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Dear Tax Talk:
A year ago our company moved into new offices that were bought by the owner personally and leased to the company. The
company spent $20,000 in leasehold improvements, such as walls and doors.
Due to an acquisition of another company, we outgrew the space and relocated to new offices, also owned
by the company's owner. The owner found another tenant for the first space. We're carrying the cost of these abandoned
improvements on our books and our auditors are telling us to write them off. What is the tax consequence?
-- Monica
Dear Monica,
Code section 109 provides that a landlord, such as the company owner, does not recognize income on the reversion of tenant
improvements when a lease terminates. When you abandon property, it is considered a disposition. You abandon property when
you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but
without passing it on to anyone else.
Loss from abandonment of business or investment property is deductible as an ordinary loss. The abandonment loss
is deducted in the tax year in which the loss is sustained.
Certain rules exist in the tax law that disallow losses on sales or exchanges between related taxpayers. These
rules apply, for example, between a company and its owner. However, since there is no sale or exchange to the owner of the
leasehold improvements, this section of the law would not prevent the company from recognizing a loss on the abandonment of
the leasehold improvements.
Accordingly, for tax purposes the company would have an ordinary loss on the abandonment of the leasehold
improvements.
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