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2009 Tax Form 1040

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2009 Tax Form 1040

2009 tax form 1040 2. 2009 tax form 1040   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. 2009 tax form 1040 Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. 2009 tax form 1040 S. 2009 tax form 1040 or foreign source income. 2009 tax form 1040 This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. 2009 tax form 1040 S. 2009 tax form 1040 Virgin Islands (USVI). 2009 tax form 1040 Generally, the same rules that apply for determining U. 2009 tax form 1040 S. 2009 tax form 1040 source income also apply for determining possession source income. 2009 tax form 1040 However, there are some important exceptions to these rules. 2009 tax form 1040 Both the general rules and the exceptions are discussed in this chapter. 2009 tax form 1040 U. 2009 tax form 1040 S. 2009 tax form 1040 income rule. 2009 tax form 1040   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. 2009 tax form 1040 Table 2-1 shows the general rules for determining whether income is from sources within the United States. 2009 tax form 1040 Table 2-1. 2009 tax form 1040 General Rules for Determining U. 2009 tax form 1040 S. 2009 tax form 1040 Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. 2009 tax form 1040 Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. 2009 tax form 1040 For more information, see Regulations section 1. 2009 tax form 1040 863-1(b). 2009 tax form 1040 Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. 2009 tax form 1040 Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. 2009 tax form 1040 Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. 2009 tax form 1040 It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. 2009 tax form 1040 Services performed wholly within a relevant possession. 2009 tax form 1040   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. 2009 tax form 1040 However, there is an exception for income earned as a member of the U. 2009 tax form 1040 S. 2009 tax form 1040 Armed Forces or a civilian spouse. 2009 tax form 1040 U. 2009 tax form 1040 S. 2009 tax form 1040 Armed Forces. 2009 tax form 1040   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. 2009 tax form 1040 However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. 2009 tax form 1040 Civilian spouse of active duty member of the U. 2009 tax form 1040 S. 2009 tax form 1040 Armed Forces. 2009 tax form 1040   If you are a bona fide resident of a U. 2009 tax form 1040 S. 2009 tax form 1040 possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. 2009 tax form 1040 Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. 2009 tax form 1040 S. 2009 tax form 1040 possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. 2009 tax form 1040 Services performed partly inside and partly outside a relevant possession. 2009 tax form 1040   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. 2009 tax form 1040 Compensation (other than certain fringe benefits) is sourced on a time basis. 2009 tax form 1040 Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 2009 tax form 1040   Or, you may be permitted to use an alternative basis to determine the source of compensation. 2009 tax form 1040 See Alternative basis , later. 2009 tax form 1040   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. 2009 tax form 1040 In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 2009 tax form 1040 Time basis. 2009 tax form 1040   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). 2009 tax form 1040 Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. 2009 tax form 1040 The time period for which the income is made does not have to be a year. 2009 tax form 1040 Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. 2009 tax form 1040 Example. 2009 tax form 1040 In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. 2009 tax form 1040 Your Puerto Rico source income is $60,000, figured as follows. 2009 tax form 1040       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. 2009 tax form 1040   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 2009 tax form 1040 Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. 2009 tax form 1040 You determine the period to which the income is attributable based on the facts and circumstances of your case. 2009 tax form 1040 For more information on multi-year compensation, see Treasury Decision (T. 2009 tax form 1040 D. 2009 tax form 1040 ) 9212 and Regulations section 1. 2009 tax form 1040 861-4, 2005-35 I. 2009 tax form 1040 R. 2009 tax form 1040 B. 2009 tax form 1040 429, available at www. 2009 tax form 1040 irs. 2009 tax form 1040 gov/irb/2005-35_IRB/ar14. 2009 tax form 1040 html. 2009 tax form 1040 Certain fringe benefits sourced on a geographical basis. 2009 tax form 1040   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. 2009 tax form 1040 Housing. 2009 tax form 1040 Education. 2009 tax form 1040 Local transportation. 2009 tax form 1040 Tax reimbursement. 2009 tax form 1040 Hazardous or hardship duty pay. 2009 tax form 1040 Moving expense reimbursement. 2009 tax form 1040 For information on determining the source of the fringe benefits listed above, see Regulations section 1. 2009 tax form 1040 861-4. 2009 tax form 1040 Alternative basis. 2009 tax form 1040   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. 2009 tax form 1040 If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. 2009 tax form 1040 De minimis exception. 2009 tax form 1040   There is an exception to the rule for determining the source of income earned in a possession. 2009 tax form 1040 Generally, you will not have income from a possession if during a tax year you: Are a U. 2009 tax form 1040 S. 2009 tax form 1040 citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. 2009 tax form 1040 This exception began with income earned during your 2008 tax year. 2009 tax form 1040 Pensions. 2009 tax form 1040   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. 2009 tax form 1040 The contribution portion is sourced according to where services were performed that earned the pension. 2009 tax form 1040 The investment earnings portion is sourced according to the location of the pension trust. 2009 tax form 1040 Example. 2009 tax form 1040 You are a U. 2009 tax form 1040 S. 2009 tax form 1040 citizen who worked in Puerto Rico for a U. 2009 tax form 1040 S. 2009 tax form 1040 company. 2009 tax form 1040 All services were performed in Puerto Rico. 2009 tax form 1040 Upon retirement you remained in Puerto Rico and began receiving your pension from the U. 2009 tax form 1040 S. 2009 tax form 1040 pension trust of your employer. 2009 tax form 1040 Distributions from the U. 2009 tax form 1040 S. 2009 tax form 1040 pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. 2009 tax form 1040 S. 2009 tax form 1040 source income. 2009 tax form 1040 Investment Income This category includes such income as interest, dividends, rents, and royalties. 2009 tax form 1040 Interest income. 2009 tax form 1040   The source of interest income is generally determined by the residence of the payer. 2009 tax form 1040 Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. 2009 tax form 1040   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. 2009 tax form 1040 See Regulations section 1. 2009 tax form 1040 937-2(i) for more information. 2009 tax form 1040 Dividends. 2009 tax form 1040   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. 2009 tax form 1040 There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. 2009 tax form 1040 For more information, see Regulations section 1. 2009 tax form 1040 937-2(g). 2009 tax form 1040 Rental income. 2009 tax form 1040   Rents from property located in a relevant possession are treated as income from sources within that possession. 2009 tax form 1040 Royalties. 2009 tax form 1040   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. 2009 tax form 1040   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. 2009 tax form 1040 Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. 2009 tax form 1040 The most common situations are discussed below. 2009 tax form 1040 Real property. 2009 tax form 1040   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. 2009 tax form 1040 The location of the property generally determines the source of income from the sale. 2009 tax form 1040 For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. 2009 tax form 1040 If, however, the home you sold was located in the United States, the gain is U. 2009 tax form 1040 S. 2009 tax form 1040 source income. 2009 tax form 1040 Personal property. 2009 tax form 1040   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. 2009 tax form 1040 Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. 2009 tax form 1040 If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. 2009 tax form 1040   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. 2009 tax form 1040 The rules applying to sales of inventory are discussed below. 2009 tax form 1040 For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. 2009 tax form 1040 Inventory. 2009 tax form 1040   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. 2009 tax form 1040 The source of income from the sale of inventory depends on whether the inventory was purchased or produced. 2009 tax form 1040 Purchased. 2009 tax form 1040   Income from the sale of inventory that you purchased is sourced where you sell the property. 2009 tax form 1040 Generally, this is where title to the property passes to the buyer. 2009 tax form 1040 Produced. 2009 tax form 1040   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. 2009 tax form 1040 For information on making the allocation, see Regulations section 1. 2009 tax form 1040 863-3(f). 2009 tax form 1040 Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. 2009 tax form 1040 S. 2009 tax form 1040 citizen or resident alien prior to becoming a bona fide resident of a possession. 2009 tax form 1040 You are subject to these special rules if you meet both of the following conditions. 2009 tax form 1040 For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. 2009 tax form 1040 For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). 2009 tax form 1040 If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. 2009 tax form 1040 Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. 2009 tax form 1040 S. 2009 tax form 1040 tax return. 2009 tax form 1040 (See chapter 3 for additional filing information. 2009 tax form 1040 ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. 2009 tax form 1040 These rules apply to dispositions after April 11, 2005. 2009 tax form 1040 For details, see Regulations section 1. 2009 tax form 1040 937-2(f)(1) and Examples 1 and 2 of section 1. 2009 tax form 1040 937-2(k). 2009 tax form 1040 Example 1. 2009 tax form 1040 In 2007, Cheryl Jones, a U. 2009 tax form 1040 S. 2009 tax form 1040 citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. 2009 tax form 1040 S. 2009 tax form 1040 corporation listed on the New York Stock Exchange. 2009 tax form 1040 On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. 2009 tax form 1040 Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. 2009 tax form 1040 On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. 2009 tax form 1040 On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. 2009 tax form 1040 Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. 2009 tax form 1040 The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. 2009 tax form 1040 This existing special rule applies if you are a U. 2009 tax form 1040 S. 2009 tax form 1040 citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. 2009 tax form 1040 S. 2009 tax form 1040 assets during the 10-year period beginning when you became a bona fide resident. 2009 tax form 1040 The gain is U. 2009 tax form 1040 S. 2009 tax form 1040 source income that generally is subject to U. 2009 tax form 1040 S. 2009 tax form 1040 tax if the property is either (1) located in the United States; (2) stock issued by a U. 2009 tax form 1040 S. 2009 tax form 1040 corporation or a debt obligation of a U. 2009 tax form 1040 S. 2009 tax form 1040 person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). 2009 tax form 1040 See chapter 3 for filing information. 2009 tax form 1040 Special election. 2009 tax form 1040   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. 2009 tax form 1040 Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. 2009 tax form 1040 This election overrides both of the special rules discussed earlier. 2009 tax form 1040   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. 2009 tax form 1040 Marketable securities. 2009 tax form 1040   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. 2009 tax form 1040 Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. 2009 tax form 1040 S. 2009 tax form 1040 holding periods. 2009 tax form 1040   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. 2009 tax form 1040 The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. 2009 tax form 1040 This is your gain (or loss) that is treated as being from sources within the relevant possession. 2009 tax form 1040 If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. 2009 tax form 1040 Example 2. 2009 tax form 1040 Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. 2009 tax form 1040 S. 2009 tax form 1040 and possession holding periods. 2009 tax form 1040 Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. 2009 tax form 1040 Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). 2009 tax form 1040 By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 2009 tax form 1040 Other personal property. 2009 tax form 1040   For personal property other than marketable securities, use a time-based allocation. 2009 tax form 1040 Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. 2009 tax form 1040      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. 2009 tax form 1040 Example 3. 2009 tax form 1040 In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. 2009 tax form 1040 On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. 2009 tax form 1040 On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. 2009 tax form 1040 She had owned the interest for a total of 1,720 days. 2009 tax form 1040 Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. 2009 tax form 1040 The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). 2009 tax form 1040 By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 2009 tax form 1040 Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. 2009 tax form 1040 Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. 2009 tax form 1040 These rules do not apply to amounts paid as salary or other compensation for services. 2009 tax form 1040 See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. 2009 tax form 1040 Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. 2009 tax form 1040 These circumstances are listed below. 2009 tax form 1040 You have an office or other fixed place of business in the relevant possession to which the income can be attributed. 2009 tax form 1040 That office or place of business is a material factor in producing the income. 2009 tax form 1040 The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 2009 tax form 1040 An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. 2009 tax form 1040 The three kinds of income from sources outside the relevant possession to which these rules apply are the following. 2009 tax form 1040 Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. 2009 tax form 1040 Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. 2009 tax form 1040 Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. 2009 tax form 1040 Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. 2009 tax form 1040 Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. 2009 tax form 1040 Example. 2009 tax form 1040 Marcy Jackson is a bona fide resident of American Samoa. 2009 tax form 1040 Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. 2009 tax form 1040 A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. 2009 tax form 1040 Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. 2009 tax form 1040 The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. 2009 tax form 1040 However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. 2009 tax form 1040 Prev  Up  Next   Home   More Online Publications
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The 2009 Tax Form 1040

2009 tax form 1040 3. 2009 tax form 1040   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. 2009 tax form 1040 Leveraged leases. 2009 tax form 1040 Leveraged leases of limited-use property. 2009 tax form 1040 Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. 2009 tax form 1040 It also discusses how to treat other kinds of payments you make that are related to your use of this property. 2009 tax form 1040 These include payments you make for taxes on the property. 2009 tax form 1040 Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. 2009 tax form 1040 In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. 2009 tax form 1040 If you have or will receive equity in or title to the property, the rent is not deductible. 2009 tax form 1040 Unreasonable rent. 2009 tax form 1040   You cannot take a rental deduction for unreasonable rent. 2009 tax form 1040 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. 2009 tax form 1040 Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. 2009 tax form 1040 Rent is not unreasonable just because it is figured as a percentage of gross sales. 2009 tax form 1040 For examples of related persons, see Related persons in chapter 2, Publication 544. 2009 tax form 1040 Rent on your home. 2009 tax form 1040   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. 2009 tax form 1040 You must meet the requirements for business use of your home. 2009 tax form 1040 For more information, see Business use of your home in chapter 1. 2009 tax form 1040 Rent paid in advance. 2009 tax form 1040   Generally, rent paid in your trade or business is deductible in the year paid or accrued. 2009 tax form 1040 If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. 2009 tax form 1040 You can deduct the rest of your payment only over the period to which it applies. 2009 tax form 1040 Example 1. 2009 tax form 1040 You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. 2009 tax form 1040 Your rent is $12,000 per year. 2009 tax form 1040 You paid the first year's rent ($12,000) on June 30. 2009 tax form 1040 You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. 2009 tax form 1040 Example 2. 2009 tax form 1040 You are a calendar year taxpayer. 2009 tax form 1040 Last January you leased property for 3 years for $6,000 a year. 2009 tax form 1040 You paid the full $18,000 (3 × $6,000) during the first year of the lease. 2009 tax form 1040 Each year you can deduct only $6,000, the part of the lease that applies to that year. 2009 tax form 1040 Canceling a lease. 2009 tax form 1040   You generally can deduct as rent an amount you pay to cancel a business lease. 2009 tax form 1040 Lease or purchase. 2009 tax form 1040   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. 2009 tax form 1040 You must first determine whether your agreement is a lease or a conditional sales contract. 2009 tax form 1040 Payments made under a conditional sales contract are not deductible as rent expense. 2009 tax form 1040 Conditional sales contract. 2009 tax form 1040   Whether an agreement is a conditional sales contract depends on the intent of the parties. 2009 tax form 1040 Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. 2009 tax form 1040 No single test, or special combination of tests, always applies. 2009 tax form 1040 However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. 2009 tax form 1040 The agreement applies part of each payment toward an equity interest you will receive. 2009 tax form 1040 You get title to the property after you make a stated amount of required payments. 2009 tax form 1040 The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. 2009 tax form 1040 You pay much more than the current fair rental value of the property. 2009 tax form 1040 You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. 2009 tax form 1040 Determine this value when you make the agreement. 2009 tax form 1040 You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. 2009 tax form 1040 The agreement designates part of the payments as interest, or that part is easy to recognize as interest. 2009 tax form 1040 Leveraged leases. 2009 tax form 1040   Leveraged lease transactions may not be considered leases. 2009 tax form 1040 Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. 2009 tax form 1040 Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. 2009 tax form 1040   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. 2009 tax form 1040 Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. 2009 tax form 1040 Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. 2009 tax form 1040 Internal Revenue Bulletin 2001-19 is available at www. 2009 tax form 1040 irs. 2009 tax form 1040 gov/pub/irs-irbs/irb01-19. 2009 tax form 1040 pdf. 2009 tax form 1040   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. 2009 tax form 1040 The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. 2009 tax form 1040 The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. 2009 tax form 1040 The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. 2009 tax form 1040 The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. 2009 tax form 1040 The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. 2009 tax form 1040   The IRS may charge you a user fee for issuing a tax ruling. 2009 tax form 1040 For more information, see Revenue Procedure 2014-1 available at  www. 2009 tax form 1040 irs. 2009 tax form 1040 gov/irb/2014-1_IRB/ar05. 2009 tax form 1040 html. 2009 tax form 1040 Leveraged leases of limited-use property. 2009 tax form 1040   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. 2009 tax form 1040 Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. 2009 tax form 1040 See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. 2009 tax form 1040 Leases over $250,000. 2009 tax form 1040   Special rules are provided for certain leases of tangible property. 2009 tax form 1040 The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. 2009 tax form 1040 Rents increase during the lease. 2009 tax form 1040 Rents decrease during the lease. 2009 tax form 1040 Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). 2009 tax form 1040 Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). 2009 tax form 1040 These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). 2009 tax form 1040   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. 2009 tax form 1040 In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. 2009 tax form 1040 For details, see section 467 of the Internal Revenue Code. 2009 tax form 1040 Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. 2009 tax form 1040 When you can deduct these taxes as additional rent depends on your accounting method. 2009 tax form 1040 Cash method. 2009 tax form 1040   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. 2009 tax form 1040 Accrual method. 2009 tax form 1040   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. 2009 tax form 1040 That you have a liability for taxes on the leased property. 2009 tax form 1040 How much the liability is. 2009 tax form 1040 That economic performance occurred. 2009 tax form 1040   The liability and amount of taxes are determined by state or local law and the lease agreement. 2009 tax form 1040 Economic performance occurs as you use the property. 2009 tax form 1040 Example 1. 2009 tax form 1040 Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. 2009 tax form 1040 Oak leases land for use in its business. 2009 tax form 1040 Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. 2009 tax form 1040 However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. 2009 tax form 1040 Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. 2009 tax form 1040 If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. 2009 tax form 1040 Oak cannot deduct the real estate taxes as rent until the tax bill is issued. 2009 tax form 1040 This is when Oak's liability under the lease becomes fixed. 2009 tax form 1040 Example 2. 2009 tax form 1040 The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. 2009 tax form 1040 As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. 2009 tax form 1040 This is the year in which Oak's liability under the lease becomes fixed. 2009 tax form 1040 Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. 2009 tax form 1040 Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. 2009 tax form 1040 If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. 2009 tax form 1040 For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. 2009 tax form 1040 The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. 2009 tax form 1040 Option to renew. 2009 tax form 1040   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. 2009 tax form 1040 However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). 2009 tax form 1040 Allocate the lease cost to the original term and any option term based on the facts and circumstances. 2009 tax form 1040 In some cases, it may be appropriate to make the allocation using a present value computation. 2009 tax form 1040 For more information, see Regulations section 1. 2009 tax form 1040 178-1(b)(5). 2009 tax form 1040 Example 1. 2009 tax form 1040 You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. 2009 tax form 1040 Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. 2009 tax form 1040 Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. 2009 tax form 1040 That is the remaining life of your present lease plus the periods for renewal. 2009 tax form 1040 Example 2. 2009 tax form 1040 The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. 2009 tax form 1040 You can amortize the entire $10,000 over the 20-year remaining life of the original lease. 2009 tax form 1040 The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). 2009 tax form 1040 Cost of a modification agreement. 2009 tax form 1040   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. 2009 tax form 1040 You must capitalize these payments and amortize them over the remaining period of the lease. 2009 tax form 1040 You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. 2009 tax form 1040 Example. 2009 tax form 1040 You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. 2009 tax form 1040 However, before you occupy it, you decide that you really need less space. 2009 tax form 1040 The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. 2009 tax form 1040 In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. 2009 tax form 1040   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. 2009 tax form 1040 Your amortization deduction each year will be $150 ($3,000 ÷ 20). 2009 tax form 1040 You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. 2009 tax form 1040 Commissions, bonuses, and fees. 2009 tax form 1040   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. 2009 tax form 1040 You must amortize these costs over the term of the lease. 2009 tax form 1040 Loss on merchandise and fixtures. 2009 tax form 1040   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. 2009 tax form 1040 You must capitalize the loss and amortize it over the remaining term of the lease. 2009 tax form 1040 Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). 2009 tax form 1040 Depreciate the property over its appropriate recovery period. 2009 tax form 1040 You cannot amortize the cost over the remaining term of the lease. 2009 tax form 1040 If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. 2009 tax form 1040 For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. 2009 tax form 1040 Assignment of a lease. 2009 tax form 1040   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. 2009 tax form 1040 If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. 2009 tax form 1040 The rest is for your investment in the permanent improvements. 2009 tax form 1040   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. 2009 tax form 1040 You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. 2009 tax form 1040 Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 2009 tax form 1040 Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. 2009 tax form 1040 You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2009 tax form 1040 Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. 2009 tax form 1040 Uniform capitalization rules. 2009 tax form 1040   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. 2009 tax form 1040 Produce real property or tangible personal property. 2009 tax form 1040 For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. 2009 tax form 1040 Acquire property for resale. 2009 tax form 1040 However, these rules do not apply to the following property. 2009 tax form 1040 Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. 2009 tax form 1040 Property you produce if you meet either of the following conditions. 2009 tax form 1040 Your indirect costs of producing the property are $200,000 or less. 2009 tax form 1040 You use the cash method of accounting and do not account for inventories. 2009 tax form 1040 Example 1. 2009 tax form 1040 You rent construction equipment to build a storage facility. 2009 tax form 1040 If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. 2009 tax form 1040 You recover your cost by claiming a deduction for depreciation on the building. 2009 tax form 1040 Example 2. 2009 tax form 1040 You rent space in a facility to conduct your business of manufacturing tools. 2009 tax form 1040 If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. 2009 tax form 1040 More information. 2009 tax form 1040   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. 2009 tax form 1040 Prev  Up  Next   Home   More Online Publications