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2. Includes an independent living unit, and either an assisted living or nursing facility, or both. 3. Substantially all of the independent living unit residents are covered by continuing care contracts. A continuing care contract is a written con- tract between an individual and a qualified con- tinuing care facility that includes all of the fol- lowing conditions. 1. The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. 2. The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individu- al's spouse in an: a. Independent living unit (which has ad- ditional available facilities outside the unit for the provision of meals and other personal care), and b. Assisted living or nursing facility avail- able in the continuing care facility. 3. The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care fa- cility, as required for the health of the indi- vidual or the individual's spouse. For more information, see section 7872(h). Sale or exchange of property. Different rules generally apply to a loan connected with the sale or exchange of property. If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. See Unstated Interest and Original Issue Discount (OID) in Pub. 537. More information. For more information on below-market loans, see section 7872 and sec- tion 1.7872-5 of the regulations. 5. Taxes Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. You cannot deduct federal income taxes, estate and gift taxes, or state in- heritance, legacy, and succession taxes. CAUTION ! Topics This chapter discusses: • When to deduct taxes • Real estate taxes • Income taxes • Employment taxes • Other taxes Useful Items You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) 1040 U.S. Individual Income Tax Return Schedule A (Form 1040) Itemized Deductions Schedule SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 13 for information about getting publications and forms. When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. This applies whether you use the cash method or an accrual method of accounting. Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Pub. 538. You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes. Limit on accrual of taxes. A taxing jurisdic- tion can require the use of a date for accruing taxes that is earlier than the date it originally re- quired. However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. Example. Your state imposes a tax on per- sonal property used in a trade or business con- ducted in the state. This tax is assessed and becomes a lien as of July 1 (accrual date). In 2018, the state changed the assessment and lien dates from July 1, 2019, to December 31, 2018, for property tax year 2019. Use the origi- nal accrual date (July 1, 2019) to determine when you can deduct the tax. You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. 15 334 510 538 551 1040 Schedule A (Form 1040) Schedule SE (Form 1040) 3115 8959 Uniform capitalization rules. Uniform capital- ization rules apply to certain taxpayers who pro- duce real property or tangible personal property for use in a trade or business or for sale to cus- tomers. They also apply to certain taxpayers who acquire property for resale. Under these rules, you either include certain costs in inven- tory or capitalize certain expenses related to the property, such as taxes. For more information, see chapter 1. Carrying charges. Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. For more information, see chapter 7. Refunds of taxes. If you receive a refund for any taxes you deducted in an earlier year, in- clude the refund in income to the extent the de- duction reduced your federal income tax in the earlier year. For more information, see Recov- ery of amount deducted (tax benefit rule) in chapter 1. You must include in income any inter- est you receive on tax refunds. Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. De- ductible real estate taxes generally do not in- clude taxes charged for local benefits and im- provements that increase the value of the property. See Taxes for local benefits, later. If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. However, you can elect to ratably accrue the taxes during the year. See Electing to ratably accrue, later. Taxes for local benefits. Generally, you can- not deduct taxes charged for local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should in- crease the basis of your property by the amount of the assessment. You can deduct taxes for these local bene- fits only if the taxes are for maintenance, re- pairs, or interest charges related to those bene- fits. If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a de- duction for that part of the tax. Example. To improve downtown commer- cial business, Waterfront City converted a downtown business area street into an en- closed pedestrian mall. The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. The city is paying the principal and interest with the an- nual payments made by the property owners. TIP Page 18 Chapter 5 Taxes