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1040ez 2013

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1040ez 2013

1040ez 2013 3. 1040ez 2013   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. 1040ez 2013 Leveraged leases. 1040ez 2013 Leveraged leases of limited-use property. 1040ez 2013 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. 1040ez 2013 It also discusses how to treat other kinds of payments you make that are related to your use of this property. 1040ez 2013 These include payments you make for taxes on the property. 1040ez 2013 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. 1040ez 2013 In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. 1040ez 2013 If you have or will receive equity in or title to the property, the rent is not deductible. 1040ez 2013 Unreasonable rent. 1040ez 2013   You cannot take a rental deduction for unreasonable rent. 1040ez 2013 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. 1040ez 2013 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. 1040ez 2013 Rent is not unreasonable just because it is figured as a percentage of gross sales. 1040ez 2013 For examples of related persons, see Related persons in chapter 2, Publication 544. 1040ez 2013 Rent on your home. 1040ez 2013   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. 1040ez 2013 You must meet the requirements for business use of your home. 1040ez 2013 For more information, see Business use of your home in chapter 1. 1040ez 2013 Rent paid in advance. 1040ez 2013   Generally, rent paid in your trade or business is deductible in the year paid or accrued. 1040ez 2013 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. 1040ez 2013 You can deduct the rest of your payment only over the period to which it applies. 1040ez 2013 Example 1. 1040ez 2013 You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. 1040ez 2013 Your rent is $12,000 per year. 1040ez 2013 You paid the first year's rent ($12,000) on June 30. 1040ez 2013 You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. 1040ez 2013 Example 2. 1040ez 2013 You are a calendar year taxpayer. 1040ez 2013 Last January you leased property for 3 years for $6,000 a year. 1040ez 2013 You paid the full $18,000 (3 × $6,000) during the first year of the lease. 1040ez 2013 Each year you can deduct only $6,000, the part of the lease that applies to that year. 1040ez 2013 Canceling a lease. 1040ez 2013   You generally can deduct as rent an amount you pay to cancel a business lease. 1040ez 2013 Lease or purchase. 1040ez 2013   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. 1040ez 2013 You must first determine whether your agreement is a lease or a conditional sales contract. 1040ez 2013 Payments made under a conditional sales contract are not deductible as rent expense. 1040ez 2013 Conditional sales contract. 1040ez 2013   Whether an agreement is a conditional sales contract depends on the intent of the parties. 1040ez 2013 Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. 1040ez 2013 No single test, or special combination of tests, always applies. 1040ez 2013 However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. 1040ez 2013 The agreement applies part of each payment toward an equity interest you will receive. 1040ez 2013 You get title to the property after you make a stated amount of required payments. 1040ez 2013 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. 1040ez 2013 You pay much more than the current fair rental value of the property. 1040ez 2013 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. 1040ez 2013 Determine this value when you make the agreement. 1040ez 2013 You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. 1040ez 2013 The agreement designates part of the payments as interest, or that part is easy to recognize as interest. 1040ez 2013 Leveraged leases. 1040ez 2013   Leveraged lease transactions may not be considered leases. 1040ez 2013 Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. 1040ez 2013 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. 1040ez 2013   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 Internal Revenue Bulletin 2001-19 is available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb01-19. 1040ez 2013 pdf. 1040ez 2013   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. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. 1040ez 2013 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. 1040ez 2013 The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. 1040ez 2013   The IRS may charge you a user fee for issuing a tax ruling. 1040ez 2013 For more information, see Revenue Procedure 2014-1 available at  www. 1040ez 2013 irs. 1040ez 2013 gov/irb/2014-1_IRB/ar05. 1040ez 2013 html. 1040ez 2013 Leveraged leases of limited-use property. 1040ez 2013   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. 1040ez 2013 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. 1040ez 2013 See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. 1040ez 2013 Leases over $250,000. 1040ez 2013   Special rules are provided for certain leases of tangible property. 1040ez 2013 The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. 1040ez 2013 Rents increase during the lease. 1040ez 2013 Rents decrease during the lease. 1040ez 2013 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). 1040ez 2013 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). 1040ez 2013 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). 1040ez 2013   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. 1040ez 2013 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. 1040ez 2013 For details, see section 467 of the Internal Revenue Code. 1040ez 2013 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. 1040ez 2013 When you can deduct these taxes as additional rent depends on your accounting method. 1040ez 2013 Cash method. 1040ez 2013   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. 1040ez 2013 Accrual method. 1040ez 2013   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. 1040ez 2013 That you have a liability for taxes on the leased property. 1040ez 2013 How much the liability is. 1040ez 2013 That economic performance occurred. 1040ez 2013   The liability and amount of taxes are determined by state or local law and the lease agreement. 1040ez 2013 Economic performance occurs as you use the property. 1040ez 2013 Example 1. 1040ez 2013 Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. 1040ez 2013 Oak leases land for use in its business. 1040ez 2013 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. 1040ez 2013 However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. 1040ez 2013 Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. 1040ez 2013 If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. 1040ez 2013 Oak cannot deduct the real estate taxes as rent until the tax bill is issued. 1040ez 2013 This is when Oak's liability under the lease becomes fixed. 1040ez 2013 Example 2. 1040ez 2013 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. 1040ez 2013 As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. 1040ez 2013 This is the year in which Oak's liability under the lease becomes fixed. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 Option to renew. 1040ez 2013   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. 1040ez 2013 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). 1040ez 2013 Allocate the lease cost to the original term and any option term based on the facts and circumstances. 1040ez 2013 In some cases, it may be appropriate to make the allocation using a present value computation. 1040ez 2013 For more information, see Regulations section 1. 1040ez 2013 178-1(b)(5). 1040ez 2013 Example 1. 1040ez 2013 You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. 1040ez 2013 Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. 1040ez 2013 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. 1040ez 2013 That is the remaining life of your present lease plus the periods for renewal. 1040ez 2013 Example 2. 1040ez 2013 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. 1040ez 2013 You can amortize the entire $10,000 over the 20-year remaining life of the original lease. 1040ez 2013 The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). 1040ez 2013 Cost of a modification agreement. 1040ez 2013   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. 1040ez 2013 You must capitalize these payments and amortize them over the remaining period of the lease. 1040ez 2013 You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. 1040ez 2013 Example. 1040ez 2013 You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. 1040ez 2013 However, before you occupy it, you decide that you really need less space. 1040ez 2013 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. 1040ez 2013 In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. 1040ez 2013   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. 1040ez 2013 Your amortization deduction each year will be $150 ($3,000 ÷ 20). 1040ez 2013 You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. 1040ez 2013 Commissions, bonuses, and fees. 1040ez 2013   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. 1040ez 2013 You must amortize these costs over the term of the lease. 1040ez 2013 Loss on merchandise and fixtures. 1040ez 2013   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. 1040ez 2013 You must capitalize the loss and amortize it over the remaining term of the lease. 1040ez 2013 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). 1040ez 2013 Depreciate the property over its appropriate recovery period. 1040ez 2013 You cannot amortize the cost over the remaining term of the lease. 1040ez 2013 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. 1040ez 2013 For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. 1040ez 2013 Assignment of a lease. 1040ez 2013   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. 1040ez 2013 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. 1040ez 2013 The rest is for your investment in the permanent improvements. 1040ez 2013   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. 1040ez 2013 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. 1040ez 2013 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. 1040ez 2013 Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. 1040ez 2013 You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040ez 2013 Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. 1040ez 2013 Uniform capitalization rules. 1040ez 2013   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. 1040ez 2013 Produce real property or tangible personal property. 1040ez 2013 For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. 1040ez 2013 Acquire property for resale. 1040ez 2013 However, these rules do not apply to the following property. 1040ez 2013 Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. 1040ez 2013 Property you produce if you meet either of the following conditions. 1040ez 2013 Your indirect costs of producing the property are $200,000 or less. 1040ez 2013 You use the cash method of accounting and do not account for inventories. 1040ez 2013 Example 1. 1040ez 2013 You rent construction equipment to build a storage facility. 1040ez 2013 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. 1040ez 2013 You recover your cost by claiming a deduction for depreciation on the building. 1040ez 2013 Example 2. 1040ez 2013 You rent space in a facility to conduct your business of manufacturing tools. 1040ez 2013 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. 1040ez 2013 More information. 1040ez 2013   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. 1040ez 2013 Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of Flooding in Alaska

AK-2013-10, June 28, 2013

ANCHORAGE — Victims of flooding that began on May 17, 2013 in parts of Alaska may qualify for tax relief from the Internal Revenue Service.

The President has declared the Alaskan Gateway Regional Education Attendance Area (REAA), Lower Yukon REAA, Yukon Flats REAA and Yukon Koyukuk REAA a federal disaster area. Individuals who reside or have a business in these areas may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after May 17, and on or before July 16, have been postponed to July 16, 2013. This includes the June 17 deadline for second quarter estimated tax payments.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after May 17, and on or before June 3, as long as the deposits are made by June 3, 2013.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.

Covered Disaster Area

The areas listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until July 16 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after May 17 and on or before July 16.

The IRS also gives affected taxpayers until July 16 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after May 17 and on or before July 16.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after May 17 and on or before June 3 provided the taxpayer makes these deposits by June 3.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Alaska/Flooding” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-TAX-FORM (800-829-3676). The IRS toll-free number for general tax questions is 800-829-1040.

Related Information

Disaster Assistance and Emergency Relief for Individuals and Businesses

Recent IRS Disaster Relief Announcements

Page Last Reviewed or Updated: 28-Jun-2013

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