Can someone tell me if I understand this code section correctly.

This is what the code says:
"In determining the amount of the deduction allowable to a lessee for exhaustion, wear and tear, obsolescence, or amortization in respect of any cost of acquiring the lease, the term of the lease shall be treated as including all renewal options (and any other period for which the parties reasonably expect the lease to be renewed) if less than 75 percent of such cost is attributable to the period of the term of the lease remaining on the date of its acquisition. - IRS Code"

I know that in general, cost of acquiring a leas is amortize over the lease term. If there renewal option, need to include the renewal period when amortize the cost.

So the case is a company entered into a new lease for 5 year with a renewal option of 5 more years. Company pay 50,000, of which 35,000 is for this lease term, and the other 15,000 is for the renewal option. But the product that company manufacture might go obsolete. If I apply Sec 178, does it means I need to amortize the 50,000 over 10 years? Or is there any exceptions that I miss or did I misunderstand it.

Edit:
Assume the company is paying above the market rental rate, the product company produce might go obsolete and also the sole shareholder might retire soon, but not specific when. Can I reasonably assume the renewal option would not be exercise? Therefore only amortize over 5 year??

It looks like you're reading the default rule correctly... since 35K is < 75% of 50K, you'd amortize the costs (assuming that these ARE lease-acquisition costs) over the 10-year period (i.e. the period including the renewal option term).

But check out Treas. Reg. 1.178-1 for a couple of modifiers to the basic rule that might be useful. For one, (b)(2) thereof provides that you can amortize over the shorter "without renewal" period IF you can establish that it's less than a 50-50 bet that you'll be exercising the renwal option when the time comes.

Less likely--but worth a look--is (b)(5)(I), which provides that it might be appropriate to use some "present value of an annuity" mathematics to establish the proportions at which the total lease-acquisition cost is properly deeemed attributable to the original lease term vs. the renewal term. Maybe you have a shot there at challenging the given 35K / 15K split of the total cost. If you can demonstrate that at least 37,500 is properly allocable to the original 5 year period, then you should be able to amortize over 5 rather than 10.

Hope that helped a bit.

Thank you so much for your help.

I just came across this portion which says that if you can reasonable certain that renewal would not happen, you can also ignore the renewal period. §1.178-3(c).