If the IRS recomposes your lease as a sale, your rents are not deductible. Instead, you are tax-entitled to depreciation deductions as the owner of the property. In addition, some of your rents, which the IRS actually re-accounts for as installments on a purchase price, is probably considered an interest that you can currently deduct. Economic news programs, real-time financial coverage and newspaper articles are full of stories of tenants closing stores and unable to pay rent as part of their leases. Commercial enterprises that are not considered “essential” have also closed and, while many are trying to continue their home operations, the source of revenue will slow down rapidly for some businesses. Some of these tenants will leave the store and recover the outstanding rent and other costs will be left to bankruptcy proceedings or other training. However, other tenants will reopen and it will be up to landlords and tenants to deal with outstanding rent and other defaults under the tenancy agreement. It is likely that some tenants would consider the challenging economic landscape to be unsafe in the near future and, in the context of the healing of previous defaults, will require a restructuring of payments after default under the lease agreement or, in some cases, a reduction and/or deferral of rent and other costs under the lease agreement. The response to the lease restructuring request includes more than the business and credit issues presented by an amendment. Tax problems are often related to changes in rents and have unexpected tax consequences for landlords and tenants. Landlords and tenants need to understand the tax pressure points for both parties during a rent restructuring in order to better develop a plan to amend the tenancy agreement that corresponds to the commercial and tax objectives of the parties.
If any of these factors describe a device lease you want to enter, you should exercise caution to avoid interest and penalties when the IRS redefines the transaction. If you have any doubts about how the IRS can view the lease, have your accountant or lawyer check the agreement. Although the leasing option is a valuable strategy in many situations, it must be used with great care. There is always a risk that the IRS may view the leasing option transaction as a sale and the lease solely as a financial instrument. Rents well above fair market rents, combined with a “good deal” option price, indicate that the transaction is likely to be labelled as a sale and that rents are in fact payments staggered over the purchase price. It is therefore appropriate to set both rents and the option price by the parties, referring to current market values and rents for similar properties. And the parties should be prepared to justify their estimates of rent and purchase price if the transaction is later challenged by the IRS. The best way to create the value of renting and real estate is to conduct an independent assessment by experts. Another common agreement between landlords and tenants (which the parties may or may not provide for in the tenancy agreement) is a rent incentive payment. Rental incentives are payments made by the landlord or on behalf of the landlord to encourage a tenant to sign a rental agreement.
Incentives to rent may take the form of cash, but may also include a transfer of ownership of a building or property, payment of fees by the lessor on behalf of the lessor, the assumption of the tenant`s prior tenancy obligation with another lessor, moving costs or the payment of termination fees to the former lessor of the taker. When the landlord provides a rent incentive, the tenant recognizes the income during the year in which the payment is received or earned, depending on the tenant`s billing method.