Discussion:Qualified Leasehold improvement eligible for special bonus dep for 2008?

S Corp’s sole owner bought a condo unit within a commercial building in 2008.

The owner used about $100K of her personal funds in 2008 to do the “build out” to accommodate her S-Corp’s business (Sylvan learning type of tutoring service). The condo is being rented to the S-Corp. so the shareholder will report the rental income from the S-Corp. The transaction for the build out is going to be recorded on the S corp’s book as:

Debit Leasehold Improvement 100,000 Credit Loan from Shareholder 100,000

The S-corp is planning on taking special 50% bonus depreciation for the LHI on the 1120S in 2008.

1. Do you see issues recording this LHI a Qualified Leasehold Improvement with useful life of 15 years by the S corp.? I am bothered by one of the requirements stated in IRS pub 946 (pg 27) which is “The improvement is placed in service more than 3 years after the date the building was first placed in service by any person” Since the improvement was made in the same year of purchase, does it disqualify to be Qualified LHI?

2. Also, is the rental by the S corp from its 100% owner handled differently?

3. If it does not qualify 15 year LHI and rental from 100% owner create problems, what is the best way to treat it based on your experience? I thought this was a common practice that the shareholder buys a building, makes improvements, and rents it to their corporation collecting rents!

Thank you so much for your help and insights

2. Treated as non-passive.

3. No problem here.