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Tax deductions 3. Tax deductions Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. Tax deductions Leveraged leases. Tax deductions Leveraged leases of limited-use property. Tax deductions 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. Tax deductions It also discusses how to treat other kinds of payments you make that are related to your use of this property. Tax deductions These include payments you make for taxes on the property. Tax deductions 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. Tax deductions In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. Tax deductions If you have or will receive equity in or title to the property, the rent is not deductible. Tax deductions Unreasonable rent. Tax deductions You cannot take a rental deduction for unreasonable rent. Tax deductions Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Tax deductions 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. Tax deductions Rent is not unreasonable just because it is figured as a percentage of gross sales. Tax deductions For examples of related persons, see Related persons in chapter 2, Publication 544. Tax deductions Rent on your home. Tax deductions 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. Tax deductions You must meet the requirements for business use of your home. Tax deductions For more information, see Business use of your home in chapter 1. Tax deductions Rent paid in advance. Tax deductions Generally, rent paid in your trade or business is deductible in the year paid or accrued. Tax deductions 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. Tax deductions You can deduct the rest of your payment only over the period to which it applies. Tax deductions Example 1. Tax deductions You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. Tax deductions Your rent is $12,000 per year. Tax deductions You paid the first year's rent ($12,000) on June 30. Tax deductions You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. Tax deductions Example 2. Tax deductions You are a calendar year taxpayer. Tax deductions Last January you leased property for 3 years for $6,000 a year. Tax deductions You paid the full $18,000 (3 × $6,000) during the first year of the lease. Tax deductions Each year you can deduct only $6,000, the part of the lease that applies to that year. Tax deductions Canceling a lease. Tax deductions You generally can deduct as rent an amount you pay to cancel a business lease. Tax deductions Lease or purchase. Tax deductions There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. Tax deductions You must first determine whether your agreement is a lease or a conditional sales contract. Tax deductions Payments made under a conditional sales contract are not deductible as rent expense. Tax deductions Conditional sales contract. Tax deductions Whether an agreement is a conditional sales contract depends on the intent of the parties. Tax deductions Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Tax deductions No single test, or special combination of tests, always applies. Tax deductions However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Tax deductions The agreement applies part of each payment toward an equity interest you will receive. Tax deductions You get title to the property after you make a stated amount of required payments. Tax deductions 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. Tax deductions You pay much more than the current fair rental value of the property. Tax deductions 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. Tax deductions Determine this value when you make the agreement. Tax deductions You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Tax deductions The agreement designates part of the payments as interest, or that part is easy to recognize as interest. Tax deductions Leveraged leases. Tax deductions Leveraged lease transactions may not be considered leases. Tax deductions Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. Tax deductions 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. Tax deductions If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. Tax deductions 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. Tax deductions 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. Tax deductions Internal Revenue Bulletin 2001-19 is available at www. Tax deductions irs. Tax deductions gov/pub/irs-irbs/irb01-19. Tax deductions pdf. Tax deductions 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. Tax deductions 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. Tax deductions 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. Tax deductions The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. Tax deductions 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. Tax deductions The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. Tax deductions The IRS may charge you a user fee for issuing a tax ruling. Tax deductions For more information, see Revenue Procedure 2014-1 available at www. Tax deductions irs. Tax deductions gov/irb/2014-1_IRB/ar05. Tax deductions html. Tax deductions Leveraged leases of limited-use property. Tax deductions The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. Tax deductions 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. Tax deductions See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. Tax deductions Leases over $250,000. Tax deductions Special rules are provided for certain leases of tangible property. Tax deductions The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. Tax deductions Rents increase during the lease. Tax deductions Rents decrease during the lease. Tax deductions 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). Tax deductions 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). Tax deductions 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). Tax deductions 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. Tax deductions 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. Tax deductions For details, see section 467 of the Internal Revenue Code. Tax deductions 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. Tax deductions When you can deduct these taxes as additional rent depends on your accounting method. Tax deductions Cash method. Tax deductions 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. Tax deductions Accrual method. Tax deductions 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. Tax deductions That you have a liability for taxes on the leased property. Tax deductions How much the liability is. Tax deductions That economic performance occurred. Tax deductions The liability and amount of taxes are determined by state or local law and the lease agreement. Tax deductions Economic performance occurs as you use the property. Tax deductions Example 1. Tax deductions Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. Tax deductions Oak leases land for use in its business. Tax deductions 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. Tax deductions However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. Tax deductions Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. Tax deductions If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. Tax deductions Oak cannot deduct the real estate taxes as rent until the tax bill is issued. Tax deductions This is when Oak's liability under the lease becomes fixed. Tax deductions Example 2. Tax deductions 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. Tax deductions As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. Tax deductions This is the year in which Oak's liability under the lease becomes fixed. Tax deductions 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. Tax deductions 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. Tax deductions 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. Tax deductions 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. Tax deductions 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. Tax deductions Option to renew. Tax deductions 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. Tax deductions 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). Tax deductions Allocate the lease cost to the original term and any option term based on the facts and circumstances. Tax deductions In some cases, it may be appropriate to make the allocation using a present value computation. Tax deductions For more information, see Regulations section 1. Tax deductions 178-1(b)(5). Tax deductions Example 1. Tax deductions You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. Tax deductions Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. Tax deductions 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. Tax deductions That is the remaining life of your present lease plus the periods for renewal. Tax deductions Example 2. Tax deductions 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. Tax deductions You can amortize the entire $10,000 over the 20-year remaining life of the original lease. Tax deductions The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). Tax deductions Cost of a modification agreement. Tax deductions You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. Tax deductions You must capitalize these payments and amortize them over the remaining period of the lease. Tax deductions You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. Tax deductions Example. Tax deductions You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. Tax deductions However, before you occupy it, you decide that you really need less space. Tax deductions 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. Tax deductions In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. Tax deductions You must capitalize the $3,000 and amortize it over the 20-year term of the lease. Tax deductions Your amortization deduction each year will be $150 ($3,000 ÷ 20). Tax deductions You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. Tax deductions Commissions, bonuses, and fees. Tax deductions Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. Tax deductions You must amortize these costs over the term of the lease. Tax deductions Loss on merchandise and fixtures. Tax deductions 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. Tax deductions You must capitalize the loss and amortize it over the remaining term of the lease. Tax deductions 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). Tax deductions Depreciate the property over its appropriate recovery period. Tax deductions You cannot amortize the cost over the remaining term of the lease. Tax deductions 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. Tax deductions For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. Tax deductions Assignment of a lease. Tax deductions 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. Tax deductions 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. Tax deductions The rest is for your investment in the permanent improvements. Tax deductions 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. Tax deductions 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. Tax deductions 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. Tax deductions Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Tax deductions You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Tax deductions Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. Tax deductions Uniform capitalization rules. Tax deductions 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. Tax deductions Produce real property or tangible personal property. Tax deductions For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Tax deductions Acquire property for resale. Tax deductions However, these rules do not apply to the following property. Tax deductions Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. Tax deductions Property you produce if you meet either of the following conditions. Tax deductions Your indirect costs of producing the property are $200,000 or less. Tax deductions You use the cash method of accounting and do not account for inventories. Tax deductions Example 1. Tax deductions You rent construction equipment to build a storage facility. Tax deductions 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. Tax deductions You recover your cost by claiming a deduction for depreciation on the building. Tax deductions Example 2. Tax deductions You rent space in a facility to conduct your business of manufacturing tools. Tax deductions 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. Tax deductions More information. Tax deductions For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. Tax deductions Prev Up Next Home More Online Publications
Help for Victims of Ponzi Investment Schemes
The IRS provides two items of guidance to help taxpayers who are victims of losses from Ponzi-type investment schemes.
Revenue Ruling 2009-9 provides guidance on determining the amount and timing of losses from these schemes, which is difficult and dependent on the prospect of recovering the lost money (which may not become known for several years).
Revenue Procedure 2009-20
simplifies compliance for taxpayers by providing a safe-harbor means of determining the year in which the loss is deemed to occur and a simplified means of computing the amount of the loss.
For an overview of this guidance, see IRS Commissioner Doug Shulman's March 17, 2009, testimony before the Senate Finance Committee on tax issues related to Ponzi schemes.
Questions and Answers
- FAQs Related to Ponzi Scenarios for Clawback Treatment
- Do you have questions on what to do if you've invested in a Ponzi scheme? If so, these questions and answers may help.
- Do you have questions on what to do if you took a tax loss due to a Ponzi scheme investment but later recovered some of your investment? If so, these questions and answers on the tax treatment of distributions received from a trustee/receiver may help. A trustee or receiver may use this information to respond to questions from investors and may include a copy of these questions and answers with any distributions sent to investors.
Page Last Reviewed or Updated: 14-Mar-2014
The Tax Deductions
Tax deductions Publication 598 - Introductory Material Table of Contents What's New Introduction Useful Items - You may want to see: What's New Federal tax deposits must be made by electronic funds transfer. Tax deductions Beginning January 1, 2011, you must use electronic funds transfer to make all federal tax deposits. Tax deductions Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after 2010. Tax deductions See Federal Tax Deposits Must be Made by Electronic Funds Transfer on page 3. Tax deductions For large corporations, special rules apply for estimated tax payments that are required to be made for the period that includes July, August, or September of 2012, and the period that immediately follows these months. Tax deductions See the instructions for line 12 on the 2012 Form 990-W (Worksheet), Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations. Tax deductions The maximum cost of a low-cost article, for organizations eligible to receive charitable contributions, was increased to $9. Tax deductions 70 for 2011. Tax deductions See Distribution of low-cost articles on page 8. Tax deductions The annual limit on associate member dues received by an agricultural or horticultural organization not treated as gross income was increased to $148 for 2011. Tax deductions See Exception under Dues of Agricultural Organizations and Business Leagues on page 10. Tax deductions The IRS has created a page on IRS. Tax deductions gov that includes information about Pub. Tax deductions 598 at www. Tax deductions irs. Tax deductions gov/pub598. Tax deductions Introduction An exempt organization is not taxed on its income from an activity substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. Tax deductions Such income is exempt even if the activity is a trade or business. Tax deductions However, if an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business. Tax deductions This publication covers the rules for the tax on unrelated business income of exempt organizations. Tax deductions It explains: Which organizations are subject to the tax (chapter 1), What the requirements are for filing a tax return (chapter 2), What an unrelated trade or business is (chapter 3), and How to figure unrelated business taxable income (chapter 4). Tax deductions All section references in this publication are to the Internal Revenue Code. Tax deductions Useful Items - You may want to see: Publication 557 Tax-Exempt Status for Your Organization Form (and Instructions) 990-T Exempt Organization Business Income Tax Return See chapter 5 for information about getting these publications and forms. Tax deductions Comments and suggestions. Tax deductions We welcome your comments about this publication and your suggestions for future editions. Tax deductions You can write to us at: Internal Revenue Service Individual Forms and Publications Branch SE:W:CAR:MP:T:I 1111 Constitution Ave. Tax deductions NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Tax deductions Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Tax deductions You can email us at taxforms@irs. Tax deductions gov. Tax deductions Please put “publications Comment” on the subject line. Tax deductions You can also send us comments from www. Tax deductions irs. Tax deductions gov/formspubs/, select “Comment on Tax Forms and Publications” under “Information about. Tax deductions ” Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Tax deductions Prev Up Next Home More Online Publications