Page 70 - Small Business Taxes

16:31 - 2-Feb-2023
Page 11 of 57
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Property Fileid: … tions/p535/2022/a/xml/cycle01/source may be able to deduct the rent you pay for that
cation leave. You can deduct vacation pay only
in the tax year in which the employee actually part. You must meet the requirements for busi-
If you transfer property (including your compa- receives it. This rule applies regardless of ness use of your home. For more information,
ny's stock) to an employee as payment for serv- whether you use the cash or accrual method of see Business use of your home in chapter 1.
ices, you can generally deduct it as wages. The accounting.
amount you can deduct is the property's fair Rent paid in advance. Generally, rent paid for
market value (FMV) on the date of the transfer use of property in your trade or business is de-
less any amount the employee paid for the ductible in the year paid or incurred. If you are
property. an accrual method taxpayer and pay rent in ad-
You can claim the deduction only for the tax vance, you can deduct only the amount of rent
that applies to your use of rented property dur-
year in which your employee includes the prop- 3. ing the tax year. You can deduct the rest of the
erty's value in their income. Your employee is rent payment only over the period to which it
deemed to have included the value in their in- applies. If you are a cash method taxpayer, you
come if you report it on their Form W-2 in a may deduct the entire amount of rent you paid
timely manner. Rent Expense in advance in the year of payment if the pay-
You treat the deductible amount as received ment applies to the right to use property that
in exchange for the property, and you must rec- does not extend beyond the earlier of 12
ognize any gain or loss realized on the transfer, Introduction months after the first date you have the right to
unless it is the company's stock transferred as use the property or the end of the tax year fol-
payment for services. Your gain or loss is the This chapter discusses the tax treatment of rent lowing the year in which you paid the advance
difference between the FMV of the property and or lease payments you make for property you rent. If your payment applies to the right to use
its adjusted basis on the date of transfer. use in your business but do not own. It also dis- property beyond this period, then you must cap-
These rules also apply to property transfer- cusses how to treat other kinds of payments italize the rent payment and deduct it over the
red to an independent contractor for services, you make that are related to your use of this period to which it applies.
generally reported on Form 1099-NEC. property. These include payments you make for
taxes on the property. Example 1. You are an accrual method
Restricted property. If the property you calendar year taxpayer and you lease a building
transfer for services is subject to restrictions Topics at a monthly rental rate of $1,000 beginning
July 1, 2022. On June 30, 2022, you pay ad-
that affect its value, you generally can't deduct it This chapter discusses:
and don't report gain or loss until it is substan- vance rent of $12,000 for the last 6 months of
2022 and the first 6 months of 2023. You can
tially vested in the recipient. However, if the re-
cipient pays for the property, you must report • The definition of rent deduct only $6,000 for 2022, for the right to use
property in 2022. You deduct the other $6,000
any gain at the time of the transfer up to the • Taxes on leased property
amount paid. • The cost of getting a lease in 2023.
“Substantially vested” means the property • Improvements by the lessee Example 2. Assume the same facts as Ex-
isn't subject to a substantial risk of forfeiture. • Capitalizing rent expenses ample 1, except you are a cash method calen-
This means that the recipient isn't likely to have dar year taxpayer. You may deduct the entire
to give up their rights in the property in the fu- Useful Items $12,000 payment for 2022. The payment ap-
ture. You may want to see: plies to your right to use the property that does
Reimbursements for Publication not extend beyond 12 months after the date you
received this right. If you deduct the $12,000 in
Business Expenses 538 538 Accounting Periods and Methods 2022, you should not deduct any part of this
544 544 Sales and Other Dispositions of payment in 2023.
You can generally deduct the amount you pay Assets
or reimburse employees for business expenses Example 3. You are either a cash or ac-
incurred for your business. However, your de- 946 946 How To Depreciate Property crual calendar year taxpayer. Last January, you
duction may be limited. See chapter 12 for information about getting leased property for 3 years for $6,000 per year.
You pay the full $18,000 (3 x $6,000) during the
If you make the payment under an account- publications and forms. first year of the lease. Because this amount is a
able plan, deduct it in the category of the ex- prepaid expense that must be capitalized, you
pense paid. For example, if you pay an em- Rent can deduct only $6,000 per year, the amount al-
ployee for travel expenses incurred on your locable to your use of the property in each year.
behalf, deduct this payment as a travel ex-
pense. If you make the payment under a nonac- Rent is any amount you pay for the use of prop- Canceling a lease. You can generally deduct
countable plan, deduct it as wages and include erty you do not own. In general, you can deduct as rent an amount you pay to cancel a business
it on the employee's Form W-2. rent as an expense only if the rent is for prop- lease.
See Reimbursement of Travel and Non-En- erty you use in your trade or business. If you
tertainment Related Meals in chapter 11 for have or will receive equity in or title to the prop- Lease or purchase. There may be instances
erty, the rent is not deductible.
more information about deducting reimburse- in which you must determine whether your pay-
ments and an explanation of accountable and Unreasonable rent. You can’t take a rental ments are for rent or for the purchase of the
nonaccountable plans. deduction for unreasonable rent. Ordinarily, the property. You must first determine whether your
agreement is a lease or a conditional sales con-
Sick and Vacation Pay issue of reasonableness arises only if you and tract. Payments made under a conditional sales
the lessor are related. Rent paid to a related
contract are not deductible as rent expense.
person is reasonable if it is the same amount
Sick pay. You can deduct amounts you pay to you would pay to a stranger for use of the same Conditional sales contract. Whether an
your employees for sickness and injury, includ- property. Rent isn’t unreasonable just because agreement is a conditional sales contract de-
ing lump-sum amounts, as wages. However, it is figured as a percentage of gross sales. For pends on the intent of the parties. Determine in-
your deduction is limited to amounts not com- examples of related persons, see Related per- tent based on the provisions of the agreement
pensated by insurance or other means. sons in chapter 2 of Pub. 544. and the facts and circumstances that exist
when you make the agreement. No single test,
Vacation pay. Vacation pay is an employee Rent on your home. If you rent your home or special combination of tests, always applies.
benefit. It includes amounts paid for unused va- and use part of it as your place of business, you However, in general, an agreement may be
Chapter 3 Rent Expense Page 11