Question

Coyote Ugly LLC pays $100,000 to Roadrunner Development Company to acquire a 10-year lease with an option for 5 more years in a swanky new mall downtown. Of the $100,000 paid, $20,000 can be reasonably allocated to the option. Coyote has developed new perfumes that it hopes to sell in the retail space. In addition, Roadrunner has agreed to improve the leased space to Coyote’s specifications, up to the amount of $50,000. a. How should Coyote treat the $100,000 payment for federal tax purposes? b. Describe the federal income tax treatment of the $50,000 expenditure for the leasehold improvements for both the landlord and the tenant.

Answer 1

a. How should Coyote treat the $100,000 payment for federal tax purposes?

Assuming that it is an operating lease as no mention of the value of the property as well as its useful life is given, we shall take the deduction of whole $ 100000 in the curreny year tax calculation

b. Describe the federal income tax treatment of the $50,000 expenditure for the leasehold improvements for both the landlord and the tenant.

Expenditure shall increase the cost of the building as it is treated as the capital expenditure and depreciation can be claimed upon the same. As for the tenant no tax treatment would be there as he has contributed nothinfg in it and there is no change in the lease terms also because of that.