Page 78 - Small Business Taxes

16:31 - 2-Feb-2023
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Limitation on acceleration of accrual of If you use an accrual method, you generally Electing to ratably accrue. If you use an ac-
taxes. A taxing jurisdiction can require the use cannot accrue real estate taxes until you pay crual method, you can elect to accrue real es-
of a date for accruing taxes that is earlier than them to the government authority. However, tate tax related to a definite period ratably over
the date it originally required. However, if you you can elect to ratably accrue the taxes during that period.
use an accrual method, and can deduct the tax the year. See Electing to ratably accrue, later.
before you pay it, use the original accrual date Example. Lea and Joey are calendar year
for the year of change and all future years to de- Taxes for local benefits. Generally, you can- taxpayers who use an accrual method. Their
termine when you can deduct the tax. not deduct taxes charged for local benefits and real estate taxes for the real property tax year,
improvements that tend to increase the value of July 1, 2022, to June 30, 2023, are $1,200. July
Example. Your state imposes a tax on per- your property. These include assessments for 1 is the assessment and lien date.
sonal property used in a trade or business con- streets, sidewalks, water mains, sewer lines, If the Lea and Joey elect to ratably accrue
ducted in the state. This tax is assessed and and public parking facilities. You should in- the taxes, $600 will accrue in 2022 ($1,200 ×
becomes a lien as of July 1 (accrual date). In crease the basis of your property by the amount 6 /12, July 1–December 31) and the balance will
2022, the state changed the assessment and of the assessment. accrue in 2023.
lien dates from July 1, 2023, to December 31, You can deduct taxes for these local bene-
2022, for property tax year 2023. Use the origi- fits only if the taxes are for maintenance, re- Separate elections. You can elect to rata-
nal accrual date (July 1, 2023) to determine pairs, or interest charges related to those bene- bly accrue the taxes for each separate trade or
when you can deduct the tax. You must also fits. If part of the tax is for maintenance, repairs, business and for nonbusiness activities if you
use the July 1 accrual date for all future years to or interest, you must be able to show how much account for them separately. Once you elect to
determine when you can deduct the tax. of the tax is for these expenses to claim a de- ratably accrue real estate taxes, you must use
duction for that part of the tax. that method unless you get permission from the
Uniform capitalization rules. Uniform capital- IRS to change your accounting method. See
ization rules apply to certain taxpayers who pro- Example. To improve downtown commer- Form 3115, later.
duce real property or tangible personal property cial business, Waterfront City converted a Making the election. If you elect to ratably
for use in a trade or business or for sale to cus- downtown business area street into an en- accrue the taxes for the first year in which you
tomers. They also apply to certain taxpayers closed pedestrian mall. The city assessed the incur real estate taxes, attach a statement to
who acquire property for resale. Under these full cost of construction, financed with 10-year your income tax return for that year. The state-
rules, you either include certain costs in inven- bonds, against the affected properties. The city ment should show all the following items.
tory or capitalize certain expenses related to the is paying the principal and interest with the an- • The trades or businesses to which the
property, such as taxes. For more information, nual payments made by the property owners. election applies and the accounting
see chapter 1. The assessments for construction costs are method or methods used.
not deductible as taxes or as business expen- • The period to which the taxes relate.
Carrying charges. Carrying charges include ses, but are depreciable capital expenses. The • The calculation of the real estate tax de-
taxes you pay to carry or develop real estate or part of the payments used to pay the interest duction for that first year.
to carry, transport, or install personal property. charges on the bonds is deductible as taxes.
You can elect to capitalize carrying charges not Generally, you must file your return by the
subject to the uniform capitalization rules if they Charges for services. Water bills, sewerage, due date (including extensions). However, if
are otherwise deductible. For more information, and other service charges assessed against you timely filed your return for the year without
see chapter 7. your business property are not real estate electing to ratably accrue, you can still make the
taxes, but are deductible as business expen- election by filing an amended return within 6
Refunds of taxes. If you receive a refund for ses. months after the due date of the return (exclud-
any taxes you deducted in an earlier year, in- ing extensions). Attach the statement to the
clude the refund in income to the extent the de- Purchase or sale of real estate. If real estate amended return and write “Filed pursuant to
duction reduced your federal income tax in the is sold, the real estate taxes must be allocated section 301.9100-2” on the statement. File the
earlier year. For more information, see Recov- between the buyer and the seller. amended return at the same address where you
ery of amount deducted (tax benefit rule) in The buyer and seller must allocate the real filed the original return.
chapter 1. estate taxes according to the number of days in Form 3115. If you elect to ratably accrue
You must include in income any inter- the real property tax year (the period to which real estate taxes for a year after the first year in
TIP est you receive on tax refunds. the tax imposed relates) that each owned the which you incur real estate taxes, or if you want
property. Treat the seller as paying the taxes up to revoke your election to ratably accrue real
to but not including the date of sale. Treat the estate taxes, file Form 3115. For more informa-
buyer as paying the taxes beginning with the tion, including applicable time frames for filing,
Real Estate Taxes date of sale. You can usually find this informa- see the Instructions for Form 3115.
tion on the settlement statement you received at
closing.
Deductible real estate taxes are any state or lo- If you (the seller) use an accrual method and Income Taxes
cal taxes, including taxes imposed by U.S. pos- have not elected to ratably accrue real estate
sessions, on real estate levied for the general taxes, you are considered to have accrued your
public welfare. The taxing authority must base part of the tax on the date you sell the property. This section discusses federal, state, local, and
the taxes on the assessed value of the real es- foreign income taxes.
tate and charge them uniformly against all prop- Example. Lynn and Curt are calendar year
erty under its jurisdiction. Deductible real estate accrual method taxpayers who own real estate Federal income taxes. You cannot deduct
taxes generally do not include taxes charged for in Olmo County. They have not elected to rata- federal income taxes.
local benefits and improvements that increase bly accrue property taxes. November 30 of
the value of the property. See Taxes for local each year is the assessment and lien date for State and local income taxes. A corporation
benefits, later. the current real property tax year, which is the or partnership can deduct state and local in-
come taxes imposed on the corporation or part-
Real estate taxes imposed by a foreign calendar year. They sold the property on June nership as business expenses.
country are not deductible unless paid or ac- 30, 2022. Under their accounting method, they An individual can deduct state and local in-
crued in connection with the conduct of a trade would not be able to claim a deduction for the come taxes only as an itemized deduction on
or business or for the production of income. For taxes because the sale occurred before No- Schedule A (Form 1040), subject to limitations.
individual tax filers, the amount of deductible vember 30. They are treated as having accrued The deduction is limited to $10,000 as a total of
state and local real estate taxes may be subject their part of the tax, 181 /365 (January 1–June the following taxes.
to a $10,000 limitation. See State and local in- 29), on June 30, and they can deduct it for
come taxes, later. 2022.
Chapter 5 Taxes Page 19