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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Deducting Rent Payments in General

If you pay to use property for business that you do not own, the payments are rent. Leases may take various forms. For example, with a net lease, the tenant pays for the use of the space as well as costs associated with operating the property, such as taxes, property insurance, utilities, sewer and water, and trash collection. Regardless of the form of the lease, the payments are all considered rents (even if they may cover taxes). They may also be called lease payments. Rents paid for property used in a business are deductible business expenses. These include obligations you pay on behalf of your landlord. For example, if you are required by the terms of your lease to pay real estate taxes on the property, you can deduct these taxes as part of your rent payments.

The rents must be reasonable in amount. The issue of reasonableness generally does not arise where you and the landlord are at arm's length. However, the issue does come up when you and the landlord are related parties, such as family members or related companies. Rent paid to a related party is treated as reasonable if it is the same rent that would be paid to an unrelated party. A percentage rental is also considered reasonable if the rental paid is reasonable.

If the rent payments entitle you to receive equity in or title to the property at the end of some term, the payments are not rent. They may, however, be deductible in part as depreciation (see Chapter 14).

Rent to Your Corporation ...

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