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. Generally, a build out allowance is a cash advance by the lessor to the lessee to pay for the finishing work of the interior space necessary for the tenant to begin doing business. The advance is generally recouped in the form of higher monthly rent.