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

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File your taxes free online Publication 551 - Introductory Material Table of Contents What's New Reminder IntroductionOrdering forms and publications. File your taxes free online Tax questions. File your taxes free online Useful Items - You may want to see: What's New Property acquired from a decedent who died in 2010. File your taxes free online  Property acquired from a decedent dying in 2010 will no longer have an automatic increase in basis. File your taxes free online See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. File your taxes free online Reminder Photographs of missing children. File your taxes free online  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. File your taxes free online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. File your taxes free online You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. File your taxes free online Introduction Basis is the amount of your investment in property for tax purposes. File your taxes free online Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. File your taxes free online Also use it to figure gain or loss on the sale or other disposition of property. File your taxes free online You must keep accurate records of all items that affect the basis of property so you can make these computations. File your taxes free online This publication is divided into the following sections. File your taxes free online Cost Basis Adjusted Basis Basis Other Than Cost The basis of property you buy is usually its cost. File your taxes free online You may also have to capitalize (add to basis) certain other costs related to buying or producing the property. File your taxes free online Your original basis in property is adjusted (increased or decreased) by certain events. File your taxes free online If you make improvements to the property, increase your basis. File your taxes free online If you take deductions for depreciation or casualty losses, reduce your basis. File your taxes free online You cannot determine your basis in some assets by cost. File your taxes free online This includes property you receive as a gift or inheritance. File your taxes free online It also applies to property received in an involuntary conversion and certain other circumstances. File your taxes free online Comments and suggestions. File your taxes free online   We welcome your comments about this publication and your suggestions for future editions. File your taxes free online   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. File your taxes free online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. File your taxes free online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. File your taxes free online   You can email us at taxforms@irs. File your taxes free online gov. File your taxes free online Please put “Publications Comment” on the subject line. File your taxes free online You can also send us comments from www. File your taxes free online irs. File your taxes free online gov/formspubs/, select “Comment on Tax Forms and Publications” under “Information about. File your taxes free online ”   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. File your taxes free online Ordering forms and publications. File your taxes free online   Visit www. File your taxes free online irs. File your taxes free online gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 business days after your request is received. File your taxes free online  Internal Revenue Service  1201 N. File your taxes free online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. File your taxes free online   If you have a tax question, visit IRS. File your taxes free online gov or call 1-800-829-1040. File your taxes free online We cannot answer tax questions sent to either of the above addresses. File your taxes free online Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 523 Selling Your Home 525 Taxable and Nontaxable Income 527 Residential Rental Property 530 Tax Information for First-Time Homeowners 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 559 Survivors, Executors, and Administrators 587 Business Use of Your Home 946 How To Depreciate Property Form (and Instructions) 706 United States Estate (and Generation-Skipping Transfer) Tax Return 706-A United States Additional Estate Tax Return 8594 Asset Acquisition Statement See How To Get Tax Help near the end of this publication for information about getting publications and forms. File your taxes free online Prev  Up  Next   Home   More Online Publications