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Accounting Periods

Any transaction offered under

method must be used for sales and

conditions of confidentiality.

purchases of merchandise.

A REIT must figure its taxable income on

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Any transaction for which the REIT has

the basis of a tax year. The tax year is the

Accrual method. Generally, a REIT

contractual protection against

annual accounting period the REIT uses

must use the accrual method of

disallowance of the tax benefits.

to keep its records and report its income

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accounting if its average annual gross

Any transaction resulting in a loss of at

and expenses. A REIT adopts a tax year

receipts exceed $5 million. See section

least $10 million in any single year or $20

when it files its first income tax return. It

448(c).

million in any combination of years.

must adopt a tax year by the due date

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Any transaction resulting in a book-tax

(not including extensions) of its first

Under the accrual method, an amount

difference of more than $10 million on a

income tax return.

is includible in income when:

gross basis.

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All the events have occurred that fix the

A REIT must adopt a calendar year

Any transaction resulting in a tax credit

right to receive the income, which is the

unless it first qualified for REIT status

of more than $250,000, if the REIT held

earliest of the date: (a) the required

before October 5, 1976.

the asset generating the credit for less

performance takes place, (b) payment is

than 45 days.

Change of tax year. A REIT may not

due, or (c) payment is received, and

change its tax year to any tax year other

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Statements

The amount can be determined with

than the calendar year. Generally, a REIT

reasonable accuracy.

must get the consent of the IRS before

Stock ownership in foreign

See Regulations section 1.451-1(a) for

changing its tax year by filing Form 1128,

corporations. Attach the statement

details.

Application To Adopt, Change, or Retain

required by section 551(c) if (a) the REIT

a Tax Year. However, upon electing to be

owned 5% or more in value of the

Generally, an accrual basis taxpayer

taxed as a REIT, an entity that has not

outstanding stock of a foreign personal

can deduct accrued expenses in the tax

engaged in any active trade or business

holding company and (b) the REIT was

year when:

may change its tax year to a calendar

required to include in its gross income

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All events that determine the liability

year without getting the consent.

any undistributed foreign personal holding

have occurred,

company income from a foreign personal

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For more information on change in tax

The amount of the liability can be

holding company.

year, see Form 1128, Regulations section

figured with reasonable accuracy, and

1.442-1, and Pub. 538.

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Transfers to a corporation controlled

Economic performance takes place

by the transferor. If a person receives

with respect to the expense.

Rounding Off to Whole

stock of a corporation in exchange for

There are exceptions to the economic

property, and no gain or loss is

Dollars

performance rule for certain items,

recognized under section 351, the person

including recurring expenses. See section

The REIT may show amounts on the

(transferor) and the transferee must each

461(h) and the related regulations for the

return and accompanying schedules as

attach to their tax returns the information

rules for determining when economic

whole dollars. To do so, drop amounts

required by Regulations section 1.351-3.

performance takes place.

less than 50 cents and increase amounts

Assembling the Return

from 50 cents through 99 cents to the

Change in accounting method.

next higher dollar.

To ensure that the REIT’s tax return is

Generally, the REIT must get IRS consent

correctly processed, attach all schedules

to change the method of accounting used

Recordkeeping

and other forms after page 4, Form

to report taxable income (for income as a

1120-REIT, and in the following order.

Keep the REIT’s records for as long as

whole or for any material item). To do so,

they may be needed for the

1. Schedule N (Form 1120).

it must file Form 3115, Application for

administration of any provision of the

2. Form 4136 and Form 4626.

Change in Accounting Method. For more

Internal Revenue Code. Usually, records

3. Additional schedules in alphabetical

information, get Pub. 538, Accounting

that support an item of income, deduction,

order.

Periods and Methods. However, there are

or credit on the return must be kept for 3

4. Additional forms in numerical order.

new procedures under which a REIT may

years from the date the return is due or

obtain automatic consent to certain

Complete every applicable entry space

filed, whichever is later. Keep records that

changes in accounting method. See Rev.

on Form 1120-REIT. Do not write “See

verify the REIT’s basis in property for as

Proc. 2002-9, 2002-3 I.R.B. 327 as

attached” instead of completing the entry

long as they are needed to figure the

modified by Rev. Proc. 2002-19, 2002-13

spaces. If more space is needed on the

basis of the original or replacement

I.R.B. 696 and Rev. Proc. 2002-54,

forms or schedules, attach separate

property.

2002-35 I.R.B. 432.

sheets using the same size and format as

The REIT should also keep copies of

the printed forms. If there are supporting

Section 481(a) adjustment. The

all filed returns. They help in preparing

statements and attachments, arrange

REIT may have to make an adjustment to

future and amended returns.

them in the same order as the schedules

prevent amounts of income or expenses

or forms they support and attach them

Depository Method of Tax

from being duplicated. This is called a

last. Show the totals on the printed forms.

section 481(a) adjustment. The section

Also, be sure to enter the REIT’s name

Payment

481(a) adjustment period is generally 1

and EIN on each supporting statement or

year for a net negative adjustment and 4

A REIT must pay the tax due in full no

attachment.

years for a net positive adjustment.

later than the 15th day of the 3rd month

However, a REIT may elect to use a

after the end of the tax year. The two

Accounting Methods

1-year adjustment period if the net section

methods of depositing REIT income

An accounting method is a set of rules

481(a) adjustment for the change is less

taxes, including the capital gains tax, are

used to determine when and how income

than $25,000. The REIT must complete

discussed below.

and expenses are reported.

the appropriate lines of Form 3115 to

Electronic Deposit Requirement

make the election. For more details on

Figure taxable income using the

The REIT must make electronic deposits

the section 481(a) adjustment, see Rev.

method of accounting regularly used in

of all depository taxes (such as

Proc. 2002-19 as amplified and clarified

keeping the REIT’s books and records.

employment tax, excise tax, and REIT

by Rev. Proc. 2002-54.

Generally, permissible methods include

income tax) using the Electronic Federal

cash, accrual, or any other method

Include any net positive section

Tax Payment System (EFTPS) in 2003 if:

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authorized by the Internal Revenue Code.

481(a) adjustment on Form 1120-REIT,

The total deposits of such taxes in

In all cases, the method used must

line 7. If the net section 481(a) adjustment

2001 were more than $200,000 or

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clearly show taxable income. If

is negative, report it on Form 1120-REIT,

The REIT was required to use EFTPS

inventories are required, the accrual

line 18.

in 2002.

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Instructions For Form 1120-Reit - U.s. Income Tax Return For Real Estate Investment Trusts - 2002 Page 5

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