2012 Tax File
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2012 Tax File
2012 tax file Publication 542 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Photographs of missing children. 2012 tax file The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2012 tax file Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2012 tax file 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. 2012 tax file Introduction This publication discusses the general tax laws that apply to ordinary domestic corporations. 2012 tax file It explains the tax law in plain language so it will be easier to understand. 2012 tax file However, the information given does not cover every situation and is not intended to replace the law or change its meaning. 2012 tax file Note. 2012 tax file This publication is not revised on an annual basis. 2012 tax file To find changes that may affect current year returns, see the instructions for your income tax return for the current year; and Changes to Current Forms and Publications at www. 2012 tax file irs. 2012 tax file gov/formspubs. 2012 tax file Comments and suggestions. 2012 tax file We welcome your comments about this publication and your suggestions for future editions. 2012 tax file You can write to us at the following address: Internal Revenue Service Business, Exempt Organizations and International Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. 2012 tax file NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. 2012 tax file Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2012 tax file You can email us at *taxforms@irs. 2012 tax file gov (The asterisk must be included in the address). 2012 tax file Please put “Publications Comment” on the subject line. 2012 tax file You can also send us comments at www. 2012 tax file irs. 2012 tax file gov/formspubs/. 2012 tax file Select “Comment on Tax Forms and Publications” under “Information about. 2012 tax file ” Although we cannot respond individually to each comment, we do appreciate your feedback and will consider your comments as we revise our tax products. 2012 tax file Tax questions. 2012 tax file If you have a tax question, visit IRS. 2012 tax file gov or call 1-800-829-1040. 2012 tax file We cannot answer tax questions at either of the addresses listed above. 2012 tax file Ordering forms and publications. 2012 tax file Visit www. 2012 tax file irs. 2012 tax file gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How to Get Tax Help, later in this publication. 2012 tax file Additional forms. 2012 tax file A list of other forms and statements that a corporation may need to file is included at the end of this publication. 2012 tax file Useful Items - You may want to see: Publication 510 Excise Taxes (Including Fuel Tax Credits and Refunds) 535 Business Expenses 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 925 Passive Activity and At-Risk Rules 946 How to Depreciate Property Prev Up Next Home More Online Publications
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The 2012 Tax File
2012 tax file 3. 2012 tax file Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. 2012 tax file Leveraged leases. 2012 tax file Leveraged leases of limited-use property. 2012 tax file 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. 2012 tax file It also discusses how to treat other kinds of payments you make that are related to your use of this property. 2012 tax file These include payments you make for taxes on the property. 2012 tax file 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. 2012 tax file In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. 2012 tax file If you have or will receive equity in or title to the property, the rent is not deductible. 2012 tax file Unreasonable rent. 2012 tax file You cannot take a rental deduction for unreasonable rent. 2012 tax file Ordinarily, the issue of reasonableness arises only if you and the lessor are related. 2012 tax file 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. 2012 tax file Rent is not unreasonable just because it is figured as a percentage of gross sales. 2012 tax file For examples of related persons, see Related persons in chapter 2, Publication 544. 2012 tax file Rent on your home. 2012 tax file 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. 2012 tax file You must meet the requirements for business use of your home. 2012 tax file For more information, see Business use of your home in chapter 1. 2012 tax file Rent paid in advance. 2012 tax file Generally, rent paid in your trade or business is deductible in the year paid or accrued. 2012 tax file 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. 2012 tax file You can deduct the rest of your payment only over the period to which it applies. 2012 tax file Example 1. 2012 tax file You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. 2012 tax file Your rent is $12,000 per year. 2012 tax file You paid the first year's rent ($12,000) on June 30. 2012 tax file You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. 2012 tax file Example 2. 2012 tax file You are a calendar year taxpayer. 2012 tax file Last January you leased property for 3 years for $6,000 a year. 2012 tax file You paid the full $18,000 (3 × $6,000) during the first year of the lease. 2012 tax file Each year you can deduct only $6,000, the part of the lease that applies to that year. 2012 tax file Canceling a lease. 2012 tax file You generally can deduct as rent an amount you pay to cancel a business lease. 2012 tax file Lease or purchase. 2012 tax file There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. 2012 tax file You must first determine whether your agreement is a lease or a conditional sales contract. 2012 tax file Payments made under a conditional sales contract are not deductible as rent expense. 2012 tax file Conditional sales contract. 2012 tax file Whether an agreement is a conditional sales contract depends on the intent of the parties. 2012 tax file Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. 2012 tax file No single test, or special combination of tests, always applies. 2012 tax file However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. 2012 tax file The agreement applies part of each payment toward an equity interest you will receive. 2012 tax file You get title to the property after you make a stated amount of required payments. 2012 tax file 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. 2012 tax file You pay much more than the current fair rental value of the property. 2012 tax file 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. 2012 tax file Determine this value when you make the agreement. 2012 tax file You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. 2012 tax file The agreement designates part of the payments as interest, or that part is easy to recognize as interest. 2012 tax file Leveraged leases. 2012 tax file Leveraged lease transactions may not be considered leases. 2012 tax file Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. 2012 tax file 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. 2012 tax file If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. 2012 tax file 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. 2012 tax file 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. 2012 tax file Internal Revenue Bulletin 2001-19 is available at www. 2012 tax file irs. 2012 tax file gov/pub/irs-irbs/irb01-19. 2012 tax file pdf. 2012 tax file 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. 2012 tax file 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. 2012 tax file 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. 2012 tax file The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. 2012 tax file 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. 2012 tax file The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. 2012 tax file The IRS may charge you a user fee for issuing a tax ruling. 2012 tax file For more information, see Revenue Procedure 2014-1 available at www. 2012 tax file irs. 2012 tax file gov/irb/2014-1_IRB/ar05. 2012 tax file html. 2012 tax file Leveraged leases of limited-use property. 2012 tax file The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. 2012 tax file 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. 2012 tax file See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. 2012 tax file Leases over $250,000. 2012 tax file Special rules are provided for certain leases of tangible property. 2012 tax file The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. 2012 tax file Rents increase during the lease. 2012 tax file Rents decrease during the lease. 2012 tax file 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). 2012 tax file 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). 2012 tax file 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). 2012 tax file 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. 2012 tax file 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. 2012 tax file For details, see section 467 of the Internal Revenue Code. 2012 tax file 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. 2012 tax file When you can deduct these taxes as additional rent depends on your accounting method. 2012 tax file Cash method. 2012 tax file 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. 2012 tax file Accrual method. 2012 tax file 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. 2012 tax file That you have a liability for taxes on the leased property. 2012 tax file How much the liability is. 2012 tax file That economic performance occurred. 2012 tax file The liability and amount of taxes are determined by state or local law and the lease agreement. 2012 tax file Economic performance occurs as you use the property. 2012 tax file Example 1. 2012 tax file Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. 2012 tax file Oak leases land for use in its business. 2012 tax file 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. 2012 tax file However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. 2012 tax file Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. 2012 tax file If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. 2012 tax file Oak cannot deduct the real estate taxes as rent until the tax bill is issued. 2012 tax file This is when Oak's liability under the lease becomes fixed. 2012 tax file Example 2. 2012 tax file 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. 2012 tax file As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. 2012 tax file This is the year in which Oak's liability under the lease becomes fixed. 2012 tax file 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. 2012 tax file 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. 2012 tax file 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. 2012 tax file 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. 2012 tax file 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. 2012 tax file Option to renew. 2012 tax file 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. 2012 tax file 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). 2012 tax file Allocate the lease cost to the original term and any option term based on the facts and circumstances. 2012 tax file In some cases, it may be appropriate to make the allocation using a present value computation. 2012 tax file For more information, see Regulations section 1. 2012 tax file 178-1(b)(5). 2012 tax file Example 1. 2012 tax file You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. 2012 tax file Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. 2012 tax file 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. 2012 tax file That is the remaining life of your present lease plus the periods for renewal. 2012 tax file Example 2. 2012 tax file 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. 2012 tax file You can amortize the entire $10,000 over the 20-year remaining life of the original lease. 2012 tax file The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). 2012 tax file Cost of a modification agreement. 2012 tax file You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. 2012 tax file You must capitalize these payments and amortize them over the remaining period of the lease. 2012 tax file You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. 2012 tax file Example. 2012 tax file You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. 2012 tax file However, before you occupy it, you decide that you really need less space. 2012 tax file 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. 2012 tax file In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. 2012 tax file You must capitalize the $3,000 and amortize it over the 20-year term of the lease. 2012 tax file Your amortization deduction each year will be $150 ($3,000 ÷ 20). 2012 tax file You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. 2012 tax file Commissions, bonuses, and fees. 2012 tax file Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. 2012 tax file You must amortize these costs over the term of the lease. 2012 tax file Loss on merchandise and fixtures. 2012 tax file 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. 2012 tax file You must capitalize the loss and amortize it over the remaining term of the lease. 2012 tax file 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). 2012 tax file Depreciate the property over its appropriate recovery period. 2012 tax file You cannot amortize the cost over the remaining term of the lease. 2012 tax file 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. 2012 tax file For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. 2012 tax file Assignment of a lease. 2012 tax file 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. 2012 tax file 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. 2012 tax file The rest is for your investment in the permanent improvements. 2012 tax file 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. 2012 tax file 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. 2012 tax file 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. 2012 tax file Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. 2012 tax file You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2012 tax file Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. 2012 tax file Uniform capitalization rules. 2012 tax file 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. 2012 tax file Produce real property or tangible personal property. 2012 tax file For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. 2012 tax file Acquire property for resale. 2012 tax file However, these rules do not apply to the following property. 2012 tax file Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. 2012 tax file Property you produce if you meet either of the following conditions. 2012 tax file Your indirect costs of producing the property are $200,000 or less. 2012 tax file You use the cash method of accounting and do not account for inventories. 2012 tax file Example 1. 2012 tax file You rent construction equipment to build a storage facility. 2012 tax file 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. 2012 tax file You recover your cost by claiming a deduction for depreciation on the building. 2012 tax file Example 2. 2012 tax file You rent space in a facility to conduct your business of manufacturing tools. 2012 tax file 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. 2012 tax file More information. 2012 tax file For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. 2012 tax file Prev Up Next Home More Online Publications