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IRS.gov Website
Publication 535
taxmap/pubs/p535-007.htm#en_us_publink1000243046

Chapter 3
Rent Expense(p10)


What’s New(p10)

rule
taxmap/pubs/p535-007.htm#en_us_publink10009429
Small business taxpayers.(p10)
P.L. 115-97, Tax Cuts and Jobs Act, made changes to uniform capitalization rules for small business taxpayers. See Uniform capitalization rules, later.

taxmap/pubs/p535-007.htm#en_us_publink1000272098Introduction

This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. It also discusses how to treat other kinds of payments you make that are related to your use of this property. These include payments you make for taxes on the property.

taxmap/pubs/p535-007.htm#TXMP3f3c1c81

Useful items

You may want to see:


Publication
  538 Accounting Periods and Methods
  544 Sales and Other Dispositions of Assets
  946 How To Depreciate Property
See chapter 13 for information about getting publications and forms.
taxmap/pubs/p535-007.htm#en_us_publink1000243047

Rent(p11)

rule
Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
taxmap/pubs/p535-007.htm#en_us_publink1000243048

Unreasonable rent.(p11)

rule
You can’t take a rental deduction for unreasonable rent. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Rent isn’t unreasonable just because it is figured as a percentage of gross sales. For examples of related persons, see Related persons in chapter 2 of Pub. 544.
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Rent on your home.(p11)

rule
If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. You must meet the requirements for business use of your home. For more information, see Business use of your home in chapter 1.
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Rent paid in advance.(p11)

rule
Generally, rent paid for use of property in your trade or business is deductible in the year paid or incurred. If you are an accrual method taxpayer and pay rent in advance, you can deduct only the amount of rent that applies to your use of rented property during the tax year. You can deduct the rest of the rent payment only over the period to which it applies. If you are a cash method taxpayer, you may deduct the entire amount of rent you paid in advance in the year of payment if the payment applies to right to use property that does not extend beyond the earlier of 12 months after the first date you have the right to use the property or the end of the tax year following the year in which you paid the advance rent. If your payment applies to the right to use property beyond this period, then you must capitalize the rent payment and deduct it over the period to which it applies.
taxmap/pubs/p535-007.htm#en_us_publink1000243052

Example 1.(p11)

You are an accrual method calendar year taxpayer and you lease a building at a monthly rental rate of $1,000 beginning July 1, 2018. On June 30, 2018, you pay advance rent of $12,000 for the last 6 months of 2018 and the first 6 months of 2019. You can deduct only $6,000 for 2018, for the right to use property in 2018. You deduct the other $6,000 in 2019.
taxmap/pubs/p535-007.htm#en_us_publink1000243053

Example 2.(p11)

Assume the same facts as Example 1, except you are a cash method calendar year taxpayer. You may deduct the entire $12,000 payment for 2018. The payment applies to your right to use the property that does not extend beyond 12 months after the date you received this right. If you deduct the $12,000 in 2018, you should not deduct any part of this payment in 2019.
taxmap/pubs/p535-007.htm#en_us_publink1000195

Example 3.(p11)

You are either a cash or accrual calendar year taxpayer. Last January, you leased property for 3 years for $6,000 per year. You pay the full $18,000 (3 x $6,000) during the first year of the lease. Because this amount is a prepaid expense that must be capitalized, you can deduct only $6,000 per year, the amount allocable to your use of the property in each year.
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Canceling a lease.(p11)

rule
You generally can deduct as rent an amount you pay to cancel a business lease.
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Lease or purchase.(p11)

rule
There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense.
taxmap/pubs/p535-007.htm#en_us_publink1000243056
Conditional sales contract.(p11)
Whether an agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. No single test, or special combination of tests, always applies. However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true.
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Leveraged leases.(p11)
Leveraged lease transactions may not be considered leases. Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. Usually, the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender.
If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. These two revenue procedures can be found in I.R.B. 2001-19, which is available at IRS.gov/pub/irs-irbs/irb01-19.pdf.
For advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following.
The IRS may charge you a user fee for issuing a tax ruling. For more information, see Revenue Procedure 2018-1, available at
IRS.gov/irb/2018-1_IRB#RP-2018-1.
taxmap/pubs/p535-007.htm#en_us_publink1000243058
Leveraged leases of limited-use property.(p11)
The IRS won’t issue advance rulings on leveraged leases of so-called limited-use property. Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. See Revenue Procedure 2001-28 for examples of limited-use property and property that isn’t limited-use property.
taxmap/pubs/p535-007.htm#en_us_publink1000243059

Leases over $250,000.(p11)

rule
Special rules are provided for certain leases of tangible property. The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year).
Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. For details, see section 467.