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Accounting for Subleasing partial space?

How do you account for receiving rent from a tenant renting a few rooms from you? You maintain the original lease and are only sub-renting. What is the GAAP rule? Is it recorded as income or reduces the overall rent expense? And, if it is income...do you have to show it as income in reporting gross income for business registration/tax purposes?

Answers

Nick Sinigaglia
Title: SVP
Company: OnDeck
(SVP, OnDeck) |

Check out the EY Financial Reporting Development (FRD) on leases. Great resource. Off the top of my head, if you are the primary obligor on the main lease, then you must account for both leases; one as the lessee (Expense) and one as the lessor (revenue). Can't comment on tax, but I would think the net effect to taxable income is the same whether you record it as additional revenue or a reduction of expense.

Anonymous
(Controller) |

If your primary business is not related to leasing, then I wonder if it's most appropriate to classify any partial, sublease income as other non-operating income rather than revenue, do you agree?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

As long as you recognize the income (I would put it in "Other") then my understanding of GAAP is that you've done it correctly.

Bottom line, Net Income will be correct.

Nick Sinigaglia
Title: SVP
Company: OnDeck
(SVP, OnDeck) |

To add one thing, be careful if your sublease results in a loss relative you the original lease. You would likely need to recognize that loss up front.

Michael VanderGoot
Title: Director of Audit
Company: BC Compliance Group, LLC
(Director of Audit, BC Compliance Group, LLC) |

Be sure to read the terms of your Lease with the Landlord. Many leases have a provision where any revenue (profit) above what your current obligation for that specific space must be shared with the Landlord. For instance, your rent is $20/SF (all in) and you sublet the space for $30/SF you may have to share the $10/SF "profit" with the Landlord. This would then change the accounting as Nick described above. Also, keep up to date on the FASB changes for accounting of leases.

Kelvin Smith
Title: Vice President
Company: Financial Computer Systems Inc.
(Vice President, Financial Computer Systems Inc.) |

A sublease is recorded as income, separate from the primary or "head" lease, since they're separate transactions. Accounting for the head lease continues totally unaffected by the sublease, unless you need to reflect an impairment loss as Nick Sinigaglia notes (if the rent received is less than the rent paid for that portion of the space).

Sublease income is part of your gross receipts for tax purposes. Since some jurisdictions tax gross receipts, not just net income, the result is that in those jurisdictions your taxes will be higher if you have $2000 in rent expense and $1000 in sublease rent income than if you have just $1000 in rent expense.

Anonymous
(Controller/HR Director) |

Thanks All. That's what I was afraid of -- showing as gross receipts and thus subject to the business registration tax. I appreciate all your help! Thanks! And thanks Nick -- EY is our auditors so I will hit them up!

By the way, this is a sublease of a few lab spaces within our lab. So there will be no recognizable profit -- just an offset to our rent expense. I was truly hoping that I could reduce our rent expense as we are still in the R&D phase of things.

Roger Poor
Title: Dir., Finance & Operations
Company: Dalberg Global Development Advisors
(Dir., Finance & Operations, Dalberg Global Development Advisors) |

Thanks for clarifying the treatment on the Income Statement. How do I recognize the sublease income stream in the balance sheet? The sublease includes annual escalation.

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