Bob Parrish CPA, P.C. Send email to pro1040@home.com (Hint: Any topic can be read in full screen by rt-click, then new window)
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Introduction
Objectives - Your Question
Analyses
Plain English Analysis - Your Answers
Increase Wealth
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Client Letter - What this idea is about
Rent is any amount you pay for the use of property that you do not own. In general, you can deduct rent as an expense only if the rent is for property that you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible. Unreasonable rent. You cannot take a rental deduction for rents that are unreasonable. Ordinarily, the issue of reasonableness of the rent will not arise unless you and the lessor are related. 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. A percentage rental is reasonable if the rental paid is reasonable. TOP
Engagement Status LetterYou have not engaged Bob Parrish CPA PC, Bob Parrish CPA, pro1040, Consulting on line, any related parties, or the ISP to perform any services for you or offer you advice. This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. ....... Thursday, February 22, 2007 11:45 AM
Learning Objectives (What You Asked)YOUR QUESTION(S) Objective one
What You Will Need
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Plain English Analysis What it does, Why it works - The Answer, Alternatives
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YOUR ANSWERS What it does, Explanation of this topic and how it may affect you: Rent paid in advance. Generally, rent paid in your trade or business is deductible in the year paid or accrued. 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. You can deduct the rest of your payment only over the period to which it applies. Lease or purchase. There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales contract. If, under the agreement, you acquired or will acquire title to or equity in the property, you should treat the agreement as a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense. Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the facts and circumstances that exist when you make the agreement. Determining the intent. In general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true.
Leveraged leases. Leveraged lease transactions may be considered leases. Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. 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. If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. The following revenue procedures contain the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes.
In general, the revenue procedures provide 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 procedures are met, including the following.
The IRS may charge you a user fee for issuing a tax ruling. See Publication 1375 and Revenue Procedure 2000-1 for more information. Revenue Procedure 2000-1 is in Internal Revenue Bulletin No. 2000-1. Leveraged leases of limited-use property. The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. 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 member of the lessee group. See Revenue Procedure 76-30 for examples of limited-use property and property that is not limited-use property. Leases over $250,000. Special rules are provided for certain leases of tangible property. The rules apply if the lease calls for total payments of more than $250,000 and either of the following apply.
Generally, if these conditions exist, you must accrue rents for the periods to which the rents are allocated under the lease. If a lease only contains a rent payment schedule, the rents payable for a period during the lease are the rents allocated to that period. If the lease allocates any rent to a calendar year that is not payable until after the close of the succeeding calendar year, only the present value of that rent should be accrued and interest on the unpaid rent accrues until the rent is paid. For certain leases designed to achieve tax avoidance, the IRS may require the parties to accrue rent and interest on rent using the constant rental method. You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. If you get an existing lease on property or equipment for your business, you must amortize any amount you pay to get that lease over the remaining term of the lease. 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. If you add buildings or make other improvements to leased property, depreciate the cost of the improvements using MACRS. Depreciate the property over its appropriate recovery period. You cannot amortize the cost over the remaining term of the lease. Taxes on Leased PropertyIf you lease business property, you can deduct as additional rent any taxes that you have to pay to or for the lessor. When you can deduct these taxes as additional rent depends on your accounting method. Cash method. 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. Accrual method. 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 of the following.
The liability and amount of taxes are determined by state or local law and the lease agreement. Economic performance occurs as you use the property. Example. Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. Oak leases land for use in its business. 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. However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. This means that property owners become liable for real estate taxes for a year on January 1 of that year, but do not have to pay them until July 1 of the next year. Under the terms of the lease, Oak becomes liable for the real estate taxes when the tax bills are issued. Oak cannot deduct the real estate taxes as rent until the tax bill is issued. This is when Oak's liability under the lease becomes fixed. If, according to the terms of the lease, Oak is liable for the real estate taxes when the owner of the property becomes liable for them, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. This is the year in which Oak's liability under the lease becomes fixed. Improvements by LesseeIf 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). Depreciate the property over its appropriate recovery period. You cannot amortize the cost over the remaining term of the lease. If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis of the improvements at that time. Assignment of a lease. 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. 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. The rest is for your investment in the permanent improvements. 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. You can depreciate the part that is for your investment in the improvements as discussed earlier.
Start of Plain English Section Why or How it works - Both Sides of the Equation and Examples: Start of Plain English Section Start of Plain English Section Start of Plain English Section Other Start of Plain English Section Reserved
Start of Plain English Section
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Technical Analysis & Citations What It does, Why it works -
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CommentaryStart of Revenue Procedures Section Start of Private Letter Rulings
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Tax KillersThis is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth. Activity Based Taxplanning (ABT) is a methodology developed by Bob Parrish CPA, that assists people with the tax issues by focusing on the activity (or actions - events) that are being undertaken or contemplated (or have already taken place). The, research is compiled from the myriad of sources to help you complete the activity with the least tax cost, while maintaining compliance the tax laws, other laws and regulations and place yourself in a position to protect your objectives. Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
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Cost Killers Management Info Sys, Cost Acctg, Activity Based Costing)This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.
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Preparing for your CPA, attorney, or preparing to start your own What to gather -
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From Your Other Business, or Financial Records From Corporation Records or Organization Records (meetings, etc.) Start of Preparing For You CPA Section
Forms - checklists, time-line to do, etc. Assistance - What To Do -
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Financial Accounting: Bookkeeping & Financials
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Financial Statement Presentation Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Bookkeeping Methods - Cash, Accrual and Other Back to Start of Financial Accounting: Bookkeeping & Financials How the Business Entity Affects the Recording
Compliance - what is required for protection, defense, etc.Compliance Checklist Back to Start of What is required for protection, defense, etc.
Alerts & Dangers - Risks, Asset Protection, IRS DefenseClick on the title to expand or collapse the topics
Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers
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Spreadsheets & Computations
Spreadsheet #1 Back to Start of Spreadsheets & Math
Contracts, Trusts, etc.Agreement #1 Back to Start of Contracts, Trusts, etc.
Reports RequiredReport #1 Back to Start of Reports Required
Checklists for DeploymentChecklist #1 Back to Start of Checklists - Deployment
Checklist for MonitoringChecklist #1 Back to Start of Checklist - Monitoring
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business_rent_exp.htm
