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My pay 3. My pay Gifts Table of Contents If you give gifts in the course of your trade or business, you can deduct all or part of the cost. My pay This chapter explains the limits and rules for deducting the costs of gifts. My pay $25 limit. My pay You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. My pay A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. My pay If you give a gift to a member of a customer's family, the gift is generally considered to be an indirect gift to the customer. My pay This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer's eventual use. My pay If you and your spouse both give gifts, both of you are treated as one taxpayer. My pay It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. My pay If a partnership gives gifts, the partnership and the partners are treated as one taxpayer. My pay Example. My pay Bob Jones sells products to Local Company. My pay He and his wife, Jan, gave Local Company three gourmet gift baskets to thank them for their business. My pay They paid $80 for each gift basket, or $240 total. My pay Three of Local Company's executives took the gift baskets home for their families' use. My pay Bob and Jan have no independent business relationship with any of the executives' other family members. My pay They can deduct a total of $75 ($25 limit × 3) for the gift baskets. My pay Incidental costs. My pay Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. My pay A cost is incidental only if it does not add substantial value to the gift. My pay For example, the cost of gift wrapping is an incidental cost. My pay However, the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial compared to the value of the fruit. My pay Exceptions. My pay The following items are not considered gifts for purposes of the $25 limit. My pay An item that costs $4 or less and: Has your name clearly and permanently imprinted on the gift, and Is one of a number of identical items you widely distribute. My pay Examples include pens, desk sets, and plastic bags and cases. My pay Signs, display racks, or other promotional material to be used on the business premises of the recipient. My pay Figure B. My pay When Are Transportation Expenses Deductible? Most employees and self-employed persons can use this chart. My pay (Do not use this chart if your home is your principal place of business. My pay See Office in the home . My pay ) Please click here for the text description of the image. My pay Figure B. My pay When Are Local Transportation Expenses Deductible?TAs for Figure B are: Reg 1. My pay 162-1(a); RR 55–109; RR 94–47 Gift or entertainment. My pay Any item that might be considered either a gift or entertainment generally will be considered entertainment. My pay However, if you give a customer packaged food or beverages you intend the customer to use at a later date, treat it as a gift. My pay If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. My pay You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage. My pay You can change your treatment of the tickets at a later date by filing an amended return. My pay Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. My pay If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. My pay You cannot choose, in this case, to treat the cost of the tickets as a gift expense. My pay Prev Up Next Home More Online Publications
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My pay 3. My pay Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. My pay Leveraged leases. My pay Leveraged leases of limited-use property. My pay 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. My pay It also discusses how to treat other kinds of payments you make that are related to your use of this property. My pay These include payments you make for taxes on the property. My pay 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. My pay In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. My pay If you have or will receive equity in or title to the property, the rent is not deductible. My pay Unreasonable rent. My pay You cannot take a rental deduction for unreasonable rent. My pay Ordinarily, the issue of reasonableness arises only if you and the lessor are related. My pay 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. My pay Rent is not unreasonable just because it is figured as a percentage of gross sales. My pay For examples of related persons, see Related persons in chapter 2, Publication 544. My pay Rent on your home. My pay 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. My pay You must meet the requirements for business use of your home. My pay For more information, see Business use of your home in chapter 1. My pay Rent paid in advance. My pay Generally, rent paid in your trade or business is deductible in the year paid or accrued. My pay 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. My pay You can deduct the rest of your payment only over the period to which it applies. My pay Example 1. My pay You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. My pay Your rent is $12,000 per year. My pay You paid the first year's rent ($12,000) on June 30. My pay You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. My pay Example 2. My pay You are a calendar year taxpayer. My pay Last January you leased property for 3 years for $6,000 a year. My pay You paid the full $18,000 (3 × $6,000) during the first year of the lease. My pay Each year you can deduct only $6,000, the part of the lease that applies to that year. My pay Canceling a lease. My pay You generally can deduct as rent an amount you pay to cancel a business lease. My pay Lease or purchase. My pay There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. My pay You must first determine whether your agreement is a lease or a conditional sales contract. My pay Payments made under a conditional sales contract are not deductible as rent expense. My pay Conditional sales contract. My pay Whether an agreement is a conditional sales contract depends on the intent of the parties. My pay Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. My pay No single test, or special combination of tests, always applies. My pay However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. My pay The agreement applies part of each payment toward an equity interest you will receive. My pay You get title to the property after you make a stated amount of required payments. My pay 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. My pay You pay much more than the current fair rental value of the property. My pay 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. My pay Determine this value when you make the agreement. My pay You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. My pay The agreement designates part of the payments as interest, or that part is easy to recognize as interest. My pay Leveraged leases. My pay Leveraged lease transactions may not be considered leases. My pay Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. My pay 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. My pay If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. My pay 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. My pay 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. My pay Internal Revenue Bulletin 2001-19 is available at www. My pay irs. My pay gov/pub/irs-irbs/irb01-19. My pay pdf. My pay 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. My pay 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. My pay 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. My pay The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. My pay 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. My pay The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. My pay The IRS may charge you a user fee for issuing a tax ruling. My pay For more information, see Revenue Procedure 2014-1 available at www. My pay irs. My pay gov/irb/2014-1_IRB/ar05. My pay html. My pay Leveraged leases of limited-use property. My pay The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. My pay 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. My pay See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. My pay Leases over $250,000. My pay Special rules are provided for certain leases of tangible property. My pay The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. My pay Rents increase during the lease. My pay Rents decrease during the lease. My pay 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). My pay 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). My pay 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). My pay 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. My pay 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. My pay For details, see section 467 of the Internal Revenue Code. My pay 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. My pay When you can deduct these taxes as additional rent depends on your accounting method. My pay Cash method. My pay 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. My pay Accrual method. My pay 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. My pay That you have a liability for taxes on the leased property. My pay How much the liability is. My pay That economic performance occurred. My pay The liability and amount of taxes are determined by state or local law and the lease agreement. My pay Economic performance occurs as you use the property. My pay Example 1. My pay Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. My pay Oak leases land for use in its business. My pay 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. My pay However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. My pay Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. My pay If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. My pay Oak cannot deduct the real estate taxes as rent until the tax bill is issued. My pay This is when Oak's liability under the lease becomes fixed. My pay Example 2. My pay 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. My pay As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. My pay This is the year in which Oak's liability under the lease becomes fixed. My pay 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. My pay 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. My pay 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. My pay 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. My pay 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. My pay Option to renew. My pay 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. My pay 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). My pay Allocate the lease cost to the original term and any option term based on the facts and circumstances. My pay In some cases, it may be appropriate to make the allocation using a present value computation. My pay For more information, see Regulations section 1. My pay 178-1(b)(5). My pay Example 1. My pay You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. My pay Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. My pay 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. My pay That is the remaining life of your present lease plus the periods for renewal. My pay Example 2. My pay 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. My pay You can amortize the entire $10,000 over the 20-year remaining life of the original lease. My pay The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). My pay Cost of a modification agreement. My pay You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. My pay You must capitalize these payments and amortize them over the remaining period of the lease. My pay You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. My pay Example. My pay You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. My pay However, before you occupy it, you decide that you really need less space. My pay 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. My pay In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. My pay You must capitalize the $3,000 and amortize it over the 20-year term of the lease. My pay Your amortization deduction each year will be $150 ($3,000 ÷ 20). My pay You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. My pay Commissions, bonuses, and fees. My pay Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. My pay You must amortize these costs over the term of the lease. My pay Loss on merchandise and fixtures. My pay 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. My pay You must capitalize the loss and amortize it over the remaining term of the lease. My pay 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). My pay Depreciate the property over its appropriate recovery period. My pay You cannot amortize the cost over the remaining term of the lease. My pay 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. My pay For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. My pay Assignment of a lease. My pay 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. My pay 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. My pay The rest is for your investment in the permanent improvements. My pay 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. My pay 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. My pay 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. My pay Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. My pay You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. My pay Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. My pay Uniform capitalization rules. My pay 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. My pay Produce real property or tangible personal property. My pay For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. My pay Acquire property for resale. My pay However, these rules do not apply to the following property. My pay Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. My pay Property you produce if you meet either of the following conditions. My pay Your indirect costs of producing the property are $200,000 or less. My pay You use the cash method of accounting and do not account for inventories. My pay Example 1. My pay You rent construction equipment to build a storage facility. My pay 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. My pay You recover your cost by claiming a deduction for depreciation on the building. My pay Example 2. My pay You rent space in a facility to conduct your business of manufacturing tools. My pay 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. My pay More information. My pay For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. My pay Prev Up Next Home More Online Publications