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1040ez Tax Instructions

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1040ez Tax Instructions

1040ez tax instructions Publication 17 - Introductory Material Table of Contents What's New Reminders IntroductionIcons. 1040ez tax instructions Ordering forms and publications. 1040ez tax instructions Tax questions. 1040ez tax instructions All material in this publication may be reprinted freely. 1040ez tax instructions A citation to Your Federal Income Tax (2013) would be appropriate. 1040ez tax instructions The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of: Tax laws enacted by Congress, Treasury regulations, and Court decisions. 1040ez tax instructions However, the information given does not cover every situation and is not intended to replace the law or change its meaning. 1040ez tax instructions This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. 1040ez tax instructions Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS. 1040ez tax instructions All taxpayers have important rights when working with the IRS. 1040ez tax instructions These rights are described in Your Rights as a Taxpayer in the back of this publication. 1040ez tax instructions What's New This section summarizes important tax changes that took effect in 2013. 1040ez tax instructions Most of these changes are discussed in more detail throughout this publication. 1040ez tax instructions Future developments. 1040ez tax instructions  For the latest information about the tax law topics covered in this publication, including information about any tax legislation, go to www. 1040ez tax instructions irs. 1040ez tax instructions gov/pub17. 1040ez tax instructions Additional Medicare Tax. 1040ez tax instructions  Beginning in 2013, a 0. 1040ez tax instructions 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. 1040ez tax instructions See Form 8959 and its instructions. 1040ez tax instructions Net Investment Income Tax. 1040ez tax instructions  Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). 1040ez tax instructions The NIIT is 3. 1040ez tax instructions 8% of the smaller of (a) your net investment income or (b) the excess of your modified adjusted gross income over: $125,000 if married filing separately, $250,000 if married filing jointly or qualifying widow(er), or $200,000 if any other filing status. 1040ez tax instructions See Form 8960 and its instructions. 1040ez tax instructions Change in tax rates. 1040ez tax instructions  The highest tax rate is 39. 1040ez tax instructions 6%. 1040ez tax instructions For more information, see the 2013 Tax Computation Worksheet or the 2013 Tax Rate Schedules near the end of this publication. 1040ez tax instructions Tax rate on net capital gain and qualified dividends. 1040ez tax instructions  The maximum tax rate of 15% on net capital gain and qualified dividends has increased to 20% for some taxpayers. 1040ez tax instructions See chapter 16. 1040ez tax instructions Medical and dental expenses. 1040ez tax instructions  You can deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (7. 1040ez tax instructions 5% if either you or your spouse is age 65 or older). 1040ez tax instructions See chapter 21. 1040ez tax instructions Personal exemption amount increased for certain taxpayers. 1040ez tax instructions  Your personal exemption is increased to $3,900. 1040ez tax instructions But the amount is reduced if your adjusted gross income is more than: $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if any other filing status. 1040ez tax instructions See chapter 3. 1040ez tax instructions Limit on itemized deductions. 1040ez tax instructions  You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if any other filing status. 1040ez tax instructions See chapter 29. 1040ez tax instructions Same-sex marriages. 1040ez tax instructions  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. 1040ez tax instructions See chapter 2. 1040ez tax instructions If you meet certain requirements, you may be able to file amended returns to change your filing status for some earlier years. 1040ez tax instructions For details on filing amended returns, see chapter 1. 1040ez tax instructions Health flexible spending arrangements (FSAs). 1040ez tax instructions  You cannot have more than $2,500 in salary reduction contributions made to a health FSA for plan years beginning after 2012. 1040ez tax instructions See chapter 5. 1040ez tax instructions Expiring credits. 1040ez tax instructions  The plug-in electric vehicle credit and the refundable part of the credit for prior year minimum tax have expired. 1040ez tax instructions You cannot claim either one on your 2013 return. 1040ez tax instructions See chapter 37. 1040ez tax instructions Ponzi-type investment schemes. 1040ez tax instructions  There are new rules for how to claim a theft loss deduction on Form 4684 due to a Ponzi-type investment scheme. 1040ez tax instructions See chapter 25. 1040ez tax instructions Home office deduction simplified method. 1040ez tax instructions  If you can take a home office deduction, you may be able to use a simplified method to figure it. 1040ez tax instructions See Publication 587. 1040ez tax instructions Standard mileage rates. 1040ez tax instructions  The 2013 rate for business use of your car is increased to 56½ cents a mile. 1040ez tax instructions See chapter 26. 1040ez tax instructions The 2013 rate for use of your car to get medical care is increased to 24 cents a mile. 1040ez tax instructions See chapter 21. 1040ez tax instructions The 2013 rate for use of your car to move is increased to 24 cents a mile. 1040ez tax instructions See Publication 521, Moving Expenses. 1040ez tax instructions Reminders Listed below are important reminders and other items that may help you file your 2013 tax return. 1040ez tax instructions Many of these items are explained in more detail later in this publication. 1040ez tax instructions Enter your social security number (SSN). 1040ez tax instructions  Enter your SSN in the space provided on your tax form. 1040ez tax instructions If you filed a joint return for 2012 and are filing a joint return for 2013 with the same spouse, enter your names and SSNs in the same order as on your 2012 return. 1040ez tax instructions See chapter 1. 1040ez tax instructions Secure your tax records from identity theft. 1040ez tax instructions  Identity theft occurs when someone uses your personal information, such as your name, SSN, or other identifying information, without your permission, to commit fraud or other crimes. 1040ez tax instructions An identity thief may use your SSN to get a job or may file a tax return using your SSN to receive a refund. 1040ez tax instructions For more information about identity theft and how to reduce your risk from it, see chapter 1. 1040ez tax instructions Taxpayer identification numbers. 1040ez tax instructions  You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. 1040ez tax instructions This applies even if the person was born in 2013. 1040ez tax instructions Generally, this number is the person's social security number (SSN). 1040ez tax instructions See chapter 1. 1040ez tax instructions Foreign source income. 1040ez tax instructions  If you are a U. 1040ez tax instructions S. 1040ez tax instructions citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by U. 1040ez tax instructions S. 1040ez tax instructions law. 1040ez tax instructions This is true whether you live inside or outside the United States and whether or not you receive a Form W-2 or Form 1099 from the foreign payer. 1040ez tax instructions This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents and royalties). 1040ez tax instructions If you live outside the United States, you may be able to exclude part or all of your foreign source earned income. 1040ez tax instructions For details, see Publication 54, Tax Guide for U. 1040ez tax instructions S. 1040ez tax instructions Citizens and Resident Aliens Abroad. 1040ez tax instructions Foreign financial assets. 1040ez tax instructions  If you had foreign financial assets in 2013, you may have to file Form 8938 with your return. 1040ez tax instructions Check www. 1040ez tax instructions IRS. 1040ez tax instructions gov/form8938 for details. 1040ez tax instructions Automatic 6-month extension to file tax return. 1040ez tax instructions  You can use Form 4868, Application for Automatic Extension of Time To File U. 1040ez tax instructions S. 1040ez tax instructions Individual Income Tax Return, to obtain an automatic 6-month extension of time to file your tax return. 1040ez tax instructions See chapter 1. 1040ez tax instructions Include your phone number on your return. 1040ez tax instructions  To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. 1040ez tax instructions Please enter your daytime telephone number on your tax form next to your signature and occupation. 1040ez tax instructions If you are filing a joint return, you can enter either your or your spouse's daytime phone number. 1040ez tax instructions Payment of taxes. 1040ez tax instructions   You can pay your taxes online, by phone, or by check or money order. 1040ez tax instructions You can make a direct transfer from your bank account or use a credit or debit card. 1040ez tax instructions If you e-file, you can schedule an electronic payment. 1040ez tax instructions See chapter 1. 1040ez tax instructions Faster ways to file your return. 1040ez tax instructions  The IRS offers fast, accurate ways to file your tax return information without filing a paper tax return. 1040ez tax instructions You can use IRS e-file (electronic filing). 1040ez tax instructions See chapter 1. 1040ez tax instructions Free electronic filing. 1040ez tax instructions  You may be able to file your 2013 taxes online for free. 1040ez tax instructions See chapter 1. 1040ez tax instructions Change of address. 1040ez tax instructions  If you change your address, you should notify the IRS. 1040ez tax instructions See Change of Address in chapter 1. 1040ez tax instructions Refund on a late filed return. 1040ez tax instructions  If you were due a refund but you did not file a return, you generally must file your return within 3 years from the date the return was due (including extensions) to get that refund. 1040ez tax instructions See chapter 1. 1040ez tax instructions Frivolous tax returns. 1040ez tax instructions  The IRS has published a list of positions that are identified as frivolous. 1040ez tax instructions The penalty for filing a frivolous tax return is $5,000. 1040ez tax instructions See chapter 1. 1040ez tax instructions Filing erroneous claim for refund or credit. 1040ez tax instructions  You may have to pay a penalty if you file an erroneous claim for refund or credit. 1040ez tax instructions See chapter 1. 1040ez tax instructions Privacy Act and paperwork reduction information. 1040ez tax instructions   The IRS Restructuring and Reform Act of 1998, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell you what our legal right is to ask for the information, why we are asking for it, how it will be used, what could happen if we do not receive it, and whether your response is voluntary, required to obtain a benefit, or mandatory under the law. 1040ez tax instructions A complete statement on this subject can be found in your tax form instructions. 1040ez tax instructions Customer service for taxpayers. 1040ez tax instructions  You can set up a personal appointment at the most convenient Taxpayer Assistance Center, on the most convenient business day. 1040ez tax instructions See How To Get Tax Help in the back of this publication. 1040ez tax instructions Preparer e-file mandate. 1040ez tax instructions  Most paid preparers must e-file returns they prepare and file. 1040ez tax instructions Your preparer may make you aware of this requirement and the options available to you. 1040ez tax instructions Treasury Inspector General for Tax Administration. 1040ez tax instructions   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (call 1-800-877-8339 if you are deaf, hard of hearing, or have a speech disability, and are using TTY/TDD equipment). 1040ez tax instructions You can remain anonymous. 1040ez tax instructions Photographs of missing children. 1040ez tax instructions  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 1040ez tax instructions Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 1040ez tax instructions You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 1040ez tax instructions Introduction This publication covers the general rules for filing a federal income tax return. 1040ez tax instructions It supplements the information contained in your tax form instructions. 1040ez tax instructions It explains the tax law to make sure you pay only the tax you owe and no more. 1040ez tax instructions How this publication is arranged. 1040ez tax instructions   This publication closely follows Form 1040, U. 1040ez tax instructions S. 1040ez tax instructions Individual Income Tax Return. 1040ez tax instructions It is divided into six parts which cover different sections of Form 1040. 1040ez tax instructions Each part is further divided into chapters which generally discuss one line of the form. 1040ez tax instructions Do not worry if you file Form 1040A or Form 1040EZ. 1040ez tax instructions Anything included on a line of either of these forms is also included on Form 1040. 1040ez tax instructions   The table of contents inside the front cover and the index in the back of the publication are useful tools to help you find the information you need. 1040ez tax instructions What is in this publication. 1040ez tax instructions   The publication begins with the rules for filing a tax return. 1040ez tax instructions It explains: Who must file a return, Which tax form to use, When the return is due, How to e-file your return, and Other general information. 1040ez tax instructions It will help you identify which filing status you qualify for, whether you can claim any dependents, and whether the income you receive is taxable. 1040ez tax instructions The publication goes on to explain the standard deduction, the kinds of expenses you may be able to deduct, and the various kinds of credits you may be able to take to reduce your tax. 1040ez tax instructions   Throughout the publication are examples showing how the tax law applies in typical situations. 1040ez tax instructions Also throughout the publication are flowcharts and tables that present tax information in an easy-to-understand manner. 1040ez tax instructions   Many of the subjects discussed in this publication are discussed in greater detail in other IRS publications. 1040ez tax instructions References to those other publications are provided for your information. 1040ez tax instructions Icons. 1040ez tax instructions   Small graphic symbols, or icons, are used to draw your attention to special information. 1040ez tax instructions See Table 1 later for an explanation of each icon used in this publication. 1040ez tax instructions What is not covered in this publication. 1040ez tax instructions   Some material that you may find helpful is not included in this publication but can be found in your tax form instruction booklet. 1040ez tax instructions This includes lists of: Where to report certain items shown on information documents, and Recorded tax information topics (TeleTax). 1040ez tax instructions   If you operate your own business or have other self-employment income, such as from babysitting or selling crafts, see the following publications for more information. 1040ez tax instructions Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). 1040ez tax instructions Publication 535, Business Expenses. 1040ez tax instructions Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 1040ez tax instructions Help from the IRS. 1040ez tax instructions   There are many ways you can get help from the IRS. 1040ez tax instructions These are explained under How To Get Tax Help in the back of this publication. 1040ez tax instructions Comments and suggestions. 1040ez tax instructions   We welcome your comments about this publication and your suggestions for future editions. 1040ez tax instructions   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 1040ez tax instructions NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 1040ez tax instructions Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 1040ez tax instructions   You can send your comments from www. 1040ez tax instructions irs. 1040ez tax instructions gov/formspubs/. 1040ez tax instructions Click on “More Information” and then on “Comment on Tax Forms and Publications”. 1040ez tax instructions   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 1040ez tax instructions Ordering forms and publications. 1040ez tax instructions   Visit www. 1040ez tax instructions irs. 1040ez tax instructions gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 1040ez tax instructions Internal Revenue Service 1201 N. 1040ez tax instructions Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 1040ez tax instructions   If you have a tax question, check the information available on IRS. 1040ez tax instructions gov or call 1-800-829-1040. 1040ez tax instructions We cannot answer tax questions sent to either of the above addresses. 1040ez tax instructions IRS mission. 1040ez tax instructions   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. 1040ez tax instructions Table 1. 1040ez tax instructions Legend of Icons Icon Explanation Items that may cause you particular problems, or an alert about pending legislation that may be enacted after this publication goes to print. 1040ez tax instructions An Internet site or an email address. 1040ez tax 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Tax Relief for Victims of Severe Storms, Flooding, Mudslides and Landslides in West Virginia

Updated 4/20/2012 to include Lincoln and Mingo counties

WVA-2012-2, March 27, 2012

CHARLESTON — Victims of the severe storms, flooding, mudslides and landslides that began on March 15, 2012 in parts of West Virginia may qualify for tax relief from the Internal Revenue Service.

The President has declared Lincoln, Logan and Mingo counties a federal disaster area. Individuals who reside or have a business in this county may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after March 15, and on or before May 31, have been postponed to May 31, 2012. This includes the April 17 deadline for filing 2011 individual income tax returns, making income tax payments and making 2011 contributions to an individual retirement account (IRA).  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after March 15, and on or before March 30, as long as the deposits are made by March 30, 2012.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.

Covered Disaster Area

The counties above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until May 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after March 15 and on or before May 31.

The IRS also gives affected taxpayers until May 31 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after March 15 and on or before May 31.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after March 15 and on or before March 30 provided the taxpayer makes these deposits by March 30.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “West Virginia/Severe Storms, Flooding, Mudslides, and Landslides” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-TAX-FORM (800-829-3676). The IRS toll-free number for general tax questions is 800-829-1040.

Related Information

Page Last Reviewed or Updated: 06-Mar-2014

The 1040ez Tax Instructions

1040ez tax instructions 4. 1040ez tax instructions   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. 1040ez tax instructions Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. 1040ez tax instructions Net unrelated income. 1040ez tax instructions Net unrelated loss. 1040ez tax instructions Control. 1040ez tax instructions Income from property financed with qualified 501(c)(3) bonds. 1040ez tax instructions Disposition of property received from taxable subsidiary and used in unrelated business. 1040ez tax instructions Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. 1040ez tax instructions If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. 1040ez tax instructions In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. 1040ez tax instructions Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. 1040ez tax instructions For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. 1040ez tax instructions Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. 1040ez tax instructions Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. 1040ez tax instructions Dividends, interest, annuities and other investment income. 1040ez tax instructions   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. 1040ez tax instructions Exception for insurance activity income of a controlled foreign corporation. 1040ez tax instructions   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. 1040ez tax instructions The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. 1040ez tax instructions Certain exceptions to this rule apply. 1040ez tax instructions For more information, see section 512(b)(17). 1040ez tax instructions Other exceptions. 1040ez tax instructions   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). 1040ez tax instructions Income from lending securities. 1040ez tax instructions   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. 1040ez tax instructions   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. 1040ez tax instructions The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. 1040ez tax instructions Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. 1040ez tax instructions Royalties. 1040ez tax instructions   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. 1040ez tax instructions   To be considered a royalty, a payment must relate to the use of a valuable right. 1040ez tax instructions Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. 1040ez tax instructions Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. 1040ez tax instructions However, royalties do not include payments for personal services. 1040ez tax instructions Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. 1040ez tax instructions   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. 1040ez tax instructions   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. 1040ez tax instructions However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. 1040ez tax instructions To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. 1040ez tax instructions To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. 1040ez tax instructions Exceptions. 1040ez tax instructions   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). 1040ez tax instructions Rents. 1040ez tax instructions   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. 1040ez tax instructions Rents from personal property are not excluded. 1040ez tax instructions However, special rules apply to “mixed leases” of both real and personal property. 1040ez tax instructions Mixed leases. 1040ez tax instructions   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. 1040ez tax instructions If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. 1040ez tax instructions If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. 1040ez tax instructions   Property is placed in service when the lessee first may use it under the terms of a lease. 1040ez tax instructions For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. 1040ez tax instructions   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. 1040ez tax instructions   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). 1040ez tax instructions Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. 1040ez tax instructions Exception for rents based on net profit. 1040ez tax instructions   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. 1040ez tax instructions Exception for income from personal services. 1040ez tax instructions   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. 1040ez tax instructions Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. 1040ez tax instructions Other exceptions. 1040ez tax instructions   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. 1040ez tax instructions ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). 1040ez tax instructions See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. 1040ez tax instructions Income from research. 1040ez tax instructions   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. 1040ez tax instructions However, the extent of the exclusion depends on the nature of the organization and the type of research. 1040ez tax instructions   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. 1040ez tax instructions   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. 1040ez tax instructions   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. 1040ez tax instructions   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. 1040ez tax instructions In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. 1040ez tax instructions Gains and losses from disposition of property. 1040ez tax instructions   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. 1040ez tax instructions   It should be noted that the last exception relates only to cut timber. 1040ez tax instructions The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. 1040ez tax instructions Lapse or termination of options. 1040ez tax instructions   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. 1040ez tax instructions The exclusion applies only if the option is written in connection with the exempt organization's investment activities. 1040ez tax instructions Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. 1040ez tax instructions Exception. 1040ez tax instructions   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. 1040ez tax instructions Gain or loss on disposition of certain brownfield property. 1040ez tax instructions   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. 1040ez tax instructions See sections 512(b)(19) and 514(b)(1)(E). 1040ez tax instructions Income from services provided under federal license. 1040ez tax instructions   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. 1040ez tax instructions   This exclusion applies only if the following requirements are met. 1040ez tax instructions The trade or business must have been operated by the order or by the institution before May 27, 1959. 1040ez tax instructions The trade or business must provide services under a license issued by a federal regulatory agency. 1040ez tax instructions More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. 1040ez tax instructions The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. 1040ez tax instructions Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. 1040ez tax instructions Exception. 1040ez tax instructions    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). 1040ez tax instructions Member income of mutual or cooperative electric companies. 1040ez tax instructions   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. 1040ez tax instructions Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. 1040ez tax instructions For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. 1040ez tax instructions Exception. 1040ez tax instructions   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. 1040ez tax instructions The limit on dues paid by an associate member is $148 for 2011. 1040ez tax instructions   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. 1040ez tax instructions Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. 1040ez tax instructions They cannot be directly connected with excluded income. 1040ez tax instructions For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. 1040ez tax instructions Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. 1040ez tax instructions For an exception, see Expenses attributable to exploitation of exempt activities, later. 1040ez tax instructions Expenses attributable solely to unrelated business. 1040ez tax instructions   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. 1040ez tax instructions   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. 1040ez tax instructions Expenses attributable to dual use of facilities or personnel. 1040ez tax instructions   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. 1040ez tax instructions The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. 1040ez tax instructions Example 1. 1040ez tax instructions A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. 1040ez tax instructions The school provides the tennis courts, housing, and dining facilities. 1040ez tax instructions The contracted individual hires the instructors, recruits campers, and provides supervision. 1040ez tax instructions The income the school receives from this activity is from a dual use of the facilities and personnel. 1040ez tax instructions The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. 1040ez tax instructions Example 2. 1040ez tax instructions An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. 1040ez tax instructions The president devotes approximately 10% of his time to the unrelated business. 1040ez tax instructions To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. 1040ez tax instructions Expenses attributable to exploitation of exempt activities. 1040ez tax instructions   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. 1040ez tax instructions (See Exploitation of exempt functions under Not substantially related in chapter 3. 1040ez tax instructions ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. 1040ez tax instructions Exception. 1040ez tax instructions   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. 1040ez tax instructions The unrelated business exploits the exempt activity. 1040ez tax instructions The unrelated business is a type normally conducted for profit by taxable organizations. 1040ez tax instructions The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. 1040ez tax instructions The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. 1040ez tax instructions   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. 1040ez tax instructions Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. 1040ez tax instructions Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. 1040ez tax instructions (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. 1040ez tax instructions ) Figuring unrelated business taxable income (UBTI). 1040ez tax instructions   The UBTI of an advertising activity is the amount shown in the following chart. 1040ez tax instructions IF gross advertising income is . 1040ez tax instructions . 1040ez tax instructions . 1040ez tax instructions THEN UBTI is . 1040ez tax instructions . 1040ez tax instructions . 1040ez tax instructions More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. 1040ez tax instructions Equal to or less than direct advertising costs Zero. 1040ez tax instructions   • Circulation income and readership costs are not taken into account. 1040ez tax instructions   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. 1040ez tax instructions   The terms used in the chart are explained in the following discussions. 1040ez tax instructions Periodical Income Gross advertising income. 1040ez tax instructions   This is all the income from the unrelated advertising activities of an exempt organization periodical. 1040ez tax instructions Circulation income. 1040ez tax instructions   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). 1040ez tax instructions It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. 1040ez tax instructions It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. 1040ez tax instructions Allocable membership receipts. 1040ez tax instructions   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. 1040ez tax instructions   The amount used to allocate membership receipts is the amount shown in the following chart. 1040ez tax instructions   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. 1040ez tax instructions The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. 1040ez tax instructions IF . 1040ez tax instructions . 1040ez tax instructions . 1040ez tax instructions THEN the amount used to allocate membership receipts is . 1040ez tax instructions . 1040ez tax instructions . 1040ez tax instructions 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. 1040ez tax instructions The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. 1040ez tax instructions Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. 1040ez tax instructions U is an exempt scientific organization with 10,000 members who pay annual dues of $15. 1040ez tax instructions One of U's activities is publishing a monthly periodical distributed to all of its members. 1040ez tax instructions U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. 1040ez tax instructions Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. 1040ez tax instructions Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). 1040ez tax instructions Example 2. 1040ez tax instructions Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. 1040ez tax instructions Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. 1040ez tax instructions U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. 1040ez tax instructions Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. 1040ez tax instructions Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. 1040ez tax instructions Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). 1040ez tax instructions U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). 1040ez tax instructions Periodical Costs Direct advertising costs. 1040ez tax instructions   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. 1040ez tax instructions   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. 1040ez tax instructions Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. 1040ez tax instructions   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. 1040ez tax instructions For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. 1040ez tax instructions Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. 1040ez tax instructions   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. 1040ez tax instructions Readership costs. 1040ez tax instructions   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. 1040ez tax instructions Costs partly attributable to other activities. 1040ez tax instructions   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. 1040ez tax instructions When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. 1040ez tax instructions The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. 1040ez tax instructions Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. 1040ez tax instructions Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. 1040ez tax instructions It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. 1040ez tax instructions Consolidated treatment, once adopted, must be followed consistently and is binding. 1040ez tax instructions This treatment can be changed only with the consent of the Internal Revenue Service. 1040ez tax instructions An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. 1040ez tax instructions Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. 1040ez tax instructions The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. 1040ez tax instructions For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. 1040ez tax instructions The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. 1040ez tax instructions Example. 1040ez tax instructions Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. 1040ez tax instructions Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. 1040ez tax instructions Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. 1040ez tax instructions The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. 1040ez tax instructions The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. 1040ez tax instructions It is not engaged in for profit. 1040ez tax instructions Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. 1040ez tax instructions It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. 1040ez tax instructions Modifications Net operating loss deduction. 1040ez tax instructions   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. 1040ez tax instructions However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. 1040ez tax instructions For example, a loss from an unrelated trade or business is not diminished because dividend income was received. 1040ez tax instructions   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. 1040ez tax instructions This would reduce the loss that could be applied against unrelated business income of prior or future tax years. 1040ez tax instructions Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. 1040ez tax instructions   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. 1040ez tax instructions   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. 1040ez tax instructions   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. 1040ez tax instructions For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. 1040ez tax instructions   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040ez tax instructions Charitable contributions deduction. 1040ez tax instructions   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. 1040ez tax instructions   To be deductible, the contribution must be paid to another qualified organization. 1040ez tax instructions For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. 1040ez tax instructions   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. 1040ez tax instructions Deduction limits. 1040ez tax instructions   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. 1040ez tax instructions See the Instructions for Form 990-T for more information. 1040ez tax instructions    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. 1040ez tax instructions However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. 1040ez tax instructions   Contributions in excess of the limits just described may be carried over to the next 5 tax years. 1040ez tax instructions A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. 1040ez tax instructions Suspension of deduction limits for farmers and ranchers. 1040ez tax instructions   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. 1040ez tax instructions See the Instructions for Form 990-T for details. 1040ez tax instructions Specific deduction. 1040ez tax instructions   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. 1040ez tax instructions However, the specific deduction is not allowed in computing an NOL or the NOL deduction. 1040ez tax instructions   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. 1040ez tax instructions Exception. 1040ez tax instructions   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. 1040ez tax instructions In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. 1040ez tax instructions   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. 1040ez tax instructions The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. 1040ez tax instructions The local units cannot file separate returns. 1040ez tax instructions However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. 1040ez tax instructions See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. 1040ez tax instructions Example. 1040ez tax instructions X is an association of churches and is divided into local units A, B, C, and D. 1040ez tax instructions Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. 1040ez tax instructions X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. 1040ez tax instructions Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. 1040ez tax instructions If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. 1040ez tax instructions No distinction is made between limited and general partners. 1040ez tax instructions The organization is required to notify the partnership of its tax-exempt status. 1040ez tax instructions Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. 1040ez tax instructions The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. 1040ez tax instructions The partnership is required to provide the organization this information on Schedule K-1. 1040ez tax instructions Example. 1040ez tax instructions An exempt educational organization is a partner in a partnership that operates a factory. 1040ez tax instructions The partnership also holds stock in a corporation. 1040ez tax instructions The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. 1040ez tax instructions Different tax years. 1040ez tax instructions   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. 1040ez tax instructions S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. 1040ez tax instructions For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. 1040ez tax instructions The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. 1040ez tax instructions Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. 1040ez tax instructions To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. 1040ez tax instructions Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). 1040ez tax instructions These organizations must figure unrelated business taxable income under special rules. 1040ez tax instructions Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. 1040ez tax instructions ). 1040ez tax instructions (See Exclusions under Income, earlier. 1040ez tax instructions ) Therefore, they are generally subject to unrelated business income tax on this income. 1040ez tax instructions The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. 1040ez tax instructions The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. 1040ez tax instructions Losses from nonexempt activities. 1040ez tax instructions   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. 1040ez tax instructions Example. 1040ez tax instructions A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. 1040ez tax instructions The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. 1040ez tax instructions Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. 1040ez tax instructions Modifications. 1040ez tax instructions   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). 1040ez tax instructions Exempt function income. 1040ez tax instructions   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. 1040ez tax instructions Exempt function income also includes income set aside for qualified purposes. 1040ez tax instructions Income that is set aside. 1040ez tax instructions   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. 1040ez tax instructions In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. 1040ez tax instructions   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. 1040ez tax instructions Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. 1040ez tax instructions These rules are explained in section 512(a)(3)(E)(ii). 1040ez tax instructions   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. 1040ez tax instructions In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. 1040ez tax instructions   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. 1040ez tax instructions However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. 1040ez tax instructions The income set aside must have been includible in gross income for that earlier year. 1040ez tax instructions Nonrecognition of gain. 1040ez tax instructions   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. 1040ez tax instructions The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. 1040ez tax instructions   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. 1040ez tax instructions Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. 1040ez tax instructions The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. 1040ez tax instructions For details, see section 512(a)(4) and the regulations under that section. 1040ez tax instructions Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. 1040ez tax instructions The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. 1040ez tax instructions All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. 1040ez tax instructions Excess qualifying specified payments. 1040ez tax instructions   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. 1040ez tax instructions Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. 1040ez tax instructions   If a controlled participant is not required to file a U. 1040ez tax instructions S. 1040ez tax instructions income tax return, the participant must ensure that the copy or copies of the Regulations section 1. 1040ez tax instructions 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. 1040ez tax instructions S. 1040ez tax instructions Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. 1040ez tax instructions S. 1040ez tax instructions Corporation or a Foreign Corporation Engaged in a U. 1040ez tax instructions S. 1040ez tax instructions Trade or Business, or any Form 8865, Return of U. 1040ez tax instructions S. 1040ez tax instructions Persons With Respect to Certain Foreign Partnerships, filed for that participant. 1040ez tax instructions Addition to tax for valuation misstatements. 1040ez tax instructions   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. 1040ez tax instructions See section 512(b)(13)(E)(ii) for more information. 1040ez tax instructions Net unrelated income. 1040ez tax instructions   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. 1040ez tax instructions Net unrelated loss. 1040ez tax instructions   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. 1040ez tax instructions Control. 1040ez tax instructions   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. 1040ez tax instructions For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. 1040ez tax instructions   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). 1040ez tax instructions Income from property financed with qualified 501(c)(3) bonds. 1040ez tax instructions If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. 1040ez tax instructions No deduction is allowed for interest on the private activity bond. 1040ez tax instructions See sections 150(b)(3) and (c) for more information. 1040ez tax instructions Disposition of property received from taxable subsidiary and used in unrelated business. 1040ez tax instructions A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). 1040ez tax instructions The assets are treated as if sold at fair market value. 1040ez tax instructions Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. 1040ez tax instructions S. 1040ez tax instructions and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. 1040ez tax instructions A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. 1040ez tax instructions However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. 1040ez tax instructions In such a case the built-in appreciation is preserved in the replacement property received in the transaction. 1040ez tax instructions A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). 1040ez tax instructions This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. 1040ez tax instructions In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. 1040ez tax instructions If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. 1040ez tax instructions If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. 1040ez tax instructions Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. 1040ez tax instructions Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. 1040ez tax instructions Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. 1040ez tax instructions The amount of income included is proportionate to the debt on the property. 1040ez tax instructions Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). 1040ez tax instructions It includes rental real estate, tangible personal property, and corporate stock. 1040ez tax instructions Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. 1040ez tax instructions The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. 1040ez tax instructions That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. 1040ez tax instructions Example 1. 1040ez tax instructions Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. 1040ez tax instructions The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. 1040ez tax instructions Example 2. 1040ez tax instructions X, an exempt organization, forms a partnership with A and B. 1040ez tax instructions The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. 1040ez tax instructions X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. 1040ez tax instructions The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. 1040ez tax instructions The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. 1040ez tax instructions The loan is secured by a mortgage on the entire office building. 1040ez tax instructions By agreement with Y bank, X is not personally liable for payment of the mortgage. 1040ez tax instructions X has acquisition indebtedness of $7 million. 1040ez tax instructions This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). 1040ez tax instructions Example 3. 1040ez tax instructions A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. 1040ez tax instructions The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. 1040ez tax instructions Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. 1040ez tax instructions The union has no outstanding debt on the property. 1040ez tax instructions The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. 1040ez tax instructions The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. 1040ez tax instructions Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. 1040ez tax instructions In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. 1040ez tax instructions Accordingly, the debt is not acquisition indebtedness. 1040ez tax instructions Change in use of property. 1040ez tax instructions   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. 1040ez tax instructions Example. 1040ez tax instructions Four years ago a university borrowed funds to acquire an apartment building as housing for married students. 1040ez tax instructions Last year, the university rented the apartment building to the public for nonexempt purposes. 1040ez tax instructions The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. 1040ez tax instructions Continued debt. 1040ez tax instructions   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. 1040ez tax instructions This is true even if the original property was not debt-financed property. 1040ez tax instructions Example. 1040ez tax instructions To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. 1040ez tax instructions The office building was not debt-financed property. 1040ez tax instructions The organization later sold the building for $1 million without repaying the $400,000 loan. 1040ez tax instructions It used the sale proceeds to buy an apartment building it rents to the general public. 1040ez tax instructions The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. 1040ez tax instructions Property acquired subject to mortgage or lien. 1040ez tax instructions   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. 1040ez tax instructions Example. 1040ez tax instructions An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. 1040ez tax instructions The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. 1040ez tax instructions Liens similar to a mortgage. 1040ez tax instructions   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. 1040ez tax instructions A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. 1040ez tax instructions However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. 1040ez tax instructions Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). 1040ez tax instructions Exception for property acquired by gift, bequest, or devise. 1040ez tax instructions   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. 1040ez tax instructions However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. 1040ez tax instructions   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). 1040ez tax instructions   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. 1040ez tax instructions Modifying existing debt. 1040ez tax instructions   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. 1040ez tax instructions When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. 1040ez tax instructions Extension or renewal. 1040ez tax instructions   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. 1040ez tax instructions   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. 1040ez tax instructions Debt increase. 1040ez tax instructions   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. 1040ez tax instructions Example. 1040ez tax instructions An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. 1040ez tax instructions The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. 1040ez tax instructions A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. 1040ez tax instructions Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. 1040ez tax instructions These include the following. 1040ez tax instructions Debts incurred in performing an exempt purpose. 1040ez tax instructions Annuity obligations. 1040ez tax instructions Securities loans. 1040ez tax instructions Real property debts of qualified organizations. 1040ez tax instructions Certain Federal financing. 1040ez tax instructions Debt incurred in performing exempt purpose. 1040ez tax instructions   A debt incurred in performing an exempt purpose is not acquisition indebtedness. 1040ez tax instructions For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. 1040ez tax instructions Annuity obligation. 1040ez tax instructions   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. 1040ez tax instructions It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. 1040ez tax instructions Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. 1040ez tax instructions It must be payable over the lives of either one or two individuals living when issued. 1040ez tax instructions It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. 1040ez tax instructions Example. 1040ez tax instructions X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. 1040ez tax instructions In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. 1040ez tax instructions The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. 1040ez tax instructions The present value of this annuity is $81,156, determined from IRS valuation tables. 1040ez tax instructions Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. 1040ez tax instructions Securities loans. 1040ez tax instructions   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). 1040ez tax instructions This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. 1040ez tax instructions   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from