Part I - Real Estate Investment Trust Taxable Income

Include in Part I the REIT's share of gross income from partnerships in which the REIT is a partner, and the deductions attributable to the gross income items. See Regulations section 1.856-3(g).

Do not include the following in Part I:

• Gross income, gains, losses, and deductions from foreclosure property (defined in section 856(e)) if the aggregate of such amounts results in net income. Report these amounts in Part II.
• Income or deductions from any prohibited transaction (defined in section 857(b)(6)) resulting in a gain. Report these amounts in Part IV.

Income

Line 1. Dividends.   Enter the total amount of dividends received during the tax year.

Line 2. Interest.   Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds, tax refunds, etc. Do not offset interest expense against interest income. Special rules apply to interest income from certain below-market rate loans. See section 7872 for more information.

Line 3. Gross rents.   Include the following:

• Charges for services customarily furnished or rendered in connection with renting real property.
• Rent from personal property leased under or with a lease of real property (but only if the rent from the personal property does not exceed 15% of the total rent for the tax year charged for both the real and personal property under such lease). Figure the percentage of rents from personal property by comparing the fair market value of the personal rental property to the fair market value of the total rental property. See section 856(d)(1) for details.
• Rent from a taxable REIT subsidiary, including rent for certain lodging facilities, but only if the rent meets the limitations and requirements of section 856(d)(8).

See section 856(d)(2) for amounts excluded from rents from real property.

Line 4. Other gross rents.   Enter the gross amount received for renting property not included on line 3.

Line 5. Capital gain net income.   Every sale or exchange of a capital asset must be reported in detail on Schedule D (Form 1120), Capital Gains and Losses, even if there is no gain or loss.

Line 7. Other income.   Enter any other taxable income not reported on lines 1 through 6, except amounts that must be reported in Part II or IV. List the type and amount of income on an attached schedule. If the REIT has only one item of other income, describe it in parentheses on line 7. Examples of other income to report on line 7 are:

• Amounts received or accrued as consideration for entering into agreements to make real property loans or to purchase or lease real property.
• Recoveries of bad debts deducted in prior years under the specific charge-off method.
• The amount of the credit for alcohol used as fuel (determined without regard to the limitation based on tax) that was entered on Form 6478, Credit for Alcohol Used as Fuel.
• Refunds of taxes deducted in prior years if they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against tax refunds.
• Any deduction previously taken under section 179A that is subject to recapture. The REIT must recapture the benefit of any allowable deduction for clean-fuel vehicle property (or clean-fuel vehicle refueling property), if the property later ceases to qualify. See Regulations section 1.179A-1 for details.

Deductions

Limitations on Deductions

Direct and indirect costs (including taxes) allocable to real or tangible personal property constructed or improved by the taxpayer.   These costs must be capitalized according to section 263A.

Transactions between related taxpayers.   Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses.

Golden parachute payments.   A portion of the payments made by a REIT to key personnel that exceeds their usual compensation may not be deductible. This occurs when the REIT has an agreement (golden parachute) with these key employees to pay them these excessive amounts if control of the REIT changes. See section 280G.

Business startup expenses.   These expenses must be capitalized unless an election is made to amortize them over a period of 60 months. See section 195 and Regulations section 1.195-1.

Passive activity limitations.   Limitations on passive activity losses and credits under section 469 apply to REITs that are closely held (as defined in section 856(h)). REITs subject to the passive activity limitations must complete Form 8810 to compute their allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, for rules on allocating interest expense among activities.

Reducing certain expenses for which credits are allowable.   For each credit listed below, the REIT must reduce the otherwise allowable deductions for expenses used to figure the credit by the amount of the current year credit.

• Work opportunity credit.
• Research credit.
• Enhanced oil recovery credit.
• Disabled access credit.
• Empowerment zone and renewal community employment credit.
• Indian employment credit.
• Employer credit for social security and Medicare taxes paid on certain employee tips.
• Orphan drug credit.
• Welfare-to-work credit.
• New York Liberty Zone business employee credit.

If the REIT has any of these credits, figure each current year credit before figuring the deduction for expenses on which the credit is based.

Line 9. Compensation of officers.   Do not include compensation deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

Disallowance of deduction for employee compensation in excess of $1 million.   Publicly held corporations may not deduct compensation to a covered employee to the extent that the compensation exceeds $1 million. Generally, a covered employee is:

• The chief executive officer of the corporation (or an individual acting in that capacity) as of the end of the tax year or
• An employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the employee is among the four highest compensated officers for that tax year (other than the chief executive officer).

For this purpose, compensation does not include the following:

• Income from certain employee trusts, annuity plans, or pensions and
• Any benefit paid to an employee that is excluded from the employee's income.

The deduction limit does not apply to:

• Commissions based on individual performance;
• Qualified performance-based compensation; and
• Income payable under a written, binding contract in effect on February 17, 1993.

The $1-million limit is reduced by amounts disallowed as excess parachute payments under section 280G.

For details, see section 162(m) and Regulations section 1.162-27.

Line 10. Salaries and wages.   Enter total salaries and wages paid or incurred for the tax year reduced by any work opportunity credit from Form 5884, any empowerment zone and renewal community employment credit from Form 8844, any Indian employment credit from Form 8845, any welfare-to-work credit from Form 8861, and any New York Liberty Zone business employee credit from Form 8884. See the instructions for these forms for more information. Do not include salaries and wages deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

If the REIT provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages the amounts allocated for depreciation and other expenses claimed on lines 16 and 18.

Line 11. Repairs and maintenance.   Enter the cost of incidental repairs and maintenance, such as labor and supplies, that do not add to the value of the property or appreciably prolong its life. New buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They must be depreciated or amortized.

Line 12. Bad debts.   Enter the total debts that became worthless in whole or in part during the tax year. A cash basis taxpayer may not claim a bad debt deduction unless the amount was previously included in income.

Line 13. Rents.   If the REIT rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also complete Part V of Form 4562, Depreciation and Amortization. If the REIT leased a vehicle for a term of 30 days or more, the deduction for the vehicle lease expense may have to be reduced by an amount called the inclusion amount.

The REIT may have an inclusion amount if:

The lease term began:	And the vehicle's FMV on the first day of the lease exceeded:
After 12/31/98	$15,500
After 12/31/96 but before 1/1/99	$15,800
After 12/31/94 but before 1/1/97	$15,500
After 12/31/93 but before 1/1/95	$14,600
If the lease term began before January 1, 1994, or, the leased vehicle was an electric vehicle, see Pub. 463,Travel, Entertainment, Gift and Car Expenses, to find out if the REIT has an inclusion amount. See Pub. 463 for instructions on figuring the inclusion amount.

Line 14. Taxes and licenses.   Enter taxes paid or incurred during the tax year, but do not include the following:

• Federal income taxes (except for the tax imposed on net recognized built-in gain allocable to ordinary income).
• Foreign income taxes if a tax credit is claimed.
• Taxes not imposed on the REIT.
• Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).
• Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
• Taxes deducted elsewhere on the return.
• Excise taxes imposed under section 4981 on undistributed REIT income.

See section 164(d) for apportionment of taxes on real property between seller and purchaser.

Line 15. Interest  

Note:   The deduction for interest is limited when the REIT is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.

The REIT must make an interest allocation if the proceeds of a loan were used for more than one purpose (e.g., to purchase a portfolio investment and to acquire an interest in a passive activity). See Temporary Regulations section 1.163-8T for the interest allocation rules.

Do not deduct the following interest.

• Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).
• For cash basis taxpayers, prepaid interest allocable to years following the current tax year (e.g., a cash basis calendar year taxpayer who in 2002 prepaid interest allocable to any period after 2002 can deduct only the amount allocable to 2002).
• Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).

Special rules apply to:

• Interest on which no tax is imposed (see section 163(j));
• Foregone interest on certain below-market-rate loans (see section 7872); and
• Original issue discount on certain high-yield discount obligations. (See section 163(e) to figure the disqualified portion.)

Line 16. Depreciation.   Besides depreciation, include on line 16 the part of the cost that the REIT elected to expense under section 179 for certain tangible property placed in service during tax year 2002 or carried over from 2001. See Form 4562 and its instructions.

Line 18. Other Deductions  

Note:   Do not deduct fines or penalties paid to a government for violating any law.

Attach a schedule, listing by type and amount, all allowable deductions that are not deductible elsewhere on the return. Enter the total on line 18. Include amortization and organization expenses. Generally, a deduction may not be taken for any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.

Charitable contributions.   Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c) and any unused contributions carried over from prior years.

REITs reporting taxable income on the accrual method may elect to treat as paid during the tax year any deductible contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return, signed by an officer, stating that the resolution authorizing the contributions was adopted by the board of directors during the tax year. Also attach a copy of the resolution.

Limitation on deduction.   The total amount claimed may not be more than 10% of taxable income computed without regard to the following:

• Any deduction for contributions,
• The special deductions on line 21b,
• The deduction allowed under section 249,
• Any net operating loss (NOL) carryback to the tax year under section 172, and
• Any capital loss carryback to the tax year under section 1212(a)(1).

Charitable contributions over the 10% limitation may not be deducted for the tax year but may be carried over to the next 5 tax years.

Special rules apply if the REIT has an NOL carryover to the tax year. In figuring the charitable contributions deduction for the tax year, the 10% limit is applied using the taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified (see section 172(b)). To the extent that contributions are used to reduced taxable income for this purpose and increase an NOL carryover, a contributions carryover is not allowed. See section 170(d)(2)(B).

Substantiation requirements.   Generally, no deduction is allowed for any contributions of $250 or more unless the REIT gets a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed, and gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the REIT's return, or if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the REIT's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, described below.

For more information on substantiation and recordkeeping requirements, see the regulations under section 170 and Pub. 526, Charitable Contributions.

Contributions to organizations conducting lobbying activities.   Contributions made to an organization that conducts lobbying activities are not deductible if:

• The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
• The principal purpose of the contribution was to avoid Federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.

Contributions of property other than cash.   If a REIT (other than a closely held REIT see below) contributes property other than cash and claims over a $500 deduction for the property, it must attach a schedule to the return describing the kind of property contributed and the method used to determine its fair market value (FMV). A closely held REIT must complete Form 8283 and attach it to its return. All other REITs generally must complete and attach Form 8283 to their returns for contributions of property (other than money) if the total claimed deduction for all property contributed was more than $5,000.

If the REIT made a qualified conservation contribution under section 170(h), also include the FMV of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose benefited by the donation. If a contribution carryover is included, show the amount and how it was determined.

Reduced deduction for contributions of certain property.   For a charitable contribution of property, the REIT must reduce the contribution by the sum of:

• The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
• For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.

The reduction for the long-term capital gain applies to:

• Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption and
• Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available (section 170(e)(5)).

Larger deduction.   A larger deduction is allowed for certain contributions of:

• Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (see section 170(e)(3) and Regulations section 1.170A-4A);
• Scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (other than by personal holding companies and service organizations) (see section 170(e)(4)); and
• Computer technology and equipment for educational purposes.

Contributions of computer technology and equipment to for educational purposes.   A REIT may take an increased deduction under section 170(e)(6) for qualified contributions of computer technology or equipment for educational purposes. Computer technology or equipment means computer software, computer or peripheral equipment, and fiber optic cable related to computer use.

A contribution is a qualified contribution if:

• It is made to an eligible donee (see below);
• Substantially all of the donee property's use is:
  1. Related to the purpose or function of the donee,
  2. For use within the United States, and
  3. For educational purposes.
• The contribution is made not later than 3 years after the date the taxpayer acquired or substantially completed the construction of the property;
• The original use of the property is by the donor or the donee;
• The property is not transferred by the donee for money, service, or other property, except for shipping, transfer, and installation costs;
• The property fits productively into the donee's education plan; and
• The property meets standards, if any, that maybe prescribed by future regulations to assure it meets minimum functionality and suitability for educational purposes.

Eligible donee.   The term eligible donee means:

• An educational organization that normally maintains a regular faculty and curriculum and has a regularly enrolled body of pupils in attendance at the place where its educational activities are regularly conducted,
• A section 501(c)(3) entity organized primarily for purposes of supporting elementary and secondary education, or
• A public library (as described in section 170(e)(6)(B)(i)(III)).

Exceptions.   The following exceptions apply to the above rules for computer technology and equipment:

• Contributions to private foundations may qualify if the foundation contributes the property to an eligible donee within 30 days after the contribution and notifies the donor of the contribution. For more details, see section 170(e)(6)(C).
• For contributions of property reacquired by the manufacturer of the property, the 3 year period begins on the date that the original construction of the property was substantially completed. Also, the original use of the property may be by someone other than the donor or the donee.

Pension, profit-sharing, etc., plans.   Include the deduction for contributions to qualified pension, profit-sharing, or other funded deferred compensation plans. Employers who maintain such a plan generally must file one of the forms listed below, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the REIT does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

Form 5500,   Annual Return/Report of Employee Benefit Plan. File this form for a plan that is not a one-participant plan (see below).

Form 5500-EZ,   Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers the owner (or the owner and his or her spouse) but only if the owner (or the owner and his or her spouse) owns the entire business.

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a REIT can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for details.

Travel.   The REIT cannot deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the officer or employee, unless that individual is an employee of the corporation, and his or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.   Generally, the REIT can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)), meals must not be lavish or extravagant; a bona fide business discussion must occur during, immediately before, or immediately after the meal; and an employee of the REIT must be present at the meal.

See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Membership dues.   The REIT may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, REITs may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.   The REIT cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity that is usually considered entertainment, amusement, or recreation.

Note:   The REIT may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

Deduction for clean-fuel vehicles and certain refueling property.   Section 179A allows a deduction for part of the cost of qualified clean-fuel vehicle property and qualified clean-fuel vehicle refueling property placed in service during the year. For more information, see Pub. 535.

Lobbying expenses.   Generally, lobbying expenses are not deductible. These expenses include amounts paid or incurred in connection with influencing Federal or state legislation (but not local legislation) or amounts paid or incurred in connection with any communication with certain Federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of influencing legislation.

Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3). If certain in-house lobbying expenditures do not exceed $2,000, they are deductible. For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9). For more information on lobbying expenses, see section 162(e).

Line 20. Taxable income before NOL deduction, total deduction for dividends paid, and section 857(b)(2)(E) deduction. At-risk rules. Generally, special at-risk rules under section 465 apply to closely held corporations engaged in any activity as a trade or business or for the production of income. These REITs that are closely held may have to adjust the amount on line 20.

But the at-risk rules do not apply to:

• Holding real property placed in service by the taxpayer before 1987;
• Equipment leasing under sections 465(c)(4), (5), and (6); or
• Any qualifying business of a qualified corporation under section 465(c)(7).

However, the at-risk rules do apply to the holding of mineral property.

For more information, see section 465 and Form 6198, At-Risk Limitations.

Line 21a. Net operating loss deduction.   A REIT may use the net operating loss (NOL) incurred in one tax year to reduce its taxable income in another tax year.

Generally, a REIT may carry an NOL over to each of the 20 years (15 years for NOLs incurred in tax years beginning before August 6, 1997) following the year of loss. REITs are not permitted to carry back an NOL to any year preceding the year of the loss. In addition, an NOL from a year that is not a REIT year may not be carried back to any year that is a REIT year.

Enter on line 21a the total NOL carryovers from other tax years, but do not enter more than the REIT's taxable income. The REIT's taxable income for purposes of the NOL deduction is taxable income (line 20) reduced by the dividends paid deduction (line 21b) and the section 857(b)(2)(E) deduction (line 21c). If this amount is less than zero, an NOL deduction cannot be taken for the tax year. Attach a schedule showing the computation of the NOL deduction. Also complete item 9 on Schedule K.

If capital gain dividends are paid during any tax year, the amount of the net capital gain for such tax year (to the extent of the capital gain dividends) is excluded in determining:

1. The NOL for the tax year and
2. The amount of the NOL of any prior tax year that may be carried over to any succeeding tax year.

Carryover rules.   The NOL for the current year is computed using the REIT's taxable income before it is reduced by the dividends paid deduction. After the REIT applies the NOL to the first tax year to which it may be carried, the taxable income of that year must be modified (as described by section 172(b) and the modified rules for REITs in section 172(d)(6)) to determine how much of the remaining loss may be carried to other years. Although the current year NOL is computed without regard to the dividends paid deduction, an NOL carryover from a prior year is applied to the current year using taxable income after it is reduced by the dividends paid deduction. The NOL amounts carried forward by the REIT are not reduced by subsequent year dividends paid deductions. See Example 1 in Regulations section 1.172-5(a)(4).

Special NOL rules   apply when:

• An ownership change occurs, the amount of the taxable income of a loss corporation that may be offset by the pre-change NOL carryovers is limited (see section 382 and the related regulations). A loss corporation must file an information statement with its income tax return for each tax year that certain ownership shifts occur (see Temporary Regulations section 1.382-2T(a)(2)(ii) for details). See Regulations section 1.382-6(b) for details on how to make the closing-of-the-books election.
• A REIT acquires control of another REIT (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gains is limited (see section 384).

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