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Amended 1040ez 3. Amended 1040ez Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. Amended 1040ez Leveraged leases. Amended 1040ez Leveraged leases of limited-use property. Amended 1040ez 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. Amended 1040ez It also discusses how to treat other kinds of payments you make that are related to your use of this property. Amended 1040ez These include payments you make for taxes on the property. Amended 1040ez 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. Amended 1040ez In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. Amended 1040ez If you have or will receive equity in or title to the property, the rent is not deductible. Amended 1040ez Unreasonable rent. Amended 1040ez You cannot take a rental deduction for unreasonable rent. Amended 1040ez Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Amended 1040ez 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. Amended 1040ez Rent is not unreasonable just because it is figured as a percentage of gross sales. Amended 1040ez For examples of related persons, see Related persons in chapter 2, Publication 544. Amended 1040ez Rent on your home. Amended 1040ez 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. Amended 1040ez You must meet the requirements for business use of your home. Amended 1040ez For more information, see Business use of your home in chapter 1. Amended 1040ez Rent paid in advance. Amended 1040ez Generally, rent paid in your trade or business is deductible in the year paid or accrued. Amended 1040ez 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. Amended 1040ez You can deduct the rest of your payment only over the period to which it applies. Amended 1040ez Example 1. Amended 1040ez You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. Amended 1040ez Your rent is $12,000 per year. Amended 1040ez You paid the first year's rent ($12,000) on June 30. Amended 1040ez You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. Amended 1040ez Example 2. Amended 1040ez You are a calendar year taxpayer. Amended 1040ez Last January you leased property for 3 years for $6,000 a year. Amended 1040ez You paid the full $18,000 (3 × $6,000) during the first year of the lease. Amended 1040ez Each year you can deduct only $6,000, the part of the lease that applies to that year. Amended 1040ez Canceling a lease. Amended 1040ez You generally can deduct as rent an amount you pay to cancel a business lease. Amended 1040ez Lease or purchase. Amended 1040ez There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. Amended 1040ez You must first determine whether your agreement is a lease or a conditional sales contract. Amended 1040ez Payments made under a conditional sales contract are not deductible as rent expense. Amended 1040ez Conditional sales contract. Amended 1040ez Whether an agreement is a conditional sales contract depends on the intent of the parties. Amended 1040ez Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Amended 1040ez No single test, or special combination of tests, always applies. Amended 1040ez However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Amended 1040ez The agreement applies part of each payment toward an equity interest you will receive. Amended 1040ez You get title to the property after you make a stated amount of required payments. Amended 1040ez 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. Amended 1040ez You pay much more than the current fair rental value of the property. Amended 1040ez 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. Amended 1040ez Determine this value when you make the agreement. Amended 1040ez You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Amended 1040ez The agreement designates part of the payments as interest, or that part is easy to recognize as interest. Amended 1040ez Leveraged leases. Amended 1040ez Leveraged lease transactions may not be considered leases. Amended 1040ez Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. Amended 1040ez 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. Amended 1040ez If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez Internal Revenue Bulletin 2001-19 is available at www. Amended 1040ez irs. Amended 1040ez gov/pub/irs-irbs/irb01-19. Amended 1040ez pdf. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. Amended 1040ez 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. Amended 1040ez The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. Amended 1040ez The IRS may charge you a user fee for issuing a tax ruling. Amended 1040ez For more information, see Revenue Procedure 2014-1 available at www. Amended 1040ez irs. Amended 1040ez gov/irb/2014-1_IRB/ar05. Amended 1040ez html. Amended 1040ez Leveraged leases of limited-use property. Amended 1040ez The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. Amended 1040ez 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. Amended 1040ez See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. Amended 1040ez Leases over $250,000. Amended 1040ez Special rules are provided for certain leases of tangible property. Amended 1040ez The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. Amended 1040ez Rents increase during the lease. Amended 1040ez Rents decrease during the lease. Amended 1040ez 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). Amended 1040ez 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). Amended 1040ez 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). Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez For details, see section 467 of the Internal Revenue Code. Amended 1040ez 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. Amended 1040ez When you can deduct these taxes as additional rent depends on your accounting method. Amended 1040ez Cash method. Amended 1040ez 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. Amended 1040ez Accrual method. Amended 1040ez 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. Amended 1040ez That you have a liability for taxes on the leased property. Amended 1040ez How much the liability is. Amended 1040ez That economic performance occurred. Amended 1040ez The liability and amount of taxes are determined by state or local law and the lease agreement. Amended 1040ez Economic performance occurs as you use the property. Amended 1040ez Example 1. Amended 1040ez Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. Amended 1040ez Oak leases land for use in its business. Amended 1040ez 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. Amended 1040ez However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. Amended 1040ez Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. Amended 1040ez If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. Amended 1040ez Oak cannot deduct the real estate taxes as rent until the tax bill is issued. Amended 1040ez This is when Oak's liability under the lease becomes fixed. Amended 1040ez Example 2. Amended 1040ez 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. Amended 1040ez As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. Amended 1040ez This is the year in which Oak's liability under the lease becomes fixed. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez Option to renew. Amended 1040ez 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. Amended 1040ez 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). Amended 1040ez Allocate the lease cost to the original term and any option term based on the facts and circumstances. Amended 1040ez In some cases, it may be appropriate to make the allocation using a present value computation. Amended 1040ez For more information, see Regulations section 1. Amended 1040ez 178-1(b)(5). Amended 1040ez Example 1. Amended 1040ez You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. Amended 1040ez Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. Amended 1040ez 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. Amended 1040ez That is the remaining life of your present lease plus the periods for renewal. Amended 1040ez Example 2. Amended 1040ez 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. Amended 1040ez You can amortize the entire $10,000 over the 20-year remaining life of the original lease. Amended 1040ez The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). Amended 1040ez Cost of a modification agreement. Amended 1040ez You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. Amended 1040ez You must capitalize these payments and amortize them over the remaining period of the lease. Amended 1040ez You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. Amended 1040ez Example. Amended 1040ez You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. Amended 1040ez However, before you occupy it, you decide that you really need less space. Amended 1040ez 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. Amended 1040ez In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. Amended 1040ez You must capitalize the $3,000 and amortize it over the 20-year term of the lease. Amended 1040ez Your amortization deduction each year will be $150 ($3,000 ÷ 20). Amended 1040ez You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. Amended 1040ez Commissions, bonuses, and fees. Amended 1040ez Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. Amended 1040ez You must amortize these costs over the term of the lease. Amended 1040ez Loss on merchandise and fixtures. Amended 1040ez 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. Amended 1040ez You must capitalize the loss and amortize it over the remaining term of the lease. Amended 1040ez 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). Amended 1040ez Depreciate the property over its appropriate recovery period. Amended 1040ez You cannot amortize the cost over the remaining term of the lease. Amended 1040ez 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. Amended 1040ez For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. Amended 1040ez Assignment of a lease. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez The rest is for your investment in the permanent improvements. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez 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. Amended 1040ez Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Amended 1040ez You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Amended 1040ez Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. Amended 1040ez Uniform capitalization rules. Amended 1040ez 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. Amended 1040ez Produce real property or tangible personal property. Amended 1040ez For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Amended 1040ez Acquire property for resale. Amended 1040ez However, these rules do not apply to the following property. Amended 1040ez Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. Amended 1040ez Property you produce if you meet either of the following conditions. Amended 1040ez Your indirect costs of producing the property are $200,000 or less. Amended 1040ez You use the cash method of accounting and do not account for inventories. Amended 1040ez Example 1. Amended 1040ez You rent construction equipment to build a storage facility. Amended 1040ez 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. Amended 1040ez You recover your cost by claiming a deduction for depreciation on the building. Amended 1040ez Example 2. Amended 1040ez You rent space in a facility to conduct your business of manufacturing tools. Amended 1040ez 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. Amended 1040ez More information. Amended 1040ez For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. Amended 1040ez Prev Up Next Home More Online Publications
Understanding Your CP54Q Notice
Your tax return shows a different name and/or ID number from the information we have on file for you or from the information from the Social Security Administration (SSA).
We previously sent you a notice asking you to provide us some updated information. We still haven’t received a response from you.
What you need to do
- Review your identifying information shown on this notice and compare it to your most recent social security card or taxpayer ID card.
- Complete the CP54 response form to explain the discrepancies.
- Include copies of documents to substantiate your name and identifying number.
You may want to
- Contact the SSA to update your records if any of the following occurred:
- you recently married and are using your spouse’s last name and have not already contacted SSA,
- you legally changed your name without contacting SSA, or
- your social security number (SSN) and/or name are different than on your social security card.
Answers to Common Questions
Q. I sent you my information. When will I get my refund?
A. Once we receive your response form and verify the information you provided, you should receive your refund in 4 to 6 weeks. If you don’t hear from us after 4 to 6 weeks, call our “Where’s My Refund?” toll free line at 1-800-829-1954 to check on the status of your refund.
Tips for next year
Make sure you file using your name and taxpayer ID number as they appear on your social security card or taxpayer ID card.
Page Last Reviewed or Updated: 23-Jan-2014
Printable samples of this notice (PDF)
Tax publications you may find useful
How to get help
- Call the 1-800 number listed on the top right corner of your notice.
- Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
- See if you qualify for help from a Low Income Taxpayer Clinic.
The Amended 1040ez
Amended 1040ez Publication 597 - Introductory Material Table of Contents Introduction Introduction This publication provides information on the income tax treaty between the United States and Canada. Amended 1040ez It discusses a number of treaty provisions that often apply to U. Amended 1040ez S. Amended 1040ez citizens or residents who may be liable for Canadian tax. Amended 1040ez Treaty provisions are generally reciprocal (the same rules apply to both treaty countries). Amended 1040ez Therefore, a Canadian resident who receives income from the United States may refer to this publication to see if a treaty provision may affect the tax to be paid to the United States. Amended 1040ez This publication does not deal with Canadian income tax laws; nor does it provide Canada's interpretation of treaty articles, definitions, or specific terms not defined in the treaty itself. Amended 1040ez The United States—Canada income tax treaty was signed on September 26, 1980. Amended 1040ez It has been amended by five protocols, the most recent of which generally became effective January 1, 2009. Amended 1040ez In this publication, the term “article” refers to the particular article of the treaty, as amended. Amended 1040ez Prev Up Next Home More Online Publications