A.
Property rented by a taxpayer is valued at eight times its net annual rental
rate. The net annual rental rate for any item of rented property is the annual
rental rate paid by the taxpayer for the property, less the aggregate annual
subrental rates paid by subtenants of the taxpayer. Subrents are not deducted
when the subrents constitute business income because the taxpayer uses the
property that produces the subrents in the regular course of a trade or
business of the taxpayer when it is producing the subrent income; accordingly,
there is no reduction in its value. If the adjustment for subrents produces a
negative or inaccurate value of rented property, the special provisions in
R15-2D-902 apply.
Example 1: The taxpayer receives subrents from a bakery
concession in a food market operated by the taxpayer. Because the subrents are
business income they are not deducted from rent paid by the taxpayer for the
food market.
Example 2: The taxpayer rents a five-story office building
primarily for use in its multistate business, uses three floors for its offices
and subleases two floors to various other businesses and persons such as
professionals and shops. The rental of the two floors is incidental to the
operation of the taxpayer's trade or business. Because the subrents are
business income, they are not deducted from the rent paid by the
taxpayer.
Example 3: The taxpayer rents a 20-story office building
and uses the lower two stories for its general corporation headquarters. The
remaining 18 floors are subleased to others. The rental of the 18 floors is not
incidental to but rather is separate from the operation of the taxpayer's trade
or business. Because the subrents are nonbusiness income they are deducted from
the rent paid by the taxpayer.
B. "Annual rental rate" means the amount paid
as rental for property for a 12-month period.
1. If property is rented for less than a
12-month period, the rent paid for the actual period of rental is the "annual
rental rate" for the tax period.
2.
If a taxpayer has rented property for a term of 12 or more months and the
current tax period covers a period of less than 12 months (due, for example, to
a reorganization or change of accounting period), the taxpayer shall annualize
the rent paid for the short tax period. If the rental term is for less than 12
months, the rent is not annualized beyond its term.
Example 1: Taxpayer A ordinarily files its returns based on
a calendar year and merges into Taxpayer B on April 30. The net rent paid under
a lease with five years remaining is $2,500 a month. The rent for the tax
period January 1 to April 30 is $10,000. After the rent is annualized the net
rent is $30,000 ($2,500 x 12).
Example 2: Same facts as in example one except that the
lease would have terminated on August 31. In this case, the annualized rent is
$20,000 ($2,500 x 8).
3. A
taxpayer shall not annualize rent when the rental term is on a month-to-month
basis.
C. "Annual rent"
means the actual sum of money or other consideration payable, directly or
indirectly, by a taxpayer or for its benefit for the use of property and
includes:
1. Any amount payable for the use of
real or tangible personal property, or any part of the property, whether
designated as a fixed sum of money or as a percentage of sales, profits, or
otherwise.
Example: A taxpayer, under the terms of a lease, pays a
lessor $1,000 per month as a base rental and at the end of year pays the lessor
one percent of its gross sales of $400,000. The annual rent is $16,000 ($12,000
plus one percent of $400,000 or $4,000).
2. Any amount payable as additional rent or
instead of rents, such as interest, taxes, insurance, repairs, or any other
items that are required to be paid by the terms of the lease or other
arrangement, not including amounts paid as service charges, such as utilities
or janitor services. If a payment includes rent and other charges unsegregated,
the amount of rent is determined by consideration of the relative values of the
rent and the other items.
Example 1: A taxpayer, under to the terms of a lease, pays
the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest
on a mortgage in the amount of $1,000. The annual rent is $15,000.
Example 2: A taxpayer stores part of its inventory in a
public warehouse. The total charge for the year is $1,000 of which $700 is for
the use of storage space and $300 for inventory insurance, handling and
shipping charges, and C.O.D. collections. The annual rent is $700.
D. "Annual rent" does
not include:
1. Incidental day-to-day
expenses, such as hotel or motel accommodations and daily rental of
automobiles; and
2. Royalties based
on extraction of natural resources, whether represented by delivery or
purchase. For purposes of this subsection, a royalty includes any consideration
conveyed or credited to a holder of an interest in property that constitutes a
sharing of current or future production of natural resources from the property,
irrespective of the method of payment or how the consideration may be
characterized, whether as a royalty, advance royalty, rental, or
otherwise.
E. For
purposes of the property factor, leasehold improvements are treated as property
owned by a taxpayer regardless of whether the taxpayer is entitled to remove
the improvements or the improvements revert to the lessor upon expiration of
the lease. The original cost of leasehold improvements are included in the
property factor.
Notes
Ariz. Admin. Code §
R15-2D-605
Recodified at 6 A.A.R.
2308, filed in the Office of the Secretary of State June 2, 2000 (Supp. 00-2).
Amended by final rulemaking at 7 A.A.R. 4973, effective October 5, 2001 (Supp.
01-4).
