Facts

One of your clients, Pebble Beach Company, leased a computer system from Integrated Technology Solutions for five years. After using the system for nine months, Pebble Beach realized that is was no longer adequate for its expanding business needs. As a result, Pebble Beach negotiated with Integrated Technology Solutions to terminate the original lease and enter into a new five-year lease under which Integrated would provide Pebble Beach with an expanded, upgraded system. Integrated would not agree to the arrangement unless Pebble Beach paid a $200,000 lease cancellation fee. Can Pebble Beach deduct the fee as a current expense, or must Pebble Beach capitalize the fee as a leasehold cost and amortize it over the five-year term of the lease?

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