Page 72 - Small Business Taxes

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Example 1. You paid $10,000 to get a based on your adjusted basis in the improve- Example 2. You rent space in a facility to
lease with 20 years remaining on it and two op- ments at that time. conduct your business of manufacturing tools. If
tions to renew for 5 years each. Of this cost, you are subject to the uniform capitalization
you paid $7,000 for the original lease and For more information, see the discussion of rules, you must include the rent you paid to oc-
$3,000 for the renewal options. Because MACRS in chapter 4 of Pub. 946. cupy the facility in the cost of the tools you pro-
$7,000 is less than 75% of the total $10,000 duce.
cost of the lease (or $7,500), you must amortize Assignment of a lease. If a long-term lessee
the $10,000 over 30 years. That is the remain- who makes permanent improvements to land More information. For exceptions and more
ing life of your present lease plus the periods for later assigns all lease rights to you for money information on these rules, see Uniform Capital-
renewal. and you pay the rent required by the lease, the ization Rules in Pub. 538 and the regulations
amount you pay for the assignment is a capital under section 263A.
Example 2. The facts are the same as in investment. If the rental value of the leased land
Example 1, except that you paid $8,000 for the increased since the lease began, part of your
original lease and $2,000 for the renewal op- capital investment is for that increase in the
tions. You can amortize the entire $10,000 over rental value. The rest is for your investment in
the 20-year remaining life of the original lease. the permanent improvements.
The $8,000 cost of getting the original lease The part that is for the increased rental value
was not less than 75% of the total cost of the of the land is a cost of getting a lease, and you 4.
lease (or $7,500). amortize it over the remaining term of the lease.
You can depreciate the part that is for your in-
Cost of a modification agreement. You may vestment in the improvements over the recov-
have to pay an additional “rent” amount over ery period of the property as discussed earlier, Interest
part of the lease period to change certain provi- without regard to the lease term.
sions in your lease. You must capitalize these
payments and amortize them over the remain-
ing period of the lease. You can’t deduct the Capitalizing Introduction
payments as additional rent, even if they are Rent Expenses This chapter discusses the tax treatment of
described as rent in the agreement. business interest expense. Business interest

Example. You are a calendar year tax- Under the uniform capitalization rules, you must expense is an amount charged for the use of
money you borrowed for business activities.
payer and sign a 20-year lease to rent part of a capitalize the direct costs and part of the indi-
building starting on January 1. However, before rect costs for certain production or resale activi-
you occupy it, you decide that you really need ties. Include these costs in the basis of property Topics
less space. The lessor agrees to reduce your you produce or acquire for resale, rather than This chapter discusses:
rent from $7,000 to $6,000 per year and to re- claiming them as a current deduction. You re-
lease the excess space from the original lease. cover the costs through depreciation, amortiza- • Allocation of interest
In exchange, you agree to pay an additional tion, or cost of goods sold when you use, sell, • Interest expense limitation
rent amount of $3,000, payable in 60 monthly or otherwise dispose of the property. • Interest you can deduct
installments of $50 each. Indirect costs include amounts incurred for • Interest you cannot deduct
You must capitalize the $3,000 and amortize renting or leasing equipment, facilities, or land. • Capitalization of interest
it over the 20-year term of the lease. Your amor- • When to deduct interest
tization deduction each year will be $150 Uniform capitalization rules. You may be • Below-market loans
($3,000 ÷ 20). You can’t deduct the $600 (12 × subject to the uniform capitalization rules if you
$50) that you will pay during each of the first 5 do any of the following, unless the property is Useful Items
years as rent. produced for your use other than in a business You may want to see:
or an activity carried on for profit.
Commissions, bonuses, and fees. Commis-
sions, bonuses, fees, and other amounts you 1. Produce real property or tangible personal Publication
pay to get a lease on property you use in your property. 537 537 Installment Sales
business are capital costs. You must amortize 2. Acquire property for resale. However, this
these costs over the term of the lease. rule does not apply to personal property if 550 550 Investment Income and Expenses
your average annual gross receipts are 936 936 Home Mortgage Interest Deduction
Loss on merchandise and fixtures. If you $27 million or less.
sell at a loss merchandise and fixtures that you Form (and Instructions)
bought solely to get a lease, the loss is a cost of Effective for tax years beginning after 2017,
getting the lease. You must capitalize the loss if you are a small business taxpayer (see Cost Schedule A (Form 1040) Schedule A (Form 1040) Itemized
and amortize it over the remaining term of the of Goods Sold in chapter 1), you are not re- Deductions
lease. quired to capitalize costs under section 263A. Schedule E (Form 1040) Schedule E (Form 1040) Supplemental
See section 263A(i). Income and Loss
Improvements erty if you construct, build, install, manufacture, Schedule K-1 (Form 1065) Schedule K-1 (Form 1065) Partner's
Producing property. You produce prop-
by Lessee develop, improve, create, raise, or grow the Share of Income,
Deductions, Credits, etc.
property. Property produced for you under a
If you add buildings or make other permanent contract is treated as produced by you to the Schedule K-1 (Form 1120-S) Schedule K-1 (Form 1120-S)
Shareholder's Share of Income,
improvements to leased property, depreciate extent you make payments or otherwise incur Deductions, Credits, etc.
the cost of the improvements using the modified costs in connection with the property.
accelerated cost recovery system (MACRS). 1098 1098 Mortgage Interest Statement
Depreciate the property over its appropriate re- Example 1. You rent construction equip-
3115 Application for Change in
covery period. You can’t amortize the cost over ment to build a storage facility. If you are sub- 3115 Accounting Method
the remaining term of the lease. ject to the uniform capitalization rules, you must
capitalize as part of the cost of the building the
4952 Investment Interest Expense
If you don’t keep the improvements when rent you paid for the equipment. You recover 4952 Deduction
you end the lease, figure your gain or loss your cost by claiming a deduction for
depreciation on the building. 8582 8582 Passive Activity Loss Limitations
Chapter 4 Interest Page 13