Rental Income Tax Accounting Chapter four Rental Income Tax Accounting

contents Overview of Rental Income Tax Basic Legal Provisions for Rental Income Tax Accounting for rental income tax

Rental Income Tax Basics Refers to Income from rental of buildings. Does not include income from lease of business and income from casual rental of property Business lease means lease of goods, equipments and building which are part of the normal operation of business Rental Income Tax income tax imposed on income from rental of buildings. Rental Income is taxed under Schedule “B” of Income Tax Proclamation No. 286/2002 and Regulation No. 78/2002

Rental Income Tax Basics : -cont'd A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset. Parties in Rent of buildings Lessor: a person who owns building and who provides building rental service Lessee: a person who rents/leases a building directly from the lessor for residential, business or subleasing purpose. Sub-lessor: the first lessee that sub lease the whole or portion of the building Sub lessee: the third party who rents the building from the sub lessor

Rental Income Tax Basics : -cont'd Sub-lessor shall pay the tax in the difference between income from sub-leasing and the rent paid to the lessor provided that the amount received from the sub-lessor is greater than the amount payable to the lessor. The owner of a building who allows a lessee to sub-lease is liable for the payment of the tax for which the sub-lessor is liable, in the event the sub-lessor fails to pay. The leased building can be empty or furnished Income that covers a period longer than one year (Advance Payments) shall be prorated over the number of years covered by the amount paid for tax purposes.

Determination of Gross Rental Income Gross Rental income shall include: All payments in cash and all benefits in kind received by the lessor (owner of the building) from the lessee; All payments made by the lessee on behalf of the lessor according to the contract of lease The value of any renovation or improvement made under the contract of lease to the land or building, where the cost of such renovation or improvement was borne by the lessee in addition to rent payable to the lessor; If the tax payer leased furnished quarters the amounts received attributable to the lease of furniture and equipment shall be included in Gross Rental Income in addition to the above rental incomes.

Deductible Expenses from Gross Rental Income Deductible expenses Include Taxes paid with respect to the land and buildings being leased and: For taxpayers not maintaining books of account, one fifth (1/5) of the gross income received as rent for buildings, furniture and equipment as an allowance for repairs, maintenance and depreciation of such buildings, furniture and equipment; For taxpayers maintaining books of account, the expenses incurred in earning, securing, and maintaining rental income, to the extent that the expenses can be proven by the taxpayer and subject to the limitations specified in Proclamation No.286/2002 Cost of lease/rent for the land Insurance premium for the property Deprn expense for the property Repair and maintenance of the property Interest on bank loans General and administrative expenses

Tax Rate On rental income of body 30% of Taxable Rental Income On income of persons according to the Schedule B Schedule B TB Income T RI Tax Rate 1st 1800 ––– Exempt (0%) 2nd 1,800 7,800 6,000 10% 3rd 16,800 9,000 15% 4th 28,200 11,400 20% 5th 42,600 14,400 25% 6th 60,000 17,400 30% 7th ***** 35%

Accounting for Rental Income Tax Involves with the following tasks: Determination of Gross Rental Income and Taxable Rental Income Calculation of Rental Income Tax Preparation of Rental Income Tax Return

Determination of Gross Rental Income Rental Income Received xxxxx Amount on the lease of furniture Amount on the lease of equipments Payments made by the lessee on behalf lessor Cost renovation/improvement paid by the lessee Gross Rental Income

Determining taxable rental income To compute the taxable amount, apply the following schedule Gross Rental Income xxxxx Less: Rental Payment (Applied by sub lessor) (xxxxx) Net Rental Income Less: deductible expenses Taxable rental income XXXX

Computing rental income tax For Bodies apply flat 30 % rate of taxable rental income For other tax payers apply the bellow schedule RIT = Taxable Rental Income @ Marginal Tax Rate – Deduction TB Over To Tax Rate Deduction 1st 1,800 Exempt 0.00 2nd 7,800 10% 180.00 3rd 16,800 15% 570.00 4th 28,000 20% 1,410.00 5th 28,200 42,600 25% 2,820.00 6th 60,000 30% 4,950.00 7th ***** 35% 7,950.00

Example 1 Assume ATO AYELE, the owner of AYU BUILDING, leased the Building at Br 2,000,000 per annum. In addition to this, the lessee will incur Br 100,000 per annum for repair and maintenance of the building. Ato Ayele maintains books of Accounts and the cost of the building is Br 20,000,000 and the following expenses are incurred by the lessor: Required: Determine the Gross Rental Income, Taxable Rental Income, and Rental Income Tax Cost of Lease payments on Land Br 100,000 Land and Building Tax 4,800 Other Deductible Expenses 5,200

Example 2 Habesha PLC involves in renting of dwelling houses around Bole. For the year ended Sene 30, 1998, the firm has processed the following transactions. Recognized income from renting of building Br. 65,000/month. The associated furniture and equipment were rented at a per month rate of Br. 20,000. The value of building owned by the company is Br. 5,000,000 and the value of furniture and equipment is Br. 1,000,000. The company paid land tax of Br. 10,000/year. General and administrative expenses of Br. 40,000 were also paid. Required:-With the assumptions of Habesha PLC maintains records and did not maintain records, compute the taxable income and tax liability for both assumptions for the year 1998.

Exercise s Exercise 1 : Biftu Plc leased its building for Br 200,000 for cash per month. The lessee is responsible to make renovation and improvement in the building by incurring Br 100,000 per year as per the lease term. The cost of building is Br 10,000,000. Biftu Plc paid Br 100,000 for the lease hold Land. General administrative costs of Biftu on the building rental are Br 150,000 per year. Required: Determine Rental Income Tax Liability of Biftu

Exercise s - cont'd Exercise 2: ATO ZINABU leased his furnished building for Br 2,000 per month and the equipments and furniture were leased for Br 1,000 per month. He paid Br 1,200 land and building tax to Addis Ababa Municipality. Determine Gross Rental Income, Taxable Rental Income and Rental Income Tax Liability assuming that the house was vacant for four months during tax year 1999

Rental Income Tax Declarations RIT Declaration with books of accounts (FORM 1201) RIT Lessee Details Declaration and Continuation Sheet (FORM 1202 and FORM 1203) RIT Declaration for taxpayers not maintaining Books of Accounts (FORM 1205 & FORM 1206)

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