What are leasehold improvements and how do we record them?
We’ve talked about capital improvements. Click here to read about improvements made to a property that you own. But what if you’re renting your facility? Or if you’re the landlord that made improvements to a property for a tenant?
You should capitalize improvements to the space that you rent. We call these leasehold improvements. By making these improvements an asset you can depreciate the expense monthly over a period of time.
Leasehold improvements include painting, installing partitions, changing the flooring, putting in customized lighting. An example would be offices created in an unfinished space. It is assumed these improvements will stay with the landlord after the tenant has moved out. (We can’t un-paint, can we?) BTW, this definition is different from the definition of capital improvements.
These costs are categorized as a non-current fixed asset on the balance sheet. (If the landlord pays for these improvements then they’ll be categorized the same in the landlord’s bookkeeping.) We do this by debiting the asset “Leasehold Improvements” and crediting the cash account (or whichever account paid for the improvements.) You’ll probably use bills and payments to record this as you pay for things; so, don’t make an extra journal entry.
Now let’s look at the depreciation for these improvements. The economic life of these improvements may be 10 years, but what if your lease is only for 5 years? If you’re only using the improvements for 5 years then that is the useful life of the asset. So, depreciate for 5 years.
I usually ask the tax preparer for a depreciation schedule. Some may want to depreciate monthly and some will want to add depreciation once a year when they prepare the tax return.
Have fun! And be nice to your bookkeeper!
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