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Free 1040ez online Publication 560 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionSEP plans. Free 1040ez online SIMPLE plans. Free 1040ez online Qualified plans. Free 1040ez online Ordering forms and publications. Free 1040ez online Tax questions. Free 1040ez online Future Developments For the latest information about developments related to Publication 560, such as legislation enacted after we release it, go to www. Free 1040ez online irs. Free 1040ez online gov/pub560. Free 1040ez online What's New Compensation limit increased for 2013 and 2014. Free 1040ez online  For 2013 the maximum compensation used for figuring contributions and benefits increases to $255,000. Free 1040ez online This limit increases to $260,000 for 2014. Free 1040ez online Elective deferral limit for 2013 and 2014. Free 1040ez online  The limit on elective deferrals, other than catch-up contributions, increases to $17,500 for 2013 and remains at $17,500 for 2014. Free 1040ez online These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(b) plans and section 457(b) plans. Free 1040ez online Defined contribution limit increased for 2013 and 2014. Free 1040ez online  The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan increases to $51,000 for 2013. Free 1040ez online This limit increases to $52,000 for 2014. Free 1040ez online SIMPLE plan salary reduction contribution limit for 2013 and 2014. Free 1040ez online  The limit on salary reduction contributions, other than catch-up contributions, increases to $12,000 for 2013 and remains at $12,000 for 2014. Free 1040ez online Catch-up contribution limit remains unchanged for 2013 and 2014. Free 1040ez online  A plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions. Free 1040ez online The catch-up contribution limitation for defined contribution plans other than SIMPLE plans remains unchanged at $5,500 for 2013 and 2014. Free 1040ez online The catch-up contribution limitation for SIMPLE plans remains unchanged at $2,500 for 2013 and 2014. Free 1040ez online The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts. Free 1040ez online The catch-up contribution limit. Free 1040ez online The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Free 1040ez online See “Catch-up contributions” under Contribution Limits and Limit on Elective Deferrals in chapters 3 and 4, respectively, for more information. Free 1040ez online All section references are to the Internal Revenue Code, unless otherwise stated. Free 1040ez online Reminders In-plan Roth rollovers. Free 1040ez online  Section 402A(c)(4) provides for a distribution from an individual's account in a 401(k) plan, other than from a designated Roth account, that is rolled over to the individual's designated Roth account in the same plan. Free 1040ez online An in-plan Roth rollover is not treated as a distribution for most purposes. Free 1040ez online Section 402A(c)(4) was added by the Small Business Jobs Act of 2010 and applies to distributions made after September 27, 2010. Free 1040ez online For additional guidance on in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. Free 1040ez online R. Free 1040ez online B. Free 1040ez online 872, available at  www. Free 1040ez online irs. Free 1040ez online gov/irb/2010-51_IRB/ar11. Free 1040ez online html. Free 1040ez online In-plan Roth rollovers expanded. Free 1040ez online  Beginning in 2013, a plan with designated Roth accounts can permit a participant to roll over amounts into a designated Roth account from his or her other accounts in the same plan, regardless of whether the participant is eligible for a distribution from the other accounts. Free 1040ez online Section 402A(c)(4) was amended by the American Taxpayer Relief Act of 2012. Free 1040ez online For more information, see Notice 2013-74, 2013-52 I. Free 1040ez online R. Free 1040ez online B. Free 1040ez online 819, available at www. Free 1040ez online irs. Free 1040ez online gov/irb/2013-52_IRB/ar11. Free 1040ez online html. Free 1040ez online Credit for startup costs. Free 1040ez online  You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. Free 1040ez online The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. Free 1040ez online You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. Free 1040ez online You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. Free 1040ez online At least one participant must be a non-highly compensated employee. Free 1040ez online The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies. Free 1040ez online You. Free 1040ez online A member of a controlled group that includes you. Free 1040ez online A predecessor of (1) or (2). Free 1040ez online The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. Free 1040ez online However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002. Free 1040ez online You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year. Free 1040ez online To take the credit, use Form 8881, Credit for Small Employer Pension Plan Startup Costs. Free 1040ez online Retirement savings contributions credit. Free 1040ez online  Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contribution credit. Free 1040ez online The maximum contribution eligible for the credit is $2,000. Free 1040ez online To take the credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. Free 1040ez online For more information on who is eligible for the credit, retirement plan contributions eligible for the credit and how to figure the credit, see Form 8880 and its instructions or go to the IRS website and search Retirement Topics-Retirement Savings Contributions Credit (Saver's Credit). Free 1040ez online Photographs of missing children. Free 1040ez online  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free 1040ez online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free 1040ez online 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. Free 1040ez online Introduction This publication discusses retirement plans you can set up and maintain for yourself and your employees. Free 1040ez online In this publication, “you” refers to the employer. Free 1040ez online See chapter 1 for the definition of the term employer and the definitions of other terms used in this publication. Free 1040ez online This publication covers the following types of retirement plans. Free 1040ez online SEP (simplified employee pension) plans. Free 1040ez online SIMPLE (savings incentive match plan for employees) plans. Free 1040ez online Qualified plans (also called H. Free 1040ez online R. Free 1040ez online 10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans. Free 1040ez online SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. Free 1040ez online You can deduct contributions you make to the plan for your employees. Free 1040ez online If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. Free 1040ez online You can also deduct trustees' fees if contributions to the plan do not cover them. Free 1040ez online Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. Free 1040ez online Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. Free 1040ez online These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free. Free 1040ez online What this publication covers. Free 1040ez online   This publication contains the information you need to understand the following topics. Free 1040ez online What type of plan to set up. Free 1040ez online How to set up a plan. Free 1040ez online How much you can contribute to a plan. Free 1040ez online How much of your contribution is deductible. Free 1040ez online How to treat certain distributions. Free 1040ez online How to report information about the plan to the IRS and your employees. Free 1040ez online Basic features of SEP, SIMPLE, and qualified plans. Free 1040ez online The key rules for SEP, SIMPLE, and qualified plans are outlined in Table 1. Free 1040ez online SEP plans. Free 1040ez online   SEPs provide a simplified method for you to make contributions to a retirement plan for yourself and your employees. Free 1040ez online Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee. Free 1040ez online SIMPLE plans. Free 1040ez online   Generally, if you had 100 or fewer employees who received at least $5,000 in compensation last year, you can set up a SIMPLE plan. Free 1040ez online Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. Free 1040ez online In addition, you will contribute matching or nonelective contributions. Free 1040ez online The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan. Free 1040ez online Qualified plans. Free 1040ez online   The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. Free 1040ez online However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases. Free 1040ez online Table 1. Free 1040ez online Key Retirement Plan Rules for 2013 Type  of  Plan Last Date for Contribution Maximum Contribution Maximum Deduction When To Set Up Plan SEP Due date of employer's return (including extensions). Free 1040ez online Smaller of $51,000 or 25%1 of participant's compensation. Free 1040ez online 2 25%1 of all participants' compensation. Free 1040ez online 2 Any time up to the due date of employer's return (including extensions). Free 1040ez online SIMPLE IRA and SIMPLE 401(k) Salary reduction contributions: 30 days after the end of the month for which the contributions are to be made. Free 1040ez online 4  Matching or nonelective contributions: Due date of employer's return (including extensions). Free 1040ez online Employee contribution: Salary reduction contribution up to $12,000, $14,500 if age 50 or over. Free 1040ez online   Employer contribution:  Either dollar-for-dollar matching contributions, up to 3% of employee's compensation,3 or fixed nonelective contributions of 2% of compensation. Free 1040ez online 2 Same as maximum contribution. Free 1040ez online Any time between 1/1 and 10/1 of the calendar year. Free 1040ez online   For a new employer coming into existence after 10/1, as soon as administratively feasible. Free 1040ez online Qualified Plan: Defined Contribution Plan  Elective deferral: Due date of employer's return (including extensions). Free 1040ez online 4   Employer contribution: Money Purchase or Profit-Sharing: Due date of employer's return (including extensions). Free 1040ez online  Employee contribution: Elective deferral up to $17,500, $23,000 if age 50 or over. Free 1040ez online   Employer contribution: Money Purchase: Smaller of $51,000 or 100%1 of participant's compensation. Free 1040ez online 2  Profit-Sharing: Smaller of $51,000 or 100%1 of participant's compensation. Free 1040ez online 2  25%1 of all participants' compensation2, plus amount of elective deferrals made. Free 1040ez online   By the end of the tax year. Free 1040ez online Qualified Plan: Defined Benefit Plan Contributions generally must be paid in quarterly installments, due 15 days after the end of each quarter. Free 1040ez online See Minimum Funding Requirement in chapter 4. Free 1040ez online Amount needed to provide an annual benefit no larger than the smaller of $205,000 or 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. Free 1040ez online Based on actuarial assumptions and computations. Free 1040ez online By the end of the tax year. Free 1040ez online 1Net earnings from self-employment must take the contribution into account. Free 1040ez online See Deduction Limit for Self-Employed Individuals in chapters 2 and 4 . Free 1040ez online  2Compensation is generally limited to $255,000 in 2013. Free 1040ez online  3Under a SIMPLE 401(k) plan, compensation is generally limited to $255,000 in 2013. Free 1040ez online  4Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions and elective deferrals. Free 1040ez online What this publication does not cover. Free 1040ez online   Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it does not contain all the rules and exceptions that apply to these plans. Free 1040ez online You may also need professional help and guidance. Free 1040ez online   Also, this publication does not cover all the rules that may be of interest to employees. Free 1040ez online For example, it does not cover the following topics. Free 1040ez online The comprehensive IRA rules an employee needs to know. Free 1040ez online These rules are covered in Publication 590, Individual Retirement Arrangements (IRAs). Free 1040ez online The comprehensive rules that apply to distributions from retirement plans. Free 1040ez online These rules are covered in Publication 575, Pension and Annuity Income. Free 1040ez online The comprehensive rules that apply to section 403(b) plans. Free 1040ez online These rules are covered in Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). Free 1040ez online Comments and suggestions. Free 1040ez online   We welcome your comments about this publication and your suggestions for future editions. Free 1040ez online   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free 1040ez online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free 1040ez online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free 1040ez online   You can send your comments from www. Free 1040ez online irs. Free 1040ez online gov/formspubs. Free 1040ez online Click on “More Information” and then on “Give us feedback. Free 1040ez online ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free 1040ez online Ordering forms and publications. Free 1040ez online   Visit www. Free 1040ez online irs. Free 1040ez online gov/formspubs to download forms  and publications, call 1-800-TAX-FORM  (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free 1040ez online Internal Revenue Service 1201 N. Free 1040ez online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free 1040ez online   If you have a tax question, check the information available on IRS. Free 1040ez online gov or call 1-800-829-1040. Free 1040ez online We cannot answer tax questions sent to either of the above addresses. Free 1040ez online Note. Free 1040ez online Forms filed electronically with the Department of Labor are not available on the IRS website. Free 1040ez online Instead, see www. Free 1040ez online efast. Free 1040ez online dol. Free 1040ez online gov. Free 1040ez online Prev  Up  Next   Home   More Online Publications
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The Morris K. Udall and Stewart L. Udall Foundation, through the U.S. Institute for Environmental Conflict Resolution, provides assessment, mediation, and other services to resolve environmental conflicts. The Foundation also supports a variety of educational opportunities in the area of environmental policy.

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Free 1040ez online 3. Free 1040ez online   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. Free 1040ez online Leveraged leases. Free 1040ez online Leveraged leases of limited-use property. Free 1040ez online Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. Free 1040ez online It also discusses how to treat other kinds of payments you make that are related to your use of this property. Free 1040ez online These include payments you make for taxes on the property. Free 1040ez online Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. Free 1040ez online In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. Free 1040ez online If you have or will receive equity in or title to the property, the rent is not deductible. Free 1040ez online Unreasonable rent. Free 1040ez online   You cannot take a rental deduction for unreasonable rent. Free 1040ez online Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Free 1040ez online Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Free 1040ez online Rent is not unreasonable just because it is figured as a percentage of gross sales. Free 1040ez online For examples of related persons, see Related persons in chapter 2, Publication 544. Free 1040ez online Rent on your home. Free 1040ez online   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Free 1040ez online You must meet the requirements for business use of your home. Free 1040ez online For more information, see Business use of your home in chapter 1. Free 1040ez online Rent paid in advance. Free 1040ez online   Generally, rent paid in your trade or business is deductible in the year paid or accrued. Free 1040ez online If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Free 1040ez online You can deduct the rest of your payment only over the period to which it applies. Free 1040ez online Example 1. Free 1040ez online You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. Free 1040ez online Your rent is $12,000 per year. Free 1040ez online You paid the first year's rent ($12,000) on June 30. Free 1040ez online You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. Free 1040ez online Example 2. Free 1040ez online You are a calendar year taxpayer. Free 1040ez online Last January you leased property for 3 years for $6,000 a year. Free 1040ez online You paid the full $18,000 (3 × $6,000) during the first year of the lease. Free 1040ez online Each year you can deduct only $6,000, the part of the lease that applies to that year. Free 1040ez online Canceling a lease. Free 1040ez online   You generally can deduct as rent an amount you pay to cancel a business lease. Free 1040ez online Lease or purchase. Free 1040ez online   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. Free 1040ez online You must first determine whether your agreement is a lease or a conditional sales contract. Free 1040ez online Payments made under a conditional sales contract are not deductible as rent expense. Free 1040ez online Conditional sales contract. Free 1040ez online   Whether an agreement is a conditional sales contract depends on the intent of the parties. Free 1040ez online Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Free 1040ez online No single test, or special combination of tests, always applies. Free 1040ez online However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Free 1040ez online The agreement applies part of each payment toward an equity interest you will receive. Free 1040ez online You get title to the property after you make a stated amount of required payments. Free 1040ez online The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Free 1040ez online You pay much more than the current fair rental value of the property. Free 1040ez online You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Free 1040ez online Determine this value when you make the agreement. Free 1040ez online You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Free 1040ez online The agreement designates part of the payments as interest, or that part is easy to recognize as interest. Free 1040ez online Leveraged leases. Free 1040ez online   Leveraged lease transactions may not be considered leases. Free 1040ez online Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. Free 1040ez online Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. Free 1040ez online   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. Free 1040ez online Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. Free 1040ez online Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. Free 1040ez online Internal Revenue Bulletin 2001-19 is available at www. Free 1040ez online irs. Free 1040ez online gov/pub/irs-irbs/irb01-19. Free 1040ez online pdf. Free 1040ez online   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. Free 1040ez online The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. Free 1040ez online The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. Free 1040ez online The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. Free 1040ez online The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. Free 1040ez online The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. Free 1040ez online   The IRS may charge you a user fee for issuing a tax ruling. Free 1040ez online For more information, see Revenue Procedure 2014-1 available at  www. Free 1040ez online irs. Free 1040ez online gov/irb/2014-1_IRB/ar05. Free 1040ez online html. Free 1040ez online Leveraged leases of limited-use property. Free 1040ez online   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. Free 1040ez online Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. Free 1040ez online See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. Free 1040ez online Leases over $250,000. Free 1040ez online   Special rules are provided for certain leases of tangible property. Free 1040ez online The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. Free 1040ez online Rents increase during the lease. Free 1040ez online Rents decrease during the lease. Free 1040ez online Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). Free 1040ez online Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). Free 1040ez online These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). Free 1040ez online   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. Free 1040ez online In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. Free 1040ez online For details, see section 467 of the Internal Revenue Code. Free 1040ez online Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. Free 1040ez online When you can deduct these taxes as additional rent depends on your accounting method. Free 1040ez online Cash method. Free 1040ez online   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. Free 1040ez online Accrual method. Free 1040ez online   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. Free 1040ez online That you have a liability for taxes on the leased property. Free 1040ez online How much the liability is. Free 1040ez online That economic performance occurred. Free 1040ez online   The liability and amount of taxes are determined by state or local law and the lease agreement. Free 1040ez online Economic performance occurs as you use the property. Free 1040ez online Example 1. Free 1040ez online Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. Free 1040ez online Oak leases land for use in its business. Free 1040ez online Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. Free 1040ez online However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. Free 1040ez online Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. Free 1040ez online If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. Free 1040ez online Oak cannot deduct the real estate taxes as rent until the tax bill is issued. Free 1040ez online This is when Oak's liability under the lease becomes fixed. Free 1040ez online Example 2. Free 1040ez online The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. Free 1040ez online As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. Free 1040ez online This is the year in which Oak's liability under the lease becomes fixed. Free 1040ez online Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. Free 1040ez online Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. Free 1040ez online If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. Free 1040ez online For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. Free 1040ez online The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. Free 1040ez online Option to renew. Free 1040ez online   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. Free 1040ez online However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). Free 1040ez online Allocate the lease cost to the original term and any option term based on the facts and circumstances. Free 1040ez online In some cases, it may be appropriate to make the allocation using a present value computation. Free 1040ez online For more information, see Regulations section 1. Free 1040ez online 178-1(b)(5). Free 1040ez online Example 1. Free 1040ez online You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. Free 1040ez online Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. Free 1040ez online Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. Free 1040ez online That is the remaining life of your present lease plus the periods for renewal. Free 1040ez online Example 2. Free 1040ez online The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. Free 1040ez online You can amortize the entire $10,000 over the 20-year remaining life of the original lease. Free 1040ez online The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). Free 1040ez online Cost of a modification agreement. Free 1040ez online   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. Free 1040ez online You must capitalize these payments and amortize them over the remaining period of the lease. Free 1040ez online You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. Free 1040ez online Example. Free 1040ez online You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. Free 1040ez online However, before you occupy it, you decide that you really need less space. Free 1040ez online The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. Free 1040ez online In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. Free 1040ez online   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. Free 1040ez online Your amortization deduction each year will be $150 ($3,000 ÷ 20). Free 1040ez online You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. Free 1040ez online Commissions, bonuses, and fees. Free 1040ez online   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. Free 1040ez online You must amortize these costs over the term of the lease. Free 1040ez online Loss on merchandise and fixtures. Free 1040ez online   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. Free 1040ez online You must capitalize the loss and amortize it over the remaining term of the lease. Free 1040ez online Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). Free 1040ez online Depreciate the property over its appropriate recovery period. Free 1040ez online You cannot amortize the cost over the remaining term of the lease. Free 1040ez online If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. Free 1040ez online For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. Free 1040ez online Assignment of a lease. Free 1040ez online   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. Free 1040ez online If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. Free 1040ez online The rest is for your investment in the permanent improvements. Free 1040ez online   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. Free 1040ez online You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. Free 1040ez online Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Free 1040ez online Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Free 1040ez online You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free 1040ez online Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. Free 1040ez online Uniform capitalization rules. Free 1040ez online   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Free 1040ez online Produce real property or tangible personal property. Free 1040ez online For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Free 1040ez online Acquire property for resale. Free 1040ez online However, these rules do not apply to the following property. Free 1040ez online Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. Free 1040ez online Property you produce if you meet either of the following conditions. Free 1040ez online Your indirect costs of producing the property are $200,000 or less. Free 1040ez online You use the cash method of accounting and do not account for inventories. Free 1040ez online Example 1. Free 1040ez online You rent construction equipment to build a storage facility. Free 1040ez online If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. Free 1040ez online You recover your cost by claiming a deduction for depreciation on the building. Free 1040ez online Example 2. Free 1040ez online You rent space in a facility to conduct your business of manufacturing tools. Free 1040ez online If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. Free 1040ez online More information. Free 1040ez online   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. Free 1040ez online Prev  Up  Next   Home   More Online Publications