I n this burgeoning economic climate, many law firms and their clients are finding the need to expand and, therefore, are negotiating leases for new or additional space. Often, as a way to differentiate themselves, landlords are offering a variety of leasehold inducements. Generally, leasehold inducements provide needed cashflow at a time when cash may be at a premium. They come with various tax consequences.
Cash paid by a landlord to a new tenant generally constitutes taxable income.
This is true whether the cash is for a current expenditure such as the reimbursement of moving costs or a capital item such as a build out allowance. Some inducements provide for an offsetting tax deduction. While monies paid to reimburse moving costs are taxable, the moving expense is a current deduction. The costliest inducement for the lessee, however, if not properly handled, is a build out allowance. When taking on new space, renovations or capital improvements can cost thousands or even millions of dollars.