Taxation Philippines: Leasehold Improvements

5/23/2018 Taxation Philippines: Leasehold Improvements

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INCOME onINCOME on

Leasehold ImprovementsLeasehold Improvements

ANGELITO C. DESCALZO, CPAANGELITO C. DESCALZO, CPA

ICAEW IFRS CertifiedICAEW IFRS Certified


2/17

Leasehold ImprovementsLeasehold Improvements -- DefinitionDefinition

Alterations made to rental premises in order to

customize it for the specific needs of a tenant.

Leasehold improvements include construction ofbuilding, fencing, painting, installing partitions,

changing the flooring, putting in customized light

fixtures, etc.

Leasehold improvements can either be undertaken bylandlords (lessors), who may offer to do so to increase

the marketability of their rental units, or by the tenants

(lessees) themselves.


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When the lessee makes useful improvement to the leased

property, the following rules shall apply if no reimbursements

are made by the lessor:

1. The lessor may report income under the:

a. Outright method based on fair marketva ue o mprovemen s n e year o

completion

b. Spread-out method book value (BV) of

improvements are spread over the remaining

term of the lease


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Rules on Leasehold Improvement (continued):

2. Lessee may claim depreciation of the

improvements over the remaining term of the lease

or life of the improvements, whichever is shorter.. ,

lessor should report income based on the BV upon

termination less amount already reported as

income.4. The lessor shall apply cash method on

prepayment of rental even if it is using accrual

accounting.


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Leasehold ImprovementsLeasehold Improvements

Note:

If leased property (land and building) is being used

actually, directly and exclusive foreducationalpurpose, t e essee s a e exempt rom pay ng rea

estate tax.

All assessments or reassessments made after the 1st

day of January of any year shall take effect on the 1stday of January of the succeeding year(Sec. 221, Local

Government Code of 1991).


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IllustrationIllustration Leasehold ImprovementLeasehold Improvement

Mr. A leased a land to Mr. B for a period of 20 years starting

January 2, 2012 at a monthly rental of P50,000.

The Lease contract provides that Mr. B will construct a school

house on the lot.

The contract also provides that the improvement shall become

property of the lessor at the end of the lease.

The school house was completed on June 30, 2014 at a cost of

2,000,000.

The estimated life of the leasehold improvement is 25 years. Mr. B agreed to pay the real estate tax on the land assessed at

P34,567 annually.

Mr. B paid Mr. A an equivalent of 2 years rent on January 3,

2012.


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Q1Q1 What is the income to be reported byWhat is the income to be reported by

the lessor in 2012?the lessor in 2012?

Cash received (P50,000 x 24) 1,200,000

Tax aid b lessee 34 567

Income to be reported in 2012 1,234,567


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the lessor in 2013?the lessor in 2013?

Tax paid by lessee 34,567

Income to be re orted in 2013 34 567


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the lessor in 2014 under the outrightthe lessor in 2014 under the outright

method?method?

Rent income (50,000 x 12) 600,000

Leasehold improvement 2,000,000


Income to be reported in 2014

under outright method 2,634,567


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the lessor in 2014 under the spreadthe lessor in 2014 under the spread--outout

method?method?

Rent income (P50,000 x 12) 600,000


Cost 2,000,000

Less: Accumulated amortization

(2,000,000/25 x 17.5) 1,400,000

Book value, end of lease 600,000

Computation: (600,000/17.5) x 6/12 17,143


under spread-out method 651,710


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the lessor in 2015 under the spreadthe lessor in 2015 under the spread--outout

method?method?

Rent income (P50,000 x 12) 600,000

Income on Leasehold improvement: , ,

Less: Accumulated amortization

(2,000,000/25 x 17.5) 1,400,000

Book value, end of lease 600,000

Computation: (600,000/17.5) 34,286


under spread-out method 634,286


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Q6Q6 Assuming the lease contract was terminated onAssuming the lease contract was terminated onMarch 31, 2018 due to lessees fault, how much incomeMarch 31, 2018 due to lessees fault, how much income

should Mr. A report in 2018 under the spreadshould Mr. A report in 2018 under the spread--out method?out method?

Cash received (50,000 x 3) 150,000

Leasehold improvement:

Cost 2,000,000ess: ccumu a e eprec a on

(2,000,000/25 x 3.75) 300,000

Book value upon termination 1,700,000

Less:Amount declared as income

2014 17,143

2015 34,286

2016 34,286

2017 34,286 120,001 1,579,999

Income to be reported in 2018 1,729,999


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Q7Q7 How much deductible expenses canHow much deductible expenses can

the lessee report in 2014?the lessee report in 2014?

Rent expense (P50,000 x 12)

Tax

600,000

34,567

De reciation on LHI

2,000,000/17.5 x 6/12 57,143

Expenses to be reported in 2014 691,710


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Rent expense (P50,000 x 12) 600,000

Depreciation on LHI, , . ,



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Rent expense (P50,000 x 3) 150,000

Depreciation on LHI, , . ,


Note: Remaining book value of leasehold improvementshall be treated as other loss by the lessee


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GROSS INCOME fromManufacturing, Merchandising or

Mining business

Computation ofGross income:

Total sales Pxxx

Less: Cost of Goods Sold xx

Gross Profit Pxxx

Add: Other Income xx

Gross Income Pxxx


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GROSS INCOME from Farming

Farm includes livestock, dairy, poultry, fruit and truckfarms, plantations, ranches, and all land used for

farming operations.Methods of reporting gross income:

a. Cash basis no inventory is used to determineprofits

b. Accrual basis an inventory account is used todetermine profits

c. Crop basis used when crops take more a yearto gather and dispose of from the time of planting.

Documents

Taxation Philippines: Leasehold Improvements