Publication 535 |
2001 Tax Year |
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. 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 the
following.
- That you have a liability for taxes on the leased
property.
- How much the liability is.
- That economic performance occurred.
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 1.
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. Under the terms
of the lease, Oak becomes liable for the real estate taxes in the
later year when the tax bills are issued. If the lease ends before the
tax bill for a year is issued, Oak is not liable for the taxes for
that year.
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.
Example 2.
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.
As a result, 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.
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