ET-9 - Limitation on Deduction for Real Estate Rent Paid to an Affiliate

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 excess rent amount reported on Schedule J, is $36,000 [$3,000 x 12].

A penalty may be assessed for failure to report the required add-back. The reasonable rent limitation does not apply to personal property rents or rents paid to nonaffiliated parties.

Reference: Tenn. Code Ann. §§ 67-4-2004(1); 67-4-2006(b)(1)(N).

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