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Terminating a lease will require disposing of the leasehold improvements that remain with the building. If the leasehold improvements have not been fully depreciated, you will need to debit an expense account called Loss on Early Termination of Leasehold Improvements for the amount of the remaining asset balance.
To capitalize the assets, you would debit Leasehold Improvements and credit Cash or Accounts Payable, depending on how you paid for the improvements. Only improvements that add value to the building should be capitalized. Routine maintenance or minor improvements should be immediately expensed.
While the useful economic life of most leasehold improvements is five to 15 years, the Internal Revenue Code requires that depreciation for such improvements to occur over the economic life of the building.
Leasehold improvements are considered business assets because they're attached to real property. They can, therefore, be depreciated. You can treat them like other assets in every way, but you can't sell them unless you sell the whole building.
Write off leasehold improvements from the balance sheet. Upon termination or non-renewal of a lease, the tenant essentially abandons the various leasehold improvements made to the rental property. Over the lease term, leasehold improvements are depreciated like any other physical asset.
The most common way that landlords pay for commercial leasehold improvements is with a Tenant Improvement Allowance (TIA). A TIA is a certain amount of money (a fixed amount or an amount per square foot) that the landlord gives you to make improvements. If the cost of improvements exceeds the TIA, you pay the extra.
You can generally expense qualified leasehold improvements up to $500,000 (adjusted annually for inflation) under Section 179, as opposed to depreciating them.
You can generally expense qualified leasehold improvements up to $500,000 (adjusted annually for inflation) under Section 179, as opposed to depreciating them. However, Section 179 begins to phase out when you place in service assets valued in excess of $2,000,000 in a single tax year.

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