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entertainment expenses paid or incurred

Lobbying expenses. Generally,

extent of the capital gain dividends) is

in its trade or business. Also, special rules

lobbying expenses are not deductible.

excluded in determining:

apply to deductions for gifts, skybox

These expenses include amounts paid or

1. The NOL for the tax year and

rentals, luxury water travel, convention

incurred in connection with influencing

2. The amount of the NOL of any prior

expenses, and entertainment tickets. See

Federal or state legislation (but not local

tax year that may be carried over to any

section 274 and Pub. 463 for details.

legislation) or amounts paid or incurred in

succeeding tax year.

connection with any communication with

Travel. The REIT cannot deduct travel

certain Federal executive branch officials

Carryover rules. The NOL for the

expenses of any individual accompanying

in an attempt to influence the official

current year is computed using the REIT’s

a corporate officer or employee, including

actions or positions of the officials. See

taxable income before it is reduced by the

a spouse or dependent of the officer or

Regulations section 1.162-29 for the

dividends paid deduction. After the REIT

employee, unless that individual is an

definition of “influencing legislation.”

applies the NOL to the first tax year to

employee of the corporation, and his or

which it may be carried, the taxable

Dues and other similar amounts paid

her travel is for a bona fide business

income of that year must be modified (as

purpose and would otherwise be

to certain tax-exempt organizations may

described by section 172(b) and the

not be deductible. See section 162(e)(3).

deductible by that individual.

modified rules for REITs in section

If certain in-house lobbying expenditures

Meals and entertainment. Generally,

172(d)(6)) to determine how much of the

do not exceed $2,000, they are

the REIT can deduct only 50% of the

remaining loss may be carried to other

deductible. For information on

amount otherwise allowable for meals

years. Although the current year NOL is

contributions to charitable organizations

and entertainment expenses paid or

computed without regard to the dividends

that conduct lobbying activities, see

incurred in its trade or business. In

paid deduction, an NOL carryover from a

section 170(f)(9). For more information on

addition (subject to exceptions under

prior year is applied to the current year

lobbying expenses, see section 162(e).

section 274(k)(2)), meals must not be

using taxable income after it is reduced

Line 20. Taxable income before NOL

lavish or extravagant; a bona fide

by the dividends paid deduction. The NOL

deduction, total deduction for

business discussion must occur during,

amounts carried forward by the REIT are

dividends paid, and section

immediately before, or immediately after

not reduced by subsequent year

857(b)(2)(E) deduction.

the meal; and an employee of the REIT

dividends paid deductions. See Example

At-risk rules. Generally, special at-risk

must be present at the meal.

1 in Regulations section 1.172-5(a)(4).

rules under section 465 apply to closely

See section 274(n)(3) for a special rule

Special NOL rules apply when:

held corporations engaged in any activity

•

that applies to expenses for meals

An ownership change occurs, the

as a trade or business or for the

consumed by individuals subject to the

amount of the taxable income of a loss

production of income. These REITs that

hours of service limits of the Department

corporation that may be offset by the

are closely held may have to adjust the

of Transportation.

amount on line 20.

pre-change NOL carryovers is limited

(see section 382 and the related

Membership dues. The REIT may

But the at-risk rules do not apply to:

•

regulations). A loss corporation must file

deduct amounts paid or incurred for

Holding real property placed in service

an information statement with its income

membership dues in civic or public

by the taxpayer before 1987;

•

tax return for each tax year that certain

service organizations, professional

Equipment leasing under sections

ownership shifts occur (see Temporary

organizations (such as bar and medical

465(c)(4), (5), and (6); or

•

Regulations section 1.382-2T(a)(2)(ii) for

associations), business leagues, trade

Any qualifying business of a qualified

details). See Regulations section

associations, chambers of commerce,

corporation under section 465(c)(7).

1.382-6(b) for details on how to make the

boards of trade, and real estate boards.

However, the at-risk rules do apply to

closing-of-the-books election.

However, no deduction is allowed if a

the holding of mineral property.

•

A REIT acquires control of another

principal purpose of the organization is to

For more information, see section 465

REIT (or acquires its assets in a

entertain, or provide entertainment

and Form 6198, At-Risk Limitations.

reorganization), the amount of

facilities for, members or their guests. In

pre-acquisition losses that may offset

addition, REITs may not deduct

Line 21a. Net operating loss deduction.

recognized built-in gains is limited (see

membership dues in any club organized

A REIT may use the net operating loss

section 384).

for business, pleasure, recreation, or

(NOL) incurred in one tax year to reduce

other social purpose. This includes

its taxable income in another tax year.

Tax and Payments

country clubs, golf and athletic clubs,

Generally, a REIT may carry an NOL

airline and hotel clubs, and clubs

Line 24b. Estimated tax payments.

over to each of the 20 years (15 years for

operated to provide meals under

Enter any estimated tax payments the

NOLs incurred in tax years beginning

conditions favorable to business

REIT made for the tax year.

before August 6, 1997) following the year

discussion.

Line 24f. Enter the credit (from Form

of loss. REITs are not permitted to carry

2439) for the REIT’s share of the tax paid

Entertainment facilities. The REIT

back an NOL to any year preceding the

by a regulated investment company or

cannot deduct an expense paid or

year of the loss. In addition, an NOL from

another REIT on undistributed long-term

incurred for a facility (such as a yacht or

a year that is not a REIT year may not be

capital gains included in the REIT’s

hunting lodge) used for an activity that is

carried back to any year that is a REIT

income. Attach Form 2439 to Form

usually considered entertainment,

year.

1120-REIT.

amusement, or recreation.

Enter on line 21a the total NOL

Line 24g. Enter the credit from Form

Note: The REIT may be able to deduct

carryovers from other tax years, but do

4136, Credit for Federal Tax Paid on

not enter more than the REIT’s taxable

otherwise nondeductible meals, travel,

Fuels, if the REIT qualifies to take this

income. The REIT’s taxable income for

and entertainment expenses if the

credit. Attach Form 4136 to Form

amounts are treated as compensation

purposes of the NOL deduction is taxable

1120-REIT.

income (line 20) reduced by the dividends

and reported on Form W-2 for an

paid deduction (line 21b) and the section

employee or on Form 1099-MISC for an

Line 24h. Add the amounts on lines 24d

857(b)(2)(E) deduction (line 21c). If this

independent contractor.

through 24g and enter the total on line

amount is less than zero, an NOL

24h.

Deduction for clean-fuel vehicles and

deduction cannot be taken for the tax

certain refueling property. Section

Backup withholding. If the REIT had

year. Attach a schedule showing the

179A allows a deduction for part of the

income tax withheld from any payments it

computation of the NOL deduction. Also

cost of qualified clean-fuel vehicle

received because, for example, it failed to

complete item 9 on Schedule K.

property and qualified clean-fuel vehicle

give the payer its correct EIN, include the

refueling property placed in service during

If capital gain dividends are paid

amount withheld in the total for line 24h.

the year. For more information, see Pub.

during any tax year, the amount of the net

This type of withholding is called “Backup

535.

capital gain for such tax year (to the

Withholding.” Show the amount withheld

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Instructions For Form 1120-Reit - U.s. Income Tax Return For Real Estate Investment Trusts - 2002 Page 10

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