Harold L. Jenkins, better known as the legendary country music singer, Conway Twitty, was able to accomplish something few before and after him have accomplshed, or even attempted for that matter. That is, pay back those who lost money as a result of an enterprise he sponsored. In a surprise turn of events, Twitty was also able to deduct these repayments from his federal taxes as ordinary and necessary expenses of his business.
Individuals in the middle of, or just beyond a divorce rarely consider the tax ramifications of the agreements that they make as a party to the divorce proceedings. It’s only later that they become aware of the tax consequences of their divorce, when they get their tax bill and their accountant informs them of the special circumstances which increased it.
There are many issues which landlords and tenants must negotiate in commercial leasing transactions. In the first two parts of this article, which deals with the tax treatment of important lease terms, we discussed lease inducement payments and tenant construction allowances. In this part, we will conclude our discussion of lease termination payments.
As mentioned earlier in this series of blogs, there are two types of lease termination payments: (1) payments made by the landlord to the tenant and (2) payments made by the tenant to the landlord. Part three addressed payments made by the landlord to the tenant. This final section will consider lease termination payments made by a tenant to a landlord.
There are many issues which landlords and tenants must negotiate in commercial leasing transactions. In the first two parts of this article, which deals with the tax treatment of important lease terms, we discussed lease inducement payments and tenant construction allowances. In this part, and the next, we will briefly discuss the importance of lease termination payments.
Generally, I.R.C. § 263 disallows a current deduction for amounts chargeable to capital account. The applicable Tax Regulations provide that a taxpayer must capitalize amounts paid to another party to terminate a lease of real property between the taxpayer-lessor and the lessee. However, these regulations fail to discuss whether the payment is a nondeductible capital expenditure or whether it is amortizable and, if so, for what period is it capitalized into the cost of the building?
Tenant construction allowances are a common detail in commercial real estate leases. Because landlords need tenants to fill their commercial spaces, and tenants need to customize these spaces for their business, a tenant allowance is a vital lease term which significantly pushes forward and finalizes a commercial real estate leasing transaction. An allowance must be structured accordingly to avoid undesired tax consequences.
I.R.C. § 110 provides landlords and tenants with a safe harbor which ensures that a tenant is not required to recognize income for a tenant allowance in leases which are for 15 years or less of a retail space. Otherwise, the tenant treats a tenant allowance received from the landlord as ordinary income, while depreciating assets over their useful life, typically resulting in much more income than expenses.
The relationship between commercial landlord and tenant is often fraught with complications which often arise from a failure to understand the legal consequences of some formal or informal arrangement within the landlord-tenant relationship. To understand, avoid, and, at the very least, minimize these consequences, commercial tenants and landlords should avail themselves of the experience and knowledge of a qualified tax professional.
A common arrangement between landlords and tenants is a lease inducement payment, made by or on behalf of the landlord to entice a tenant to sign a lease agreement. Lease inducement payments may be:
- moving expenses;
An IRS levy is the legal seizure of a taxpayer’s property to satisfy his or her tax debt. The IRS may garnish wages, seize and sell real and personal property, and take money in any bank or financial account under the legal authority of a levy, which is given to the IRS in I.R.C. § 6331. The IRS may levy any property owned by a taxpayer, or on which there is a Federal tax lien, unless the property is exempt from levy.
IRC § 911(b)(1)(A) provides the definition of “foreign income.” For tax purposes, this provision is important because If certain requirements are met, a taxpayer may qualify for the foreign earned income, foreign housing exclusions and the foreign housing deduction. Under certain circumstances, the value of meals and lodging provided to a taxpayer by an employer may also be excluded from income.
U.S. citizens or a resident aliens of the United States living abroad are taxed on their worldwide income. However, they may qualify to exclude from income up to an amount of their foreign earnings that is adjusted annually for inflation. In 2015, this amount was $100,800. Additionally, certain foreign housing amounts may be excluded or deducted.
In addition to the foreign earned income exclusion, taxpayers may also claim an exclusion or a deduction from gross income for an expenditure for housing if the home of the tax is in a foreign country and they qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.
The housing exclusion applies only to amounts which are treated as paid by an employer, which includes any amounts paid to a taxpayer or paid or incurred on a taxpayer’s behalf by his or her employer that are taxable foreign earned income for the year. In contrast, the housing deduction applies only to amounts paid for with earnings from self-employment. Thus, the source of the amounts paid typically determine use of the deduction or exclusion.