Instructions For Form 1120-Reit - 2006 (Page 4 of 13) in pdf

cents to the next dollar (for example, $1.39

Accrual Method

Interest and Penalties

becomes $1 and $2.50 becomes $3).

Generally, a REIT must use the accrual

Interest. Interest is charged on taxes paid late

If two or more amounts must be added to

method of accounting if its average annual

even if an extension of time to file is granted.

figure the amount to enter on a line, include

gross receipts exceed $5 million. See section

Interest is also charged on penalties imposed

cents when adding the amounts and round off

448(c).

for failure to file, negligence, fraud, substantial

only the total.

Under the accrual method, an amount is

valuation misstatements, and substantial

includible in income when:

understatements of tax from the due date

Recordkeeping

(including extensions) to the date of payment.

1. All the events have occurred that fix the

Keep the REIT’s records for as long as they

The interest charge is figured at a rate

right to receive the income, which is the

may be needed for the administration of any

earliest of the date:

determined under section 6621.

provision of the Internal Revenue Code.

Late filing of return. A REIT that does not file

a. the required performance takes place,

Usually, records that support an item of

its tax return by the due date, including

b. payment is due, or

income, deduction, or credit on the return must

extensions, may be penalized 5% of the unpaid

c. payment is received, and

be kept for 3 years from the date the return is

tax for each month or part of a month the

2. The amount can be determined with

due or filed, whichever is later. Keep records

return is late, up to a maximum of 25% of the

reasonable accuracy.

that verify the REIT’s basis in property for as

unpaid tax. The minimum penalty for a return

long as they are needed to figure the basis of

See Regulations section 1.451-1(a) for

that is over 60 days late is the smaller of the

the original or replacement property.

details and Publication 538, Accounting

tax due or $100. The penalty will not be

Periods and Methods.

The REIT should also keep copies of all

imposed if the REIT can show that the failure

filed returns. They help in preparing future and

to file on time was due to reasonable cause.

Change in accounting method. To change

amended returns.

REITs that file late must attach a statement

its method of accounting used to report taxable

explaining the reasonable cause.

income (for income as a whole or for the

Other Forms That May Be

Late payment of tax. A REIT that does not

treatment of any material item), the REIT must

file Form 3115, Application for Change in

pay the tax when due generally may be

Required

penalized

of 1% of the unpaid tax for each

Accounting Method. For more information, see

The REIT may have to file other forms. See

month or part of a month the tax is not paid, up

Form 3115 and Pub. 538, Accounting Periods

Publication 542, Corporations.

and Methods.

to a maximum of 25% of the unpaid tax. The

penalty will not be imposed if the REIT can

Form 926, Return by a U.S. Transferor of

Section 481(a) adjustment. The REIT

show that the failure to pay on time was due to

Property to a Foreign Corporation, is filed to

may have to make an adjustment under

reasonable cause.

report certain transfers to foreign corporations

section 481(a) to prevent amounts of income or

Trust fund recovery penalty. This penalty

under section 6038B.

expenses from being duplicated or omitted.

may apply if certain excise, income, social

This is referred to as a “section 481(a)

Form 966, Corporate Dissolution or

security, and Medicare taxes that must be

adjustment.” The section 481(a) adjustment

Liquidation, is used to report the adoption of a

collected or withheld are not collected or

period is generally 1 year for a net negative

resolution or plan to dissolve the corporation or

withheld, or these taxes are not paid. These

adjustment and 4 years for a net positive

liquidate any of its stock.

taxes are generally reported on:

adjustment. However, a REIT may elect to use

•

Forms 1042,1042-S, and 1042-T, Annual

Form 720, Quarterly Federal Excise Tax

a 1-year adjustment period if the net section

Withholding Tax Return for U.S. Source

Return;

481(a) adjustment for the change is less than

•

Income of Foreign Persons, Form 1042-S,

Form 941, Employer’s Quarterly Federal Tax

$25,000. The REIT must complete the

Foreign Person’s U.S. Source Income Subject

Return;

appropriate lines of Form 3115 to make the

•

to Withholding, and Form 1042-T, Annual

Form 943, Employer Annual Federal Tax

election.

Summary and Transmittal of Forms 1042-S.

Return for Agricultural Employees; or

Include any net positive section 481(a)

•

Use these forms to report and send withheld

Form 945, Annual Return of Withheld

adjustment on page 1, line 7. Report any

tax on payments or distributions made to

Federal Income Tax.

negative adjustment on page 1, line 18.

nonresident alien individuals, foreign

The trust fund recovery penalty may be

partnerships, or foreign corporations to the

imposed on all persons who are determined by

Accounting Period

extent these payments constitute gross income

the IRS to have been responsible for collecting,

from sources within the United States (see

A REIT must figure its taxable income on the

accounting for, and paying over these taxes,

sections 861 through 865).

basis of a tax year. A tax year is the annual

and who acted willfully in not doing so. The

accounting period a REIT uses to keep its

Also, see sections 1441 and 1442, and

penalty is equal to the unpaid trust fund tax.

records and report its income and expenses. A

Pub. 515, Withholding of Tax on Nonresident

See the Instructions for Form 720, or

REIT adopts a tax year when it files its first

Aliens and Foreign Entities.

Publication 15 (Circular E), Employer’s Tax

income tax return. It must adopt a tax year by

Guide.

Form 2438, Undistributed Capital Gains Tax

the due date (not including extensions) of its

Return, must be filed by the REIT if it

Failure to ascertain ownership. If the REIT

initial income tax return.

designates undistributed net long-term capital

fails to comply with Regulations section

Note. A REIT must adopt a calendar year

gains under section 857(b)(3)(D).

1.857-8 for ascertaining ownership and

unless it first qualified for REIT status before

maintaining factual ownership records for a tax

Form 2439, Notice to Shareholder of

October 5, 1976.

year, it must pay a $25,000 penalty ($50,000

Undistributed Long-Term Capital Gains, must

for intentional disregard) upon notice and

Change of tax year. A REIT may not change

be completed and a copy given to each

demand by the IRS. If the REIT can show that

its tax year to any tax year other than the

shareholder for whom the REIT paid tax on

the failure was due to reasonable cause, the

calendar year. Generally, a REIT must receive

undistributed net long-term capital gains under

penalty may not be imposed. For more

consent from the IRS before changing its tax

section 857(b)(3)(D).

information, see section 857(f).

year by filing Form 1128, Application To Adopt,

Form 3520, Annual Return To Report

Change, or Retain a Tax Year.

Other penalties. Other penalties can be

Transactions With Foreign Trusts and Receipt

imposed for negligence, substantial

However, upon electing to be taxed as a

of Certain Foreign Gifts, is required either if the

understatement of tax, and fraud. See sections

REIT, an entity that has not engaged in any

REIT received a distribution from a foreign trust

6662 and 6663.

active trade or business may change its tax

or if the REIT was a grantor of, transferor of, or

year to a calendar year without obtaining the

transferor to a foreign trust that existed during

Accounting Methods

consent.

the tax year. See Question 5 of Schedule N

(Form 1120).

An accounting method is a set of rules used to

For more information on change of tax year,

determine when and how income and

see Form 1128, Regulations section 1.442-1,

Form 5471, Information Return of U.S.

expenses are reported. Figure taxable income

and Pub. 538.

Persons With Respect to Certain Foreign

using the method of accounting regularly used

Corporations, is required if the REIT controls a

in keeping the REIT’s books and records. In all

Rounding Off to

foreign corporation; acquires, disposes of, or

cases, the method used must clearly show

owns 10% or more in value or vote of the

Whole Dollars

taxable income.

outstanding stock of a foreign corporation; or

Generally, permissible methods include:

The REIT may round off cents to whole dollars

had control of a foreign corporation for an

•

Cash,

on its returns and schedules. If the REIT does

uninterrupted period of at least 30 days during

•

Accrual, or

round to whole dollars, it must round all

the annual accounting period of the foreign

•

Any other method authorized by the Internal

amounts. To round, drop amounts under 50

corporation. See Question 4 of Schedule N

Revenue Code.

cents and increase amounts from 50 to 99

(Form 1120).

-4-

Instructions For Form 1120-Reit - 2006 Page 4

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