In part 1 of our restaurant financial management post, we provided an overview of tenant improvement allowances. Now, we’ll be covering the basics of accounting for these funds.
Tenant improvement allowances are generally negotiated through the lease and ownership of the improvements are stated in the lease. Generally, the assets that are purchased by the tenant using the tenant improvement allowances are still considered assets owned by the landlord and therefore are depreciated by the landlord. This can become important because the money contributed by the landlord to the tenant for the improvements can be seen as taxable income to the tenant if ownership of the assets purchased with the tenant improvement allowance is not specifically stated in the lease.
The tenant can also have taxable income if the amount of tenant improvement allowances that was stated in the lease were received but not spent on the build-out and improvement of the space. It is unlikely a landlord would allow this to happen but you should keep in mind the money needs to be spent where the lease specified.
To ensure you are in compliance with all applicable accounting rules and regulations, we recommend you discuss your specific situation with a CPA.
Need assistance with restaurant financial management? Contact Kirk Trowbridge at 614.545.9200 x29.