Arizona Administrative Code › Title 15 - REVENUE › Chapter 2 - DEPARTMENT OF REVENUE - INCOME AND WITHHOLDING TAX SECTION › Subchapter D - CORPORATIONS › Article 6 - PROPERTY FACTOR › Section R15-2D-605 - Valuation of Rented Property

Current through Register Vol. 30, No. 28, July 12, 2024
A.
				  Property rented by a taxpayer is valued at eight times its net annual rental
				  rate. The net annual rental rate for any item of rented property is the annual
				  rental rate paid by the taxpayer for the property, less the aggregate annual
				  subrental rates paid by subtenants of the taxpayer. Subrents are not deducted
				  when the subrents constitute business income because the taxpayer uses the
				  property that produces the subrents in the regular course of a trade or
				  business of the taxpayer when it is producing the subrent income; accordingly,
				  there is no reduction in its value. If the adjustment for subrents produces a
				  negative or inaccurate value of rented property, the special provisions in
				  R15-2D-902 apply.
Example 1: The taxpayer receives subrents from a bakery
					 concession in a food market operated by the taxpayer. Because the subrents are
					 business income they are not deducted from rent paid by the taxpayer for the
					 food market.
Example 2: The taxpayer rents a five-story office building
					 primarily for use in its multistate business, uses three floors for its offices
					 and subleases two floors to various other businesses and persons such as
					 professionals and shops. The rental of the two floors is incidental to the
					 operation of the taxpayer's trade or business. Because the subrents are
					 business income, they are not deducted from the rent paid by the
					 taxpayer.
Example 3: The taxpayer rents a 20-story office building
					 and uses the lower two stories for its general corporation headquarters. The
					 remaining 18 floors are subleased to others. The rental of the 18 floors is not
					 incidental to but rather is separate from the operation of the taxpayer's trade
					 or business. Because the subrents are nonbusiness income they are deducted from
					 the rent paid by the taxpayer.
B. "Annual rental rate" means the amount paid
				  as rental for property for a 12-month period.
1. If property is rented for less than a
				  12-month period, the rent paid for the actual period of rental is the "annual
				  rental rate" for the tax period.
2.
				  If a taxpayer has rented property for a term of 12 or more months and the
				  current tax period covers a period of less than 12 months (due, for example, to
				  a reorganization or change of accounting period), the taxpayer shall annualize
				  the rent paid for the short tax period. If the rental term is for less than 12
				  months, the rent is not annualized beyond its term.
Example 1: Taxpayer A ordinarily files its returns based on
					 a calendar year and merges into Taxpayer B on April 30. The net rent paid under
					 a lease with five years remaining is $2,500 a month. The rent for the tax
					 period January 1 to April 30 is $10,000. After the rent is annualized the net
					 rent is $30,000 ($2,500 x 12).
Example 2: Same facts as in example one except that the
					 lease would have terminated on August 31. In this case, the annualized rent is
					 $20,000 ($2,500 x 8).
3. A
				  taxpayer shall not annualize rent when the rental term is on a month-to-month
				  basis.