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Tax Benefits of Tenant Improvements

Businesses that incur costs upgrading office, retail or commercial space during the next year may be eligible for a nice tax break contained in a relatively obscure provision of the Job Creation and Worker Assistance Act of 2002. A special first-year bonus depreciation allowance is provided for qualified property, importantly including tenant improvements, made after May 5, 2003 and placed in service before January 1, 2005. (A 30 % first-year depreciation allowance is provided for qualified tenant improvements made after September 10, 2001, and before January 1, 2005.) This is a significant benefit, though of course, future depreciation will be reduced by the deduction taken.

It does not apply to new buildings but rather buildings that have been in service at least three years. It only applies to interior construction of leased space. Thus, an owner-occupant is not eligible for this deduction and it does not apply to the cost of structural components. It applies to both landlords and tenants, to the extent each shares in these costs.

This bonus depreciation allowance must be taken in the first year that the improvements are placed in service. If not, this opportunity will be lost and only standard depreciation deductions will be available.