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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
The tax cost of improvements on vacated office space
Tax Talk

Deducting abandonment loss
 

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.

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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.

Bankrate.com's corrections policy -- Posted: March 25, 2008
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