Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Free E File Tax Extension

Senior Tax RebateState Unemployment Tax1040ez BookHow To File Taxes From 20122011 Tax Act OnlineEzformFree Federal Tax FilingHow To File A State Tax Return1040ez 2013 Tax FormFree Online Tax PreparationFile Taxes For 2012Military Pay TaxesMilitary Pay ChartH & R Block Free Tax FilingEz Tax Form OnlineHow Can I File Taxes For 2012Mass Income State Tax FormsFillable Tax Forms 2011Filing Past Tax ReturnsMichigan Tax Forms 1040ezWww Handrblock ComClaim Social Security Income TaxesFiling TaxesI Need To Amend My Taxes2011 Tax FormsHow To Fill Out 1040x Step By StepIrs Gov Forms Form 1040x1040 Ez E FileFile Taxes IncomeWww Irs GovlefileDownload Form 1040xI Filed My Taxes WrongTurbotax 1040ezHr Block Taxes OnlineFile Income Taxes Online1040 Ez FileFiling 2011 Taxes LateFree Federal Tax ReturnForm 1040 EzHow To File A Tax Amendment

Free E File Tax Extension

Free e file tax extension 6. Free e file tax extension   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Free e file tax extension However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Free e file tax extension This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Free e file tax extension This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Free e file tax extension However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Free e file tax extension If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Free e file tax extension For more information, see chapter 2. Free e file tax extension Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Free e file tax extension These lines are reproduced below and are explained in the discussion that follows. Free e file tax extension 35 Inventory at beginning of year. Free e file tax extension If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Free e file tax extension Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Free e file tax extension Subtract line 41 from line 40. Free e file tax extension  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Free e file tax extension If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Free e file tax extension Opening inventory usually will be identical to the closing inventory of the year before. Free e file tax extension You must explain any difference in a schedule attached to your return. Free e file tax extension Donation of inventory. Free e file tax extension   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Free e file tax extension The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Free e file tax extension You must remove the amount of your contribution deduction from your opening inventory. Free e file tax extension It is not part of the cost of goods sold. Free e file tax extension   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Free e file tax extension Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Free e file tax extension For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Free e file tax extension   A special rule may apply to certain donations of food inventory. Free e file tax extension See Publication 526, Charitable Contributions. Free e file tax extension Example 1. Free e file tax extension You are a calendar year taxpayer who uses an accrual method of accounting. Free e file tax extension In 2013, you contributed property from inventory to a church. Free e file tax extension It had a fair market value of $600. Free e file tax extension The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Free e file tax extension The charitable contribution allowed for 2013 is $400 ($600 − $200). Free e file tax extension The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Free e file tax extension The cost of goods sold you use in determining gross income for 2013 must not include the $400. Free e file tax extension You remove that amount from opening inventory for 2013. Free e file tax extension Example 2. Free e file tax extension If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Free e file tax extension You would not be allowed any charitable contribution deduction for the contributed property. Free e file tax extension Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Free e file tax extension If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Free e file tax extension Trade discounts. Free e file tax extension   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Free e file tax extension You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Free e file tax extension Do not show the discount amount separately as an item in gross income. Free e file tax extension   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Free e file tax extension Cash discounts. Free e file tax extension   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Free e file tax extension There are two methods of accounting for cash discounts. Free e file tax extension You can either credit them to a separate discount account or deduct them from total purchases for the year. Free e file tax extension Whichever method you use, you must be consistent. Free e file tax extension If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Free e file tax extension For more information, see Change in Accounting Method in chapter 2. Free e file tax extension   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Free e file tax extension If you use this method, do not reduce your cost of goods sold by the cash discounts. Free e file tax extension Purchase returns and allowances. Free e file tax extension   You must deduct all returns and allowances from your total purchases during the year. Free e file tax extension Merchandise withdrawn from sale. Free e file tax extension   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Free e file tax extension Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Free e file tax extension You must also charge the amount to your drawing account. Free e file tax extension   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Free e file tax extension As stated above, you also use it to record withdrawals of merchandise for personal or family use. Free e file tax extension This account is also known as a “withdrawals account” or “personal account. Free e file tax extension ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Free e file tax extension Small merchandisers (wholesalers, retailers, etc. Free e file tax extension ) usually do not have labor costs that can properly be charged to cost of goods sold. Free e file tax extension In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Free e file tax extension Direct labor. Free e file tax extension   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Free e file tax extension They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Free e file tax extension Indirect labor. Free e file tax extension   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Free e file tax extension Other labor. Free e file tax extension   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Free e file tax extension Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Free e file tax extension Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Free e file tax extension Those that are not used in the manufacturing process are treated as deferred charges. Free e file tax extension You deduct them as a business expense when you use them. Free e file tax extension Business expenses are discussed in chapter 8. Free e file tax extension Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Free e file tax extension Containers. Free e file tax extension   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Free e file tax extension If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Free e file tax extension Freight-in. Free e file tax extension   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Free e file tax extension Overhead expenses. Free e file tax extension   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Free e file tax extension The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Free e file tax extension Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Free e file tax extension Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Free e file tax extension Inventory at the end of the year is also known as closing or ending inventory. Free e file tax extension Your ending inventory will usually become the beginning inventory of your next tax year. Free e file tax extension Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Free e file tax extension Prev  Up  Next   Home   More Online Publications
 
Print - Click this link to Print this page

General FAQs on Payment Card and Third Party Network Transactions

I received Form 1099-K. How do I report it on my tax return?

Separate reporting of these transactions is not required. However, you should follow the return instructions on the form you are completing to report your gross receipts or sales. You should report items that qualify as a trade or business expense on the appropriate line item of Schedules C, E and F.

What is a participating payee?

A participating payee is:

  • Any person who accepts a payment card as payment, or
  • Any person who accepts payment made by a third party settlement organization on behalf of the purchaser or customer.

Why is this reporting necessary?

This reporting is required by law. Third party information reporting has been shown to increase voluntary tax compliance and improve collections and assessments within IRS.

How are reportable transactions to be reported to IRS?

Gross payment card and third party network transaction amounts are reported on the Form 1099-K, Payment Card and Third Party Network Transactions.

What information must be reported on the Form 1099-K?

The gross amount of reportable payment transactions for the calendar year and its corresponding months are required to be reported for each payee. The reporting of both annual and monthly amounts is necessary to resolve differences between information returns and tax returns of fiscal year filers. The name, address and taxpayer identification number of each participating payee must also be included on the form.

When are Forms 1099-K due?

Information reporting for payment card and third party network transactions is due to the IRS on the last day of February of the year following the transactions. If filing electronically, it is due the first day of April of the year following the transactions.

May Forms 1099-K be filed electronically?

Yes. Those required to file may do so through the FIRE (Filing Information Returns Electronically) system. If a payment settlement entity has more than 250 individual information returns to file in any calendar year, they all must be submitted electronically. Existing users may log into FIRE. New users may create an account and test their file before submitting.

For more information, review Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically. If you are considering filing on paper, review General Instructions for Certain Information Returns.

What are payee statements and when are they due?

Every payment settlement entity required to file a Form 1099-K must also furnish to each participating payee a written statement with the same information reported to the IRS. The statements must be furnished to the payee by January 31 of the year following the transactions.

May payee statements be furnished to participating payees electronically?

Yes. With the participating payee’s prior consent, payee statements may be provided electronically. This consent may be granted electronically. (See Treasury regulations section 1.6050W-2 for instructions for receiving consent from payees.) If a payee statement is furnished electronically, an email address for the reporting entity may be provided in lieu of a phone number.

Is there a de minimis exception for Forms 1099-K by third party settlement organizations?  

There is a “de minimis” exception from reporting for a third party settlement organization with respect to third party network transactions. If payments to a participating payee exceed $20,000 and exceed 200 transactions within the calendar year they must file for that participating payee.

Does the de minimis exception described above apply to payment card transactions?

No. The “de minimis” exception does not apply to payment card transactions settled by merchant acquiring entities.

What constitutes the "gross amount" of reportable transactions?

The "gross amount" of reportable transactions means the total unadjusted dollar amount of aggregate payment transactions for each participating payee.  

Are foreign payment settlement entities subject to the reporting requirements?

Yes. The statute and regulations establish that a "payment settlement entity" may be a domestic or foreign entity.

Are payment settlement entities required to report the transactions of governmental units, whether state or federal?

Yes. The term "participating payees" includes any governmental unit.

What is payment card and third party network reporting?

Under section 6050W of the Internal Revenue Code, payment settlement entities (merchant acquiring entities and third party settlement organizations) must report payment card and third party network transactions. This reporting requirement began in early 2012 for payment card and third party network transactions that occurred in 2011.

Are purchases made with stored-value cards or gift cards reportable transactions?

It depends.

  • Purchases are not reportable when the card is accepted as payment by the issuer or someone who is related to the issuer of the card (such as a subsidiary company or the company itself). Under these circumstances, the stored-value cards do not fit the definition of a "payment card" and purchases made with such cards are therefore not reportable. 
  • Purchases are reportable when the stored-value card is accepted by a network of persons unrelated to the issuer and each other.

For the definition of unrelated person see section 267(b) of the Internal Revenue Code, including the application of section 267(b) and (e)(3), or section 707(b)(1).

If transactions are already reportable on other information returns, must they be reported again by payment settlement entities?

No. If a transaction is reportable by a PSE both under section 6041 or section 6041 A(a) and under section 6050W, the transaction must be reported on a Form 1099-K and not a Form 1099-MISC.

If a worker at a trade or business is an independent contractor, and the independent contractor swipes payment cards on behalf of the trade or business in the normal course of business (in other words, the trade or business, not the independent contractor, receives the proceeds), should the trade or business report payments to the worker on Form 1099-K or Form 1099-MISC?

In this situation, the trade or business should continue to report payments made to independent contractors on Form 1099-MISC as they have done in the past. However, the business will receive a Form 1099-K for these payment card transactions from the payment settlement entity.

How can payee TINs be verified?

Verification of payee TINs is done through the Taxpayer Identification Number (TIN) Matching Program.   

For further information please visit General Instructions for Certain Information Returns - Introductory Material or call 1-866-255-0654.

Can the entity responsible for filing Form 1099-K contract with a third party to prepare and file these returns?

Yes. However, the entity responsible for filing (i.e., the entity that submits the instructions to transfer funds) is liable for any applicable penalties under sections 6721 and 6722 if the reporting requirements are not met. In addition, the name, address and Taxpayer Identification Number of the entity responsible for filing must be reported on the Form 1099-K in the box for the filer's information.

What is Form 1099-K?

The Form 1099-K, Payment Card and Third Party Network Transactions, is an information return that reports the gross amount of reportable transactions for the calendar year to the IRS.

If you receive a Form 1099-K, you should retain it for your records and may use it to assist you in completing your tax returns.

I filed Form 1099-K last year. What changes will I see on my 2013 Form 1099-K?

IRS modified calendar year 2013 Form 1099-K to improve compliance effectiveness. These changes include:

  • Box 3 (Number of payment transactions) is no longer optional for calendar year 2013 and should reflect the number of purchase transactions (not including refund transactions) processed through the payment card or the third party network.
  • Box 4 (Federal income tax withheld) was added to reflect amounts that may have been withheld by the payer, such as backup withholding. The recipient of the Form 1099-K should include this amount on their income tax return as tax withheld.
  • Boxes 6, 7 & 8 were added to be consistent with other information returns and reflect the State, State ID Number and State Income Tax Withheld, respectively.

What are payment settlement entities?

A payment settlement entity is an entity that makes payment in settlement of a payment card transaction or third party network transaction. Payment Settlement Entities are often referred to as “PSEs” and can take one of two forms:

  • Merchant Acquiring Entity: A bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions
  • Third Party Settlement Organization: The central organization that has the contractual obligation to make payment to participating payees of third party network transactions

If I use a payment card (or a third party settlement organization) to pay for a purchase, do these payment card reporting rules affect me and will I receive a Form 1099-K?

No. Individuals will not receive a Form 1099-K for making a purchase. These provisions affect only businesses or entities that accept payment cards or use third party network settlement organizations for payment of goods or services.

Do payment settlement entities adjust the "gross amount" to account for fees, refunds, charge-backs or other costs and refunded amounts?

No. The "gross amount" is the total unadjusted dollar amount of the payment transactions for a participating payee. This amount is not to be adjusted to account for any fees, refunds, or any other amounts.

What do I do with the information on Form 1099-K?

The Form 1099-K is an information return. Use this information return in conjunction with your other tax records to determine your correct tax. To get further information on record keeping, check out Publication 552, for individuals or Publication 583, Starting a Business and Keeping Record.  

How will IRS use the data?

The IRS will use the data from the Form 1099-K to develop:

  • Taxpayer education and outreach products and services.
  • New examination and collection approaches.    

What do I do if I think my Form 1099-K is incorrect?

If you believe the information on a Form 1099-K is incorrect, the form has been issued in error, or you have a question relating to the form, contact the filer, whose name appears in the upper left corner on the front of the form.

Or you may contact the payer, or PSE, whose name and phone number are shown in the lower left corner of the form. If you cannot get this form corrected, you may attach an explanation to your tax return and report your income correctly.

To get the further information on Information Returns, check out the General Instructions for Certain Information Returns.

Where can I call if I have a question on the Form 1099-K?

Payors who have questions about the Form 1099-K itself, may call the IRS at 1-866-455-7438. Payees who have questions about the information on a Form 1099-K they have received should contact the filer, whose name appears in the upper left corner on the form.  

I own a small business and also have a not-for-profit hobby. I do not accept payment cards for payment for either, but I do use a credit card and third party settlement organization to make purchases for both. Do the payment card reporting rules affect me?

No. The provisions for payment settlement entity reporting affect only those businesses or entities that accept these forms of payment for goods or services.

Since you do not accept these forms of payments, you will not receive a Form 1099-K for your sales.

Additionally, you will not receive a Form 1099-K for your purchases. Individuals and businesses only receive Form 1099-K for receiving payment for goods and services in reportable transactions.

I occasionally sell items on an Internet auction site and accept payment cards. How do the payment settlement entity reporting rules affect me?

If you accept payment cards as a form of payment, you will receive a Form 1099-K for the gross amount of proceeds for the goods or services purchased from you through the use of a payment card in a calendar year. Further, if you accept payments from a third party settlement organization, you should receive a Form 1099-K from that organization only if:

  • The total number of your transactions exceeds 200 

AND 

  • The aggregate value exceeds $20,000 in a calendar year.

If I have a holiday craft business and accept payment cards for payments, how do the payment settlement entity reporting rules affect me?

If you are set up to accept payment cards as a form of payment, you will receive a Form 1099-K for the gross amount of the proceeds for the goods or services purchased from you through the use of a payment card in a calendar year. Further, if you accept payments from a third party settlement organization, you should receive a Form 1099-K only if:

  • the total number of your transactions exceeds 200 

AND

  • the aggregate value exceeds $20,000 in a calendar year.

 

Page Last Reviewed or Updated: 20-Mar-2014

The Free E File Tax Extension

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