Glass jar full of money with a white allowance labelThe new IRS repair regulations can impact how tenant allowances are structured.

Traditionally, landlord and tenants have relied on the Section 110 safe harbor so that provided the allowance is spent on leasehold improvements, the allowance is not taxable to the tenant and the landlord depreciates the leasehold improvements over 39 years.

Under the repair regulations, the landlord may get to expense, rather than depreciate over 39 years, certain improvements if it can meet certain conditions. Note that a landlord can deduct larger expense items if the landlord has audited financials. In order for the repair regulations to apply, the tenant allowance should be structured to fall outside the Section 110 safe harbor. However, the allowance will still not be taxable to the tenant as long as the landlord owns the property and the tenant only uses the allowance for leasehold improvements and qualifying related costs.

The repair regulations may be helpful for larger landlords without hurting tenants. It is worthy of note because it is rare that regulations are ever adopted where one side is helped without a corresponding cost to the other.

And while you are thinking about the tax treatment of an allowance, it may be helpful to remind tenants that any portion of the allowance not spent on leasehold improvements and qualifying related costs which will be owned by the tenant is taxable to the tenant in the year received. So, in a ground lease situation where the tenant builds the building and the costs are paid for by the allowance, the landlord must own the building and get the depreciation (or deduction under the repair regulations, if applicable) or else the allowance will be taxable to the tenant. The repair regulations do not change the treatment of the allowance for the tenant.

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Scott Kadish

Chairing the firm’s Leasing and Retail Groups, Scott maintains the skills and expertise needed to represent landlords and tenants in the development and lease-up of shopping centers on a national basis. He also counsels clients on a wide variety of real estate and…

Chairing the firm’s Leasing and Retail Groups, Scott maintains the skills and expertise needed to represent landlords and tenants in the development and lease-up of shopping centers on a national basis. He also counsels clients on a wide variety of real estate and business transactions, and general business law. Scott brings his leadership to the firm’s Cincinnati office where he serves as partner-in-charge, overseeing its operations, business development and client relationships. Repeatedly named to Ohio Super Lawyers, and having achieved the highest ranking, AV Preeminent®, from Martindale-Hubbell®, Scott also serves as a member of the firm’s Management Committee.