is part of a casualty loss, and the repair is needed to put the building back in operation

then Reg. 1.263(a)-3(k) requires you to capitalize the cost and amortize it over the remaining life of the building, even if the building is leased.

This regulation isn't binding in your case, since from what you wrote, it sounds like you're looking for financial accounting advice, not tax advice. But the examples to this regulation may not only give you a guideline as to what can/should be capitalized and where the (admittedly murky and gray) dividing line is. You can find it linked here: https://www.law.cornell.edu/cfr/text/26/1.263(a)-3#k

Some questions to ask to decide this:

1. Are you able to use the building for your normal services while the mold remediation goes on?
2. How much of the building is being remediated?
3. Does the remediation require replacing components of the roof, insulation, HVAC, plumbing or electrical system?
4. Are you restoring the building to like-new condition or just to ordinarily-usable condition?

Hope this helps.

 

[Laleda62]

Thanks for your help!

 

[Shcoll]

Hello,

I work for a church that is renting their building. The landlord does not charge rent but makes us pay any building repairs that may come up. We are currently under going a mold remediation project, and I listed it as an expense. The board asked whether it should be an asset instead. I'm not very familiar with leasehold improvements. Should a mold remediation be an asset for the duration of the lease?

Normally, Generally Accepted Accounting Principal expensed Operation Lease and Capitalizes Capital Lease Cost. I will assume if the Board said you should capitalize the remediation it is a Capital Lease, therefore yes, it should be amortized over the life of the remediation.