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H&r free federal 20. H&r free federal   Standard Deduction Table of Contents What's New Introduction Standard Deduction Amount Standard Deduction for Dependents Who Should ItemizeWhen to itemize. H&r free federal Married persons who filed separate returns. H&r free federal What's New Standard deduction increased. H&r free federal  The standard deduction for some taxpayers who do not itemize their deductions on Schedule A (Form 1040) is higher for 2013 than it was for 2012. H&r free federal The amount depends on your filing status. H&r free federal You can use the 2013 Standard Deduction Tables in this chapter to figure your standard deduction. H&r free federal Introduction This chapter discusses the following topics. H&r free federal How to figure the amount of your standard deduction. H&r free federal The standard deduction for dependents. H&r free federal Who should itemize deductions. H&r free federal Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. H&r free federal If you have a choice, you can use the method that gives you the lower tax. H&r free federal The standard deduction is a dollar amount that reduces your taxable income. H&r free federal It is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and taxes, on Schedule A (Form 1040). H&r free federal The standard deduction is higher for taxpayers who: Are 65 or older, or Are blind. H&r free federal You benefit from the standard deduction if your standard deduction is more than the total of your allowable itemized deductions. H&r free federal Persons not eligible for the standard deduction. H&r free federal   Your standard deduction is zero and you should itemize any deductions you have if: Your filing status is married filing separately, and your spouse itemizes deductions on his or her return, You are filing a tax return for a short tax year because of a change in your annual accounting period, or You are a nonresident or dual-status alien during the year. H&r free federal You are considered a dual-status alien if you were both a nonresident and resident alien during the year. H&r free federal Note. H&r free federal If you are a nonresident alien who is married to a U. H&r free federal S. H&r free federal citizen or resident alien at the end of the year, you can choose to be treated as a U. H&r free federal S. H&r free federal resident. H&r free federal (See Publication 519, U. H&r free federal S. H&r free federal Tax Guide for Aliens. H&r free federal ) If you make this choice, you can take the standard deduction. H&r free federal If an exemption for you can be claimed on another person's return (such as your parents' return), your standard deduction may be limited. H&r free federal See Standard Deduction for Dependents, later. H&r free federal Standard Deduction Amount The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. H&r free federal Generally, the standard deduction amounts are adjusted each year for inflation. H&r free federal The standard deduction amounts for most people are shown in Table 20-1. H&r free federal Decedent's final return. H&r free federal   The standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. H&r free federal However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed. H&r free federal Higher Standard Deduction for Age (65 or Older) If you are age 65 or older on the last day of the year and do not itemize deductions, you are entitled to a higher standard deduction. H&r free federal You are considered 65 on the day before your 65th birthday. H&r free federal Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1949. H&r free federal Use Table 20-2 to figure the standard deduction amount. H&r free federal Higher Standard Deduction for Blindness If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. H&r free federal Not totally blind. H&r free federal   If you are not totally blind, you must get a certified statement from an eye doctor (ophthalmologist or optometrist) that: You cannot see better than 20/200 in the better eye with glasses or contact lenses, or Your field of vision is 20 degrees or less. H&r free federal   If your eye condition is not likely to improve beyond these limits, the statement should include this fact. H&r free federal You must keep the statement in your records. H&r free federal   If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify. H&r free federal Spouse 65 or Older or Blind You can take the higher standard deduction if your spouse is age 65 or older or blind and: You file a joint return, or You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and cannot be claimed as a dependent by another taxpayer. H&r free federal You cannot claim the higher standard deduction for an individual other than yourself and your spouse. H&r free federal Examples The following examples illustrate how to determine your standard deduction using Tables 20-1 and 20-2. H&r free federal Example 1. H&r free federal Larry, 46, and Donna, 33, are filing a joint return for 2013. H&r free federal Neither is blind, and neither can be claimed as a dependent. H&r free federal They decide not to itemize their deductions. H&r free federal They use Table 20-1. H&r free federal Their standard deduction is $12,200. H&r free federal Example 2. H&r free federal The facts are the same as in Example 1 except that Larry is blind at the end of 2013. H&r free federal Larry and Donna use Table 20-2. H&r free federal Their standard deduction is $13,400. H&r free federal Example 3. H&r free federal Bill and Lisa are filing a joint return for 2013. H&r free federal Both are over age 65. H&r free federal Neither is blind, and neither can be claimed as a dependent. H&r free federal If they do not itemize deductions, they use Table 20-2. H&r free federal Their standard deduction is $14,600. H&r free federal Standard Deduction for Dependents The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of: $1,000, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,100). H&r free federal However, if the individual is 65 or older or blind, the standard deduction may be higher. H&r free federal If you (or your spouse, if filing jointly) can be claimed as a dependent on someone else's return, use Table 20-3 to determine your standard deduction. H&r free federal Earned income defined. H&r free federal   Earned income is salaries, wages, tips, professional fees, and other amounts received as pay for work you actually perform. H&r free federal    For purposes of the standard deduction, earned income also includes any part of a scholarship or fellowship grant that you must include in your gross income. H&r free federal See Scholarships and fellowships in chapter 12 for more information on what qualifies as a scholarship or fellowship grant. H&r free federal Example 1. H&r free federal Michael is single. H&r free federal His parents can claim an exemption for him on their 2013 tax return. H&r free federal He has interest income of $780 and wages of $150. H&r free federal He has no itemized deductions. H&r free federal Michael uses Table 20-3 to find his standard deduction. H&r free federal He enters $150 (his earned income) on line 1, $500 ($150 + $350) on line 3, $1,000 (the larger of $500 and $1,000) on line 5, and $6,100 on line 6. H&r free federal His standard deduction, on line 7a, is $1,000 (the smaller of $1,000 and $6,100). H&r free federal Example 2. H&r free federal Joe, a 22-year-old full-time college student, can be claimed as a dependent on his parents' 2013 tax return. H&r free federal Joe is married and files a separate return. H&r free federal His wife does not itemize deductions on her separate return. H&r free federal Joe has $1,500 in interest income and wages of $3,800. H&r free federal He has no itemized deductions. H&r free federal Joe finds his standard deduction by using Table 20-3. H&r free federal He enters his earned income, $3,800 on line 1. H&r free federal He adds lines 1 and 2 and enters $4,150 on line 3. H&r free federal On line 5, he enters $4,150, the larger of lines 3 and 4. H&r free federal Because Joe is married filing a separate return, he enters $6,100 on line 6. H&r free federal On line 7a he enters $4,150 as his standard deduction because it is smaller than $6,100, the amount on line 6. H&r free federal Example 3. H&r free federal Amy, who is single, can be claimed as a dependent on her parents' 2013 tax return. H&r free federal She is 18 years old and blind. H&r free federal She has interest income of $1,300 and wages of $2,900. H&r free federal She has no itemized deductions. H&r free federal Amy uses Table 20-3 to find her standard deduction. H&r free federal She enters her wages of $2,900 on line 1. H&r free federal She adds lines 1 and 2 and enters $3,250 on line 3. H&r free federal On line 5, she enters $3,250, the larger of lines 3 and 4. H&r free federal Because she is single, Amy enters $6,100 on line 6. H&r free federal She enters $3,250 on line 7a. H&r free federal This is the smaller of the amounts on lines 5 and 6. H&r free federal Because she checked one box in the top part of the worksheet, she enters $1,500 on line 7b. H&r free federal She then adds the amounts on lines 7a and 7b and enters her standard deduction of $4,750 on line 7c. H&r free federal Example 4. H&r free federal Ed is single. H&r free federal His parents can claim an exemption for him on their 2013 tax return. H&r free federal He has wages of $7,000, interest income of $500, and a business loss of $3,000. H&r free federal He has no itemized deductions. H&r free federal Ed uses Table 20-3 to figure his standard deduction. H&r free federal He enters $4,000 ($7,000 - $3,000) on line 1. H&r free federal He adds lines 1 and 2 and enters $4,350 on line 3. H&r free federal On line 5 he enters $4,350, the larger of lines 3 and 4. H&r free federal Because he is single, Ed enters $6,100 on line 6. H&r free federal On line 7a he enters $4,350 as his standard deduction because it is smaller than $6,100, the amount on line 6. H&r free federal Who Should Itemize You should itemize deductions if your total deductions are more than the standard deduction amount. H&r free federal Also, you should itemize if you do not qualify for the standard deduction, as discussed earlier under Persons not eligible for the standard deduction . H&r free federal You should first figure your itemized deductions and compare that amount to your standard deduction to make sure you are using the method that gives you the greater benefit. H&r free federal You may be subject to a limit on some of your itemized deductions if your adjusted gross income is more than: $250,000 if single ($275,000 if head of household, $300,000 if married filing jointly or qualifying widow(er); or $150,000 if married filing separately). H&r free federal See chapter 29 or the instructions for Schedule A (Form 1040) for more information on figuring the correct amount of your itemized deductions. H&r free federal When to itemize. H&r free federal   You may benefit from itemizing your deductions on Schedule A (Form 1040) if you: Do not qualify for the standard deduction, or the amount you can claim is limited, Had large uninsured medical and dental expenses during the year, Paid interest and taxes on your home, Had large unreimbursed employee business expenses or other miscellaneous deductions, Had large uninsured casualty or theft losses, Made large contributions to qualified charities, or Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled. H&r free federal These deductions are explained in chapters 21–28. H&r free federal    If you decide to itemize your deductions, complete Schedule A and attach it to your Form 1040. H&r free federal Enter the amount from Schedule A, line 29, on Form 1040, line 40. H&r free federal Electing to itemize for state tax or other purposes. H&r free federal   Even if your itemized deductions are less than your standard deduction, you can elect to itemize deductions on your federal return rather than take the standard deduction. H&r free federal You may want to do this if, for example, the tax benefit of itemizing your deductions on your state tax return is greater than the tax benefit you lose on your federal return by not taking the standard deduction. H&r free federal To make this election, you must check the box on line 30 of Schedule A. H&r free federal Changing your mind. H&r free federal   If you do not itemize your deductions and later find that you should have itemized — or if you itemize your deductions and later find you should not have — you can change your return by filing Form 1040X, Amended U. H&r free federal S. H&r free federal Individual Income Tax Return. H&r free federal See Amended Returns and Claims for Refund in chapter 1 for more information on amended returns. H&r free federal Married persons who filed separate returns. H&r free federal   You can change methods of taking deductions only if you and your spouse both make the same changes. H&r free federal Both of you must file a consent to assessment for any additional tax either one may owe as a result of the change. H&r free federal    You and your spouse can use the method that gives you the lower total tax, even though one of you may pay more tax than you would have paid by using the other method. H&r free federal You both must use the same method of claiming deductions. H&r free federal If one itemizes deductions, the other should itemize because he or she will not qualify for the standard deduction. H&r free federal See Persons not eligible for the standard deduction , earlier. H&r free federal 2013 Standard Deduction Tables If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1949, or are blind. H&r free federal Table 20-1. H&r free federal Standard Deduction Chart for Most People* If your filing status is. H&r free federal . H&r free federal . H&r free federal Your standard deduction is: Single or Married filing separately $6,100 Married filing jointly or Qualifying widow(er) with dependent child 12,200 Head of household 8,950 *Do not use this chart if you were born before January 2, 1949, are blind, or if someone else can claim you (or your spouse if filing jointly) as a dependent. H&r free federal Use Table 20-2 or 20-3 instead. H&r free federal Table 20-2. H&r free federal Standard Deduction Chart for People Born Before January 2, 1949, or Who are Blind Check the correct number of boxes below. H&r free federal Then go to the chart. H&r free federal You: Born before January 2, 1949 □ Blind □ Your spouse, if claiming spouse's exemption: Born before January 2, 1949 □ Blind □ Total number of boxes checked   IF  your filing status is. H&r free federal . H&r free federal . H&r free federal AND the number in the box above is. H&r free federal . H&r free federal . H&r free federal THEN your standard deduction is. H&r free federal . H&r free federal . H&r free federal Single 1 $7,600   2 9,100 Married filing jointly 1 $13,400 or Qualifying 2 14,600 widow(er) with 3 15,800 dependent child 4 17,000 Married filing 1 $7,300 separately 2 8,500   3 9,700   4 10,900 Head of household 1 $10,450   2 11,950 *If someone else can claim you (or your spouse if filing jointly) as a dependent, use Table 20-3 instead. H&r free federal Table 20-3. H&r free federal Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse if filing jointly) as a dependent. H&r free federal Check the correct number of boxes below. H&r free federal Then go to the worksheet. H&r free federal You:   Born before January 2, 1949 □ Blind □ Your spouse, if claiming spouse's exemption: Born before January 2, 1949 □ Blind □ Total number of boxes checked 1. H&r free federal Enter your earned income (defined below). H&r free federal If none, enter -0-. H&r free federal 1. H&r free federal   2. H&r free federal Additional amount. H&r free federal 2. H&r free federal $350 3. H&r free federal Add lines 1 and 2. H&r free federal 3. H&r free federal   4. H&r free federal Minimum standard deduction. H&r free federal 4. H&r free federal $1,000 5. H&r free federal Enter the larger of line 3 or line 4. H&r free federal 5. H&r free federal   6. H&r free federal Enter the amount shown below for your filing status. H&r free federal Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 6. H&r free federal   7. H&r free federal Standard deduction. H&r free federal         a. H&r free federal Enter the smaller of line 5 or line 6. H&r free federal If born after January 1, 1949, and not blind, stop here. H&r free federal This is your standard deduction. H&r free federal Otherwise, go on to line 7b. H&r free federal 7a. H&r free federal     b. H&r free federal If born before January 2, 1949, or blind, multiply $1,500 ($1,200 if married) by the number in the box above. H&r free federal 7b. H&r free federal     c. H&r free federal Add lines 7a and 7b. H&r free federal This is your standard deduction for 2013. H&r free federal 7c. H&r free federal   Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. H&r free federal It also includes any amount received as a scholarship that you must include in your income. H&r free federal Prev  Up  Next   Home   More Online Publications
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H&r free federal 3. H&r free federal   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. H&r free federal Leveraged leases. H&r free federal Leveraged leases of limited-use property. H&r free federal 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. H&r free federal It also discusses how to treat other kinds of payments you make that are related to your use of this property. H&r free federal These include payments you make for taxes on the property. H&r free federal 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. H&r free federal In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. H&r free federal If you have or will receive equity in or title to the property, the rent is not deductible. H&r free federal Unreasonable rent. H&r free federal   You cannot take a rental deduction for unreasonable rent. H&r free federal Ordinarily, the issue of reasonableness arises only if you and the lessor are related. H&r free federal 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. H&r free federal Rent is not unreasonable just because it is figured as a percentage of gross sales. H&r free federal For examples of related persons, see Related persons in chapter 2, Publication 544. H&r free federal Rent on your home. H&r free federal   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. H&r free federal You must meet the requirements for business use of your home. H&r free federal For more information, see Business use of your home in chapter 1. H&r free federal Rent paid in advance. H&r free federal   Generally, rent paid in your trade or business is deductible in the year paid or accrued. H&r free federal 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. H&r free federal You can deduct the rest of your payment only over the period to which it applies. H&r free federal Example 1. H&r free federal You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. H&r free federal Your rent is $12,000 per year. H&r free federal You paid the first year's rent ($12,000) on June 30. H&r free federal You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. H&r free federal Example 2. H&r free federal You are a calendar year taxpayer. H&r free federal Last January you leased property for 3 years for $6,000 a year. H&r free federal You paid the full $18,000 (3 × $6,000) during the first year of the lease. H&r free federal Each year you can deduct only $6,000, the part of the lease that applies to that year. H&r free federal Canceling a lease. H&r free federal   You generally can deduct as rent an amount you pay to cancel a business lease. H&r free federal Lease or purchase. H&r free federal   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. H&r free federal You must first determine whether your agreement is a lease or a conditional sales contract. H&r free federal Payments made under a conditional sales contract are not deductible as rent expense. H&r free federal Conditional sales contract. H&r free federal   Whether an agreement is a conditional sales contract depends on the intent of the parties. H&r free federal Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. H&r free federal No single test, or special combination of tests, always applies. H&r free federal However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. H&r free federal The agreement applies part of each payment toward an equity interest you will receive. H&r free federal You get title to the property after you make a stated amount of required payments. H&r free federal 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. H&r free federal You pay much more than the current fair rental value of the property. H&r free federal 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. H&r free federal Determine this value when you make the agreement. H&r free federal You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. H&r free federal The agreement designates part of the payments as interest, or that part is easy to recognize as interest. H&r free federal Leveraged leases. H&r free federal   Leveraged lease transactions may not be considered leases. H&r free federal Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. H&r free federal 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. H&r free federal   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. H&r free federal 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. H&r free federal 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. H&r free federal Internal Revenue Bulletin 2001-19 is available at www. H&r free federal irs. H&r free federal gov/pub/irs-irbs/irb01-19. H&r free federal pdf. H&r free federal   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. H&r free federal 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. H&r free federal 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. H&r free federal The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. H&r free federal 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. H&r free federal The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. H&r free federal   The IRS may charge you a user fee for issuing a tax ruling. H&r free federal For more information, see Revenue Procedure 2014-1 available at  www. H&r free federal irs. H&r free federal gov/irb/2014-1_IRB/ar05. H&r free federal html. H&r free federal Leveraged leases of limited-use property. H&r free federal   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. H&r free federal 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. H&r free federal See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. H&r free federal Leases over $250,000. H&r free federal   Special rules are provided for certain leases of tangible property. H&r free federal The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. H&r free federal Rents increase during the lease. H&r free federal Rents decrease during the lease. H&r free federal 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). H&r free federal 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). H&r free federal 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). H&r free federal   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. H&r free federal 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. H&r free federal For details, see section 467 of the Internal Revenue Code. H&r free federal 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. H&r free federal When you can deduct these taxes as additional rent depends on your accounting method. H&r free federal Cash method. H&r free federal   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. H&r free federal Accrual method. H&r free federal   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. H&r free federal That you have a liability for taxes on the leased property. H&r free federal How much the liability is. H&r free federal That economic performance occurred. H&r free federal   The liability and amount of taxes are determined by state or local law and the lease agreement. H&r free federal Economic performance occurs as you use the property. H&r free federal Example 1. H&r free federal Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. H&r free federal Oak leases land for use in its business. H&r free federal 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. H&r free federal However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. H&r free federal Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. H&r free federal If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. H&r free federal Oak cannot deduct the real estate taxes as rent until the tax bill is issued. H&r free federal This is when Oak's liability under the lease becomes fixed. H&r free federal Example 2. H&r free federal 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. H&r free federal As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. H&r free federal This is the year in which Oak's liability under the lease becomes fixed. H&r free federal 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. H&r free federal 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. H&r free federal 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. H&r free federal 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. H&r free federal 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. H&r free federal Option to renew. H&r free federal   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. H&r free federal 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). H&r free federal Allocate the lease cost to the original term and any option term based on the facts and circumstances. H&r free federal In some cases, it may be appropriate to make the allocation using a present value computation. H&r free federal For more information, see Regulations section 1. H&r free federal 178-1(b)(5). H&r free federal Example 1. H&r free federal You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. H&r free federal Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. H&r free federal 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. H&r free federal That is the remaining life of your present lease plus the periods for renewal. H&r free federal Example 2. H&r free federal 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. H&r free federal You can amortize the entire $10,000 over the 20-year remaining life of the original lease. H&r free federal The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). H&r free federal Cost of a modification agreement. H&r free federal   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. H&r free federal You must capitalize these payments and amortize them over the remaining period of the lease. H&r free federal You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. H&r free federal Example. H&r free federal You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. H&r free federal However, before you occupy it, you decide that you really need less space. H&r free federal 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. H&r free federal In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. H&r free federal   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. H&r free federal Your amortization deduction each year will be $150 ($3,000 ÷ 20). H&r free federal You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. H&r free federal Commissions, bonuses, and fees. H&r free federal   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. H&r free federal You must amortize these costs over the term of the lease. H&r free federal Loss on merchandise and fixtures. H&r free federal   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. H&r free federal You must capitalize the loss and amortize it over the remaining term of the lease. H&r free federal 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). H&r free federal Depreciate the property over its appropriate recovery period. H&r free federal You cannot amortize the cost over the remaining term of the lease. H&r free federal 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. H&r free federal For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. H&r free federal Assignment of a lease. H&r free federal   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. H&r free federal 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. H&r free federal The rest is for your investment in the permanent improvements. H&r free federal   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. H&r free federal 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. H&r free federal 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. H&r free federal Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. H&r free federal You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. H&r free federal Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. H&r free federal Uniform capitalization rules. H&r free federal   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. H&r free federal Produce real property or tangible personal property. H&r free federal For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. H&r free federal Acquire property for resale. H&r free federal However, these rules do not apply to the following property. H&r free federal Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. H&r free federal Property you produce if you meet either of the following conditions. H&r free federal Your indirect costs of producing the property are $200,000 or less. H&r free federal You use the cash method of accounting and do not account for inventories. H&r free federal Example 1. H&r free federal You rent construction equipment to build a storage facility. H&r free federal 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. H&r free federal You recover your cost by claiming a deduction for depreciation on the building. H&r free federal Example 2. H&r free federal You rent space in a facility to conduct your business of manufacturing tools. H&r free federal 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. H&r free federal More information. H&r free federal   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. H&r free federal Prev  Up  Next   Home   More Online Publications