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taxmap/pubs/p535-008.htm#TXMP65c76f26 Taxes on   Leased Property

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.

taxmap/pubs/p535-008.htm#TXMP2c7d8042 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.

taxmap/pubs/p535-008.htm#TXMP5483e21f 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.

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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.

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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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