Depreciating Tenant Improvements: What Project Teams Should Know

How a build-out is documented can matter long after construction is complete.

Originally published September 2011. Updated September 2026 to reflect current owner-side project practices. Tax rules change over time; specific depreciation treatment should be determined with the organization’s qualified tax adviser.

A tenant improvement project is usually organized around design, budget, schedule and occupancy.

Accounting often enters the conversation later.

By then, the project may have been recorded simply as one large construction cost.

That can create a problem.

A commercial build-out may include architectural improvements, electrical work, mechanical systems, furniture, technology, equipment and other assets that may not all receive the same accounting or tax treatment.

The project team does not need to determine the depreciation treatment.

It does need to preserve enough information for the people who will.

The question I would ask before closeout is:

“Will Finance know what we actually bought?”

A Build-Out Is Not Necessarily One Asset

A tenant may think of the entire project as “the office build-out.”

From a project-management standpoint, that makes sense.

From an accounting and tax standpoint, the expenditures may need to be evaluated differently.

Construction can include permanent building improvements as well as furniture, equipment, technology and other components.

Which costs should be capitalized, how assets should be classified, their applicable recovery periods, and whether particular tax provisions apply are accounting and tax determinations.

But those determinations depend on information generated by the project.

If everything is buried inside a single final construction number, Finance may have considerably less information to work with.

Start the Conversation Before Construction Ends

The time to ask what Finance needs is not six months after the project closes.

Before closeout, the project team should understand whether the organization’s accounting or tax advisers need costs separated by categories such as:

• construction and building improvements;

• mechanical and electrical systems;

• furniture, fixtures and equipment;

• technology and communications equipment;

• security systems;

• professional fees;

• landlord contributions or tenant improvement allowances; and

• other identifiable project assets.

The appropriate categories will depend on the organization and the project.

The important point is to establish them while the information is still accessible.

Project Cost Codes Can Help

A well-structured project budget can make the eventual accounting process easier.

If furniture, technology, equipment and construction are tracked separately during the project, the organization begins with a better record than if every expenditure is consolidated into one broad capital-project account.

That does not mean the project manager is making tax classifications.

It means the project is preserving useful cost information.

There is an important difference.

Tenant Improvement Allowances Add Another Layer

Commercial leases can make the accounting more complicated.

The landlord may fund part of the improvements through a tenant improvement allowance. The tenant may fund costs above the allowance. The landlord may perform portions of the work directly, while the tenant purchases furniture, technology or specialty equipment separately.

The project record should clearly identify who paid for what and what was delivered.

The accounting and tax consequences can then be evaluated by the appropriate professionals based on the lease structure, ownership of the improvements and applicable rules.

This is another reason the tenant improvement allowance and work letter should not be treated simply as construction paperwork.

They are part of the financial record of the transaction.

Cost Segregation May Require Better Project Records

For some projects, an organization’s tax adviser may recommend evaluating whether components of the project qualify for different depreciation treatment through a cost-segregation analysis.

That is a tax decision, not a project-management decision.

But the analysis may rely on project information such as drawings, specifications, contractor cost breakdowns, equipment schedules, invoices and other construction records.

A project that maintains good documentation gives the organization’s advisers better information to evaluate.

A project that closes with one number and a folder of unorganized invoices makes that work harder.

Don’t Lose the Detail at Closeout

Project closeout usually focuses on warranties, O&M manuals, punch lists, permits and final payments.

Financial closeout deserves attention too.

Before the team disperses, confirm that the organization has the records needed to understand:

What was purchased?

What did it cost?

Who paid for it?

Where is it located?

And what documentation supports it?

Those questions can matter for accounting, depreciation, insurance, asset management and future capital planning.

The Project Team Doesn’t Need to Be the Tax Expert

Tax law changes.

Accounting policies vary among organizations.

Lease structures differ.

The project team should not try to substitute for the organization’s accountants or tax advisers.

Its responsibility is simpler:

Give them a project record good enough to make the determination.

That means involving Finance early enough to understand what information will be required and maintaining the appropriate detail throughout the project.

Leadership takeaway: Depreciation may be determined after construction, but the information needed to make that determination is created during the project. Preserve the cost and asset detail before the project team closes the books.

This article discusses project-management and documentation considerations only and is not accounting, legal or tax advice. Organizations should consult qualified accounting and tax professionals regarding the treatment of specific expenditures.