When is real estate rent paid to an affiliate not deductible for excise tax purposes?

Reasonable real estate rent expense deducted for federal income tax purposes is likewise deductible for the Tennessee excise tax.  Reasonable rent does not exceed 2% per month of the appraised value of the property.   Federally deducted rent in excess of reasonable rent is reported as an add-back on excise Schedule J.  

For example, rent of $13,000 per month ($156,000 per year) is deducted on a federal income tax return. If the property’s appraised value for property tax purposes is $500,000, only $120,000 would be deductible for excise tax purposes.  Reasonable rent per month is $10,000 [$500,000 x 2%], and the monthly amount in excess of reasonable rent is $3,000 [$13,000 - $10,000].  The amount reported on Schedule J, is $36,000 [$3,000 x 12].

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