On today’s show we’re talking about the difficult topic of how to account for what has happened in the past year during the pandemic. Now I want to be clear, I’m not an accountant, and I don’t play one on a podcast. The questions raised on today’s show are for you to discuss with your accountant and make a determination for your specific circumstance on how to treat the situation.
So here we go.
If you’re a commercial landlord, you probably had tenants that could not pay their full lease amount. Their business might have been forced to close in order to stop the spread of the pandemic. With no revenue coming in the door, the tenant would have been looking for a reduction in rent.
As a landlord, you had a few choices. To start with, your lease probably did not have any pandemic provisions in it. A reduction in lease payments, or a forgiveness in lease payments was probably not contemplated in the lease.
These concessions are taking various forms and include reduced rent (cash payment forgiveness) or possibly deferral of rent payments.
But if a lease modification was not properly undertaken, what is the proper accounting treatment?
Do you report the full rental income on your income statement and then carry the outstanding amount as an accounts receivable? What if you never get paid? When is the income written off from the balance sheet?
What if circumstances arise that are beyond the control of the parties of the contract, such as a force majeure clause, or the laws in the jurisdiction governing the lease may create an enforceable right when a concession is legally required?
If a lease agreement provides these rights and obligations, then the concession may not be considered a lease modification. If the lease makes no mentions of a concession, then the concession is likely a lease modification.
If you’re a residential landlord and your tenant has not paid, but still owes you rent, how are you supposed to account for the rent?
You have a moratorium on evictions and have limited remedies to get your tenants to pay up. The tenants still owe you the back rent. It has not been forgiven.
How are you supposed to account for it? Do you treat the unpaid rent as an accounts payable with no reduction in income? Do you reduce the income and treat the rent as if it was variable? Could you end up paying income tax on income you never actually received?
What if there was a foreclosure involved on the property?
A foreclosure is treated the same as a sale of property. Capital gain or loss may be triggered upon such sale and, in certain instances, taxpayers may also realize income from forgiveness on certain mortgage debt. Exclusions of income created in a foreclosure may be available to taxpayers but the specific facts should be first reviewed and all tax implications considered.
What if the lease was cancelled? How will that be treated by the tax authority? It’s not necessarily obvious. You need to check.
If your tenant left behind improvements, there could be tax consequences. Whenever a lease is terminated, whether early or at the end of a lease, a landlord generally becomes the owner of improvements which were made to such leased space during the lease. Did the landlord receive a benefit or income from acquiring new property that it didn’t have before the tenant terminated the lease? You might be deemed to have received a taxable benefit, and not actually have the income to pay the tax on this benefit.
But what if the landlord paid for the improvements and was recovering the improvements over the life of the lease? How will the improvements be treated in that circumstance? Are the unamortized improvements written off? There are so many questions.
The rules are complex and vary by jurisdiction. You can’t simply guess at what should make sense.
