Instructions For Form 1120-Reit - 2003 (Page 4 of 12) in pdf

passive activity loss and credit allowed under

Transfers to a corporation controlled by the

amounts of income or expenses from being

section 469 for closely held corporations.

transferor. If a person receives stock of a

duplicated. This is called a section 481(a)

corporation in exchange for property, and no

adjustment. The section 481(a) adjustment

Form 8842, Election To Use Different

gain or loss is recognized under section 351,

period is generally 1 year for a net negative

Annualization Periods for Corporate Estimated

the person (transferor) and the transferee must

adjustment and 4 years for a net positive

Tax, is filed to elect one of the annualization

each attach to their tax returns the information

adjustment. However, a REIT may elect to use

periods in section 6655(e)(2)(C) to figure

required by Regulations section 1.351-3.

a 1-year adjustment period if the net section

estimated tax payments under the annualized

481(a) adjustment for the change is less than

Assembling the Return

income installment method.

$25,000. The REIT must complete the

appropriate lines of Form 3115 to make the

To ensure that the REIT’s tax return is correctly

Form 8865, Return of U.S. Persons With

processed, attach all schedules and other

election.

Respect To Certain Foreign Partnerships. A

forms after page 4, Form 1120-REIT, and in

Include any net positive section 481(a)

REIT may have to file Form 8865 if it:

the following order.

adjustment on Form 1120-REIT, line 7. If the

1. Controlled a foreign partnership (i.e.,

1. Schedule N (Form 1120).

net section 481(a) adjustment is negative,

owned more than a 50% direct or indirect

report it on Form 1120-REIT, line 18.

2. Form 4136 and Form 4626.

interest in the partnership).

3. Additional schedules in alphabetical

2. Owned at least a 10% direct or indirect

Accounting Periods

order.

interest in a foreign partnership while U.S.

4. Additional forms in numerical order.

persons controlled that partnership.

A REIT must figure its taxable income on the

3. Had an acquisition, disposition, or

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

Complete every applicable entry space on

change in proportional interest in a foreign

accounting period a REIT uses to keep its

Form 1120-REIT. Do not write “See attached”

partnership that:

records and report its income and expenses. A

instead of completing the entry spaces. If more

•

Increased its direct interest to at least

REIT adopts a tax year when it files its first

space is needed on the forms or schedules,

10% or reduced its direct interest of at least

income tax return. It must adopt a tax year by

attach separate sheets using the same size

10% to less than 10%.

the due date (not including extensions) of its

and format as the printed forms. If there are

•

Changed its direct interest by at least a

first income tax return.

supporting statements and attachments,

10% interest.

A REIT must adopt a calendar year unless

arrange them in the same order as the

4. Contributed property to a foreign

it first qualified for REIT status before October

schedules or forms they support and attach

partnership in exchange for a partnership

5, 1976.

them last. Show the totals on the printed forms.

interest if:

Change of tax year. A REIT may not change

Also, be sure to enter the REIT’s name and

•

Immediately after the contribution, the

EIN on each supporting statement or

its tax year to any tax year other than the

REIT owned, directly or indirectly, at least a

calendar year. Generally, a REIT must get the

attachment.

10% interest in the foreign partnership; or

consent of the IRS before changing its tax year

•

The fair market value of the property the

Accounting Methods

by filing Form 1128, Application To Adopt,

REIT contributed to the foreign partnership in

Change, or Retain a Tax Year. However, upon

An accounting method is a set of rules used to

exchange for a partnership interest, when

electing to be taxed as a REIT, an entity that

determine when and how income and

added to other contributions of property made

has not engaged in any active trade or

expenses are reported. Figure taxable income

to the foreign partnership during the preceding

business may change its tax year to a calendar

using the method of accounting regularly used

12-month period, exceeds $100,000.

year without getting the consent.

in keeping the REIT’s books and records.

Also, the REIT may have to file Form 8865

For more information on change of tax year,

Generally, permissible methods include cash,

to report certain dispositions by a foreign

see Form 1128, Regulations section 1.442-1,

accrual, or any other method authorized by the

partnership of property it previously contributed

and Pub. 538.

Internal Revenue Code.

to that foreign partnership if it was a partner at

the time of the disposition. For more details,

In all cases, the method used must clearly

Rounding Off to Whole

including penalties for failing to file Form 8865,

show taxable income. If inventories are

see Form 8865 and its separate instructions.

Dollars

required, the accrual method must be used for

sales and purchases of merchandise.

The REIT may round off cents to whole dollars

Form 8875, Taxable REIT Subsidiary Election,

on its returns and schedules. If the REIT does

Accrual method. Generally, a REIT must use

is filed jointly by a corporation and a REIT to

the accrual method of accounting if its average

round to whole dollars, it must round all

have the corporation treated as a taxable REIT

amounts. To round, drop amounts under 50

annual gross receipts exceed $5 million. See

subsidiary.

cents and increase amounts from 50 to 99

section 448(c).

cents to the next dollar (for example, $1.39

Form 8886, Reportable Transaction

Under the accrual method, an amount is

becomes $1 and $2.50 becomes $3).

Disclosure Statement. Use this form to disclose

includible in income when:

•

information for each reportable transaction in

If two or more amounts must be added to

All the events have occurred that fix the right

which the REIT participated. Form 8886 must

figure the amount to enter on a line, include

to receive the income, which is the earliest of

be filed for each tax year that the REIT enters

cents when adding the amounts and round off

the date: (a) the required performance takes

into a reportable transaction. The following are

only the total.

place, (b) payment is due, or (c) payment is

reportable transactions:

received, and

•

Recordkeeping

Any transaction that is the same as or

The amount can be determined with

substantially similar to tax avoidance

reasonable accuracy.

Keep the REIT’s records for as long as they

transactions identified by the IRS.

may be needed for the administration of any

See Regulations section 1.451-1(a) for

•

Any transaction offered under conditions of

provision of the Internal Revenue Code.

details.

confidentiality.

Usually, records that support an item of

•

Generally, an accrual basis taxpayer can

Any transaction for which the REIT has

income, deduction, or credit on the return must

deduct accrued expenses in the tax year when:

contractual protection against disallowance of

•

be kept for 3 years from the date the return is

All events that determine the liability have

the tax benefits.

due or filed, whichever is later. Keep records

•

occurred,

Any transaction resulting in a loss of at least

•

that verify the REIT’s basis in property for as

The amount of the liability can be figured

$10 million in any single year or $20 million in

long as they are needed to figure the basis of

with reasonable accuracy, and

any combination of years.

•

the original or replacement property.

•

Economic performance takes place with

Any transaction resulting in a book-tax

The REIT should also keep copies of all

respect to the expense.

difference of more than $10 million on a gross

filed returns. They help in preparing future and

basis.

There are exceptions to the economic

•

amended returns.

Any transaction resulting in a tax credit of

performance rule for certain items, including

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

recurring expenses. See section 461(h) and

Depository Method of Tax

generating the credit for 45 days or less.

the related regulations for the rules for

determining when economic performance

Payment

Statements

takes place.

A REIT must pay the tax due in full no later

Change in accounting method. To change

Stock ownership in foreign corporations.

than the 15th day of the 3rd month after the

its method of accounting used to report taxable

Attach the statement required by section

end of the tax year. The two methods of

income (for income as a whole or for any

551(c) if (a) the REIT owned 5% or more in

depositing REIT income taxes, including the

material item), the REIT must file Form 3115,

value of the outstanding stock of a foreign

capital gains tax, are discussed below.

Application for Change in Accounting Method.

personal holding company and (b) the REIT

Electronic Deposit Requirement

For more information, see Form 3115 and Pub.

was required to include in its gross income any

538, Accounting Periods and Methods.

undistributed foreign personal holding

The REIT must make electronic deposits of all

company income from a foreign personal

Section 481(a) adjustment. The REIT

depository taxes (such as employment tax,

holding company.

may have to make an adjustment to prevent

excise tax, and REIT income tax) using the

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Instructions For Form 1120-Reit - 2003 Page 4

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