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2011 Tax Return Form 1040

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2011 Tax Return Form 1040

2011 tax return form 1040 4. 2011 tax return form 1040   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. 2011 tax return form 1040 Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. 2011 tax return form 1040 Net unrelated income. 2011 tax return form 1040 Net unrelated loss. 2011 tax return form 1040 Control. 2011 tax return form 1040 Income from property financed with qualified 501(c)(3) bonds. 2011 tax return form 1040 Disposition of property received from taxable subsidiary and used in unrelated business. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. 2011 tax return form 1040 Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. 2011 tax return form 1040 Dividends, interest, annuities and other investment income. 2011 tax return form 1040   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. 2011 tax return form 1040 Exception for insurance activity income of a controlled foreign corporation. 2011 tax return form 1040   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. 2011 tax return form 1040 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. 2011 tax return form 1040 Certain exceptions to this rule apply. 2011 tax return form 1040 For more information, see section 512(b)(17). 2011 tax return form 1040 Other exceptions. 2011 tax return form 1040   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). 2011 tax return form 1040 Income from lending securities. 2011 tax return form 1040   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. 2011 tax return form 1040   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. 2011 tax return form 1040 The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. 2011 tax return form 1040 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. 2011 tax return form 1040 Royalties. 2011 tax return form 1040   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. 2011 tax return form 1040   To be considered a royalty, a payment must relate to the use of a valuable right. 2011 tax return form 1040 Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. 2011 tax return form 1040 Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. 2011 tax return form 1040 However, royalties do not include payments for personal services. 2011 tax return form 1040 Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. 2011 tax return form 1040   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. 2011 tax return form 1040   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Exceptions. 2011 tax return form 1040   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). 2011 tax return form 1040 Rents. 2011 tax return form 1040   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. 2011 tax return form 1040 Rents from personal property are not excluded. 2011 tax return form 1040 However, special rules apply to “mixed leases” of both real and personal property. 2011 tax return form 1040 Mixed leases. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. 2011 tax return form 1040   Property is placed in service when the lessee first may use it under the terms of a lease. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040   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). 2011 tax return form 1040 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. 2011 tax return form 1040 Exception for rents based on net profit. 2011 tax return form 1040   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. 2011 tax return form 1040 Exception for income from personal services. 2011 tax return form 1040   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. 2011 tax return form 1040 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. 2011 tax return form 1040 Other exceptions. 2011 tax return form 1040   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. 2011 tax return form 1040 ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). 2011 tax return form 1040 See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. 2011 tax return form 1040 Income from research. 2011 tax return form 1040   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. 2011 tax return form 1040 However, the extent of the exclusion depends on the nature of the organization and the type of research. 2011 tax return form 1040   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. 2011 tax return form 1040   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. 2011 tax return form 1040   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. 2011 tax return form 1040   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. 2011 tax return form 1040 In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. 2011 tax return form 1040 Gains and losses from disposition of property. 2011 tax return form 1040   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. 2011 tax return form 1040   It should be noted that the last exception relates only to cut timber. 2011 tax return form 1040 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. 2011 tax return form 1040 Lapse or termination of options. 2011 tax return form 1040   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. 2011 tax return form 1040 The exclusion applies only if the option is written in connection with the exempt organization's investment activities. 2011 tax return form 1040 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. 2011 tax return form 1040 Exception. 2011 tax return form 1040   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. 2011 tax return form 1040 Gain or loss on disposition of certain brownfield property. 2011 tax return form 1040   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. 2011 tax return form 1040 See sections 512(b)(19) and 514(b)(1)(E). 2011 tax return form 1040 Income from services provided under federal license. 2011 tax return form 1040   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. 2011 tax return form 1040   This exclusion applies only if the following requirements are met. 2011 tax return form 1040 The trade or business must have been operated by the order or by the institution before May 27, 1959. 2011 tax return form 1040 The trade or business must provide services under a license issued by a federal regulatory agency. 2011 tax return form 1040 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. 2011 tax return form 1040 The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. 2011 tax return form 1040 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. 2011 tax return form 1040 Exception. 2011 tax return form 1040    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). 2011 tax return form 1040 Member income of mutual or cooperative electric companies. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Exception. 2011 tax return form 1040   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. 2011 tax return form 1040 The limit on dues paid by an associate member is $148 for 2011. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 They cannot be directly connected with excluded income. 2011 tax return form 1040 For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. 2011 tax return form 1040 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. 2011 tax return form 1040 For an exception, see Expenses attributable to exploitation of exempt activities, later. 2011 tax return form 1040 Expenses attributable solely to unrelated business. 2011 tax return form 1040   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. 2011 tax return form 1040   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. 2011 tax return form 1040 Expenses attributable to dual use of facilities or personnel. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 Example 1. 2011 tax return form 1040 A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. 2011 tax return form 1040 The school provides the tennis courts, housing, and dining facilities. 2011 tax return form 1040 The contracted individual hires the instructors, recruits campers, and provides supervision. 2011 tax return form 1040 The income the school receives from this activity is from a dual use of the facilities and personnel. 2011 tax return form 1040 The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. 2011 tax return form 1040 Example 2. 2011 tax return form 1040 An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. 2011 tax return form 1040 The president devotes approximately 10% of his time to the unrelated business. 2011 tax return form 1040 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. 2011 tax return form 1040 Expenses attributable to exploitation of exempt activities. 2011 tax return form 1040   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. 2011 tax return form 1040 (See Exploitation of exempt functions under Not substantially related in chapter 3. 2011 tax return form 1040 ) 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. 2011 tax return form 1040 Exception. 2011 tax return form 1040   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. 2011 tax return form 1040 The unrelated business exploits the exempt activity. 2011 tax return form 1040 The unrelated business is a type normally conducted for profit by taxable organizations. 2011 tax return form 1040 The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. 2011 tax return form 1040 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. 2011 tax return form 1040   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. 2011 tax return form 1040 ) Figuring unrelated business taxable income (UBTI). 2011 tax return form 1040   The UBTI of an advertising activity is the amount shown in the following chart. 2011 tax return form 1040 IF gross advertising income is . 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 THEN UBTI is . 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 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. 2011 tax return form 1040 Equal to or less than direct advertising costs Zero. 2011 tax return form 1040   • Circulation income and readership costs are not taken into account. 2011 tax return form 1040   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. 2011 tax return form 1040   The terms used in the chart are explained in the following discussions. 2011 tax return form 1040 Periodical Income Gross advertising income. 2011 tax return form 1040   This is all the income from the unrelated advertising activities of an exempt organization periodical. 2011 tax return form 1040 Circulation income. 2011 tax return form 1040   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). 2011 tax return form 1040 It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. 2011 tax return form 1040 It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. 2011 tax return form 1040 Allocable membership receipts. 2011 tax return form 1040   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. 2011 tax return form 1040   The amount used to allocate membership receipts is the amount shown in the following chart. 2011 tax return form 1040   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. 2011 tax return form 1040 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. 2011 tax return form 1040 IF . 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 THEN the amount used to allocate membership receipts is . 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 U is an exempt scientific organization with 10,000 members who pay annual dues of $15. 2011 tax return form 1040 One of U's activities is publishing a monthly periodical distributed to all of its members. 2011 tax return form 1040 U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. 2011 tax return form 1040 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. 2011 tax return form 1040 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). 2011 tax return form 1040 Example 2. 2011 tax return form 1040 Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). 2011 tax return form 1040 U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). 2011 tax return form 1040 Periodical Costs Direct advertising costs. 2011 tax return form 1040   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040 Readership costs. 2011 tax return form 1040   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. 2011 tax return form 1040 Costs partly attributable to other activities. 2011 tax return form 1040   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. 2011 tax return form 1040 When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. 2011 tax return form 1040 The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. 2011 tax return form 1040 Consolidated treatment, once adopted, must be followed consistently and is binding. 2011 tax return form 1040 This treatment can be changed only with the consent of the Internal Revenue Service. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Example. 2011 tax return form 1040 Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. 2011 tax return form 1040 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. 2011 tax return form 1040 It is not engaged in for profit. 2011 tax return form 1040 Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. 2011 tax return form 1040 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. 2011 tax return form 1040 Modifications Net operating loss deduction. 2011 tax return form 1040   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. 2011 tax return form 1040 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. 2011 tax return form 1040 For example, a loss from an unrelated trade or business is not diminished because dividend income was received. 2011 tax return form 1040   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. 2011 tax return form 1040 This would reduce the loss that could be applied against unrelated business income of prior or future tax years. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040   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. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040 Charitable contributions deduction. 2011 tax return form 1040   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. 2011 tax return form 1040   To be deductible, the contribution must be paid to another qualified organization. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040 Deduction limits. 2011 tax return form 1040   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. 2011 tax return form 1040 See the Instructions for Form 990-T for more information. 2011 tax return form 1040    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. 2011 tax return form 1040 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. 2011 tax return form 1040   Contributions in excess of the limits just described may be carried over to the next 5 tax years. 2011 tax return form 1040 A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. 2011 tax return form 1040 Suspension of deduction limits for farmers and ranchers. 2011 tax return form 1040   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. 2011 tax return form 1040 See the Instructions for Form 990-T for details. 2011 tax return form 1040 Specific deduction. 2011 tax return form 1040   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. 2011 tax return form 1040 However, the specific deduction is not allowed in computing an NOL or the NOL deduction. 2011 tax return form 1040   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. 2011 tax return form 1040 Exception. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 The local units cannot file separate returns. 2011 tax return form 1040 However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. 2011 tax return form 1040 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. 2011 tax return form 1040 Example. 2011 tax return form 1040 X is an association of churches and is divided into local units A, B, C, and D. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 No distinction is made between limited and general partners. 2011 tax return form 1040 The organization is required to notify the partnership of its tax-exempt status. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 The partnership is required to provide the organization this information on Schedule K-1. 2011 tax return form 1040 Example. 2011 tax return form 1040 An exempt educational organization is a partner in a partnership that operates a factory. 2011 tax return form 1040 The partnership also holds stock in a corporation. 2011 tax return form 1040 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. 2011 tax return form 1040 Different tax years. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 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). 2011 tax return form 1040 These organizations must figure unrelated business taxable income under special rules. 2011 tax return form 1040 Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. 2011 tax return form 1040 ). 2011 tax return form 1040 (See Exclusions under Income, earlier. 2011 tax return form 1040 ) Therefore, they are generally subject to unrelated business income tax on this income. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Losses from nonexempt activities. 2011 tax return form 1040   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. 2011 tax return form 1040 Example. 2011 tax return form 1040 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. 2011 tax return form 1040 The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. 2011 tax return form 1040 Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. 2011 tax return form 1040 Modifications. 2011 tax return form 1040   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). 2011 tax return form 1040 Exempt function income. 2011 tax return form 1040   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. 2011 tax return form 1040 Exempt function income also includes income set aside for qualified purposes. 2011 tax return form 1040 Income that is set aside. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040 Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. 2011 tax return form 1040 These rules are explained in section 512(a)(3)(E)(ii). 2011 tax return form 1040   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. 2011 tax return form 1040 In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 The income set aside must have been includible in gross income for that earlier year. 2011 tax return form 1040 Nonrecognition of gain. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 For details, see section 512(a)(4) and the regulations under that section. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. 2011 tax return form 1040 Excess qualifying specified payments. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   If a controlled participant is not required to file a U. 2011 tax return form 1040 S. 2011 tax return form 1040 income tax return, the participant must ensure that the copy or copies of the Regulations section 1. 2011 tax return form 1040 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. 2011 tax return form 1040 S. 2011 tax return form 1040 Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. 2011 tax return form 1040 S. 2011 tax return form 1040 Corporation or a Foreign Corporation Engaged in a U. 2011 tax return form 1040 S. 2011 tax return form 1040 Trade or Business, or any Form 8865, Return of U. 2011 tax return form 1040 S. 2011 tax return form 1040 Persons With Respect to Certain Foreign Partnerships, filed for that participant. 2011 tax return form 1040 Addition to tax for valuation misstatements. 2011 tax return form 1040   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. 2011 tax return form 1040 See section 512(b)(13)(E)(ii) for more information. 2011 tax return form 1040 Net unrelated income. 2011 tax return form 1040   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. 2011 tax return form 1040 Net unrelated loss. 2011 tax return form 1040   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. 2011 tax return form 1040 Control. 2011 tax return form 1040   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. 2011 tax return form 1040 For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. 2011 tax return form 1040   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). 2011 tax return form 1040 Income from property financed with qualified 501(c)(3) bonds. 2011 tax return form 1040 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. 2011 tax return form 1040 No deduction is allowed for interest on the private activity bond. 2011 tax return form 1040 See sections 150(b)(3) and (c) for more information. 2011 tax return form 1040 Disposition of property received from taxable subsidiary and used in unrelated business. 2011 tax return form 1040 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). 2011 tax return form 1040 The assets are treated as if sold at fair market value. 2011 tax return form 1040 Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. 2011 tax return form 1040 S. 2011 tax return form 1040 and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 In such a case the built-in appreciation is preserved in the replacement property received in the transaction. 2011 tax return form 1040 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). 2011 tax return form 1040 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. 2011 tax return form 1040 In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. 2011 tax return form 1040 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. 2011 tax return form 1040 If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. 2011 tax return form 1040 Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 The amount of income included is proportionate to the debt on the property. 2011 tax return form 1040 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). 2011 tax return form 1040 It includes rental real estate, tangible personal property, and corporate stock. 2011 tax return form 1040 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. 2011 tax return form 1040 The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. 2011 tax return form 1040 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. 2011 tax return form 1040 Example 1. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Example 2. 2011 tax return form 1040 X, an exempt organization, forms a partnership with A and B. 2011 tax return form 1040 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. 2011 tax return form 1040 X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. 2011 tax return form 1040 The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. 2011 tax return form 1040 The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. 2011 tax return form 1040 The loan is secured by a mortgage on the entire office building. 2011 tax return form 1040 By agreement with Y bank, X is not personally liable for payment of the mortgage. 2011 tax return form 1040 X has acquisition indebtedness of $7 million. 2011 tax return form 1040 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). 2011 tax return form 1040 Example 3. 2011 tax return form 1040 A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. 2011 tax return form 1040 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. 2011 tax return form 1040 Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. 2011 tax return form 1040 The union has no outstanding debt on the property. 2011 tax return form 1040 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. 2011 tax return form 1040 The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. 2011 tax return form 1040 Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. 2011 tax return form 1040 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. 2011 tax return form 1040 Accordingly, the debt is not acquisition indebtedness. 2011 tax return form 1040 Change in use of property. 2011 tax return form 1040   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. 2011 tax return form 1040 Example. 2011 tax return form 1040 Four years ago a university borrowed funds to acquire an apartment building as housing for married students. 2011 tax return form 1040 Last year, the university rented the apartment building to the public for nonexempt purposes. 2011 tax return form 1040 The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. 2011 tax return form 1040 Continued debt. 2011 tax return form 1040   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. 2011 tax return form 1040 This is true even if the original property was not debt-financed property. 2011 tax return form 1040 Example. 2011 tax return form 1040 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. 2011 tax return form 1040 The office building was not debt-financed property. 2011 tax return form 1040 The organization later sold the building for $1 million without repaying the $400,000 loan. 2011 tax return form 1040 It used the sale proceeds to buy an apartment building it rents to the general public. 2011 tax return form 1040 The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. 2011 tax return form 1040 Property acquired subject to mortgage or lien. 2011 tax return form 1040   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. 2011 tax return form 1040 Example. 2011 tax return form 1040 An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. 2011 tax return form 1040 The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. 2011 tax return form 1040 Liens similar to a mortgage. 2011 tax return form 1040   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. 2011 tax return form 1040 A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. 2011 tax return form 1040 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. 2011 tax return form 1040 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). 2011 tax return form 1040 Exception for property acquired by gift, bequest, or devise. 2011 tax return form 1040   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. 2011 tax return form 1040 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. 2011 tax return form 1040   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). 2011 tax return form 1040   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. 2011 tax return form 1040 Modifying existing debt. 2011 tax return form 1040   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. 2011 tax return form 1040 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. 2011 tax return form 1040 Extension or renewal. 2011 tax return form 1040   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. 2011 tax return form 1040   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. 2011 tax return form 1040 Debt increase. 2011 tax return form 1040   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. 2011 tax return form 1040 Example. 2011 tax return form 1040 An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. 2011 tax return form 1040 These include the following. 2011 tax return form 1040 Debts incurred in performing an exempt purpose. 2011 tax return form 1040 Annuity obligations. 2011 tax return form 1040 Securities loans. 2011 tax return form 1040 Real property debts of qualified organizations. 2011 tax return form 1040 Certain Federal financing. 2011 tax return form 1040 Debt incurred in performing exempt purpose. 2011 tax return form 1040   A debt incurred in performing an exempt purpose is not acquisition indebtedness. 2011 tax return form 1040 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. 2011 tax return form 1040 Annuity obligation. 2011 tax return form 1040   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. 2011 tax return form 1040 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. 2011 tax return form 1040 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. 2011 tax return form 1040 It must be payable over the lives of either one or two individuals living when issued. 2011 tax return form 1040 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. 2011 tax return form 1040 Example. 2011 tax return form 1040 X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. 2011 tax return form 1040 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. 2011 tax return form 1040 The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. 2011 tax return form 1040 The present value of this annuity is $81,156, determined from IRS valuation tables. 2011 tax return form 1040 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. 2011 tax return form 1040 Securities loans. 2011 tax return form 1040   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). 2011 tax return form 1040 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. 2011 tax return form 1040   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from
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Contact My Local Office in Indiana

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City Street Address Days/Hours of Service Telephone*
Bloomington 2017 S. Liberty Dr.
Bloomington, IN 47403

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

**This office will be open 9:00 a.m. - 3:30 p.m. on 4/2**

 

Services Provided

(812) 337-7600
Columbus 2425 Northpark Dr.
Columbus, IN 47203

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)
 

Services Provided

(812) 379-7400
Evansville 7409 Eagle Crest Blvd.
Evansville, IN 47715

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(812) 474-4800
Ft. Wayne 201 E. Rudisill Blvd.
Fort Wayne, IN 46806

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)

 

Services Provided

(260) 458-5000
Indianapolis 575 N. Pennsylvania St.
Indianapolis, IN 46204

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(317) 685-7500 
Lafayette  955 Mezzanine Drive
Suite B
Lafayette, IN 47905 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(765) 449-3880 
Merrillville  233 E. 84th Dr.
Merrillville, IN 46410 

Monday-Friday - 8:30 a.m.-4:30 p.m.


Services Provided

(219) 736-4378
 
Muncie  225 N. High St.
Muncie, IN 47305 

Monday-Friday 8:30 a.m.- 4:30 p.m. 
(Closed for lunch 12:30 p.m.- 1:30 p.m.)
 

Services Provided

(765) 747-5533 
South Bend  100 E Wayne St
South Bend, IN 46601 

Monday-Friday - 8:30 a.m.-4:30 p.m.  
 

Services Provided

(574) 236-8149 
Terre Haute  801 Wabash Ave. 
Terre Haute, IN 47807 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(812) 231-6521 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (317) 685-7840 in Indianapolis or 1-877-777-4778 elsewhere, or see  Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see  Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
575 N. Pennsylvania St.
Room 573, Stop WI-665
Indianapolis, IN 46204

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The 2011 Tax Return Form 1040

2011 tax return form 1040 19. 2011 tax return form 1040   Education- Related Adjustments Table of Contents Introduction Useful Items - You may want to see: Student Loan Interest DeductionStudent Loan Interest Defined Can You Claim the Deduction How Much Can You Deduct How Do You Figure the Deduction Tuition and Fees DeductionCan You Claim the Deduction What Expenses Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses How Much Can You Deduct Educator Expenses Introduction This chapter discusses the education-related adjustment you can deduct in figuring your adjusted gross income. 2011 tax return form 1040 This chapter covers the student loan interest deduction, tuition and fees deduction, and the deduction for educator expenses. 2011 tax return form 1040 Useful Items - You may want to see: Publication 970 Tax Benefits for Education Student Loan Interest Deduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. 2011 tax return form 1040 However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. 2011 tax return form 1040 For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. 2011 tax return form 1040 This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. 2011 tax return form 1040 Table 19-1 summarizes the features of the student loan interest deduction. 2011 tax return form 1040 Table 19-1. 2011 tax return form 1040 Student Loan Interest Deduction at a Glance Do not rely on this table alone. 2011 tax return form 1040 Refer to the text for more details. 2011 tax return form 1040 Feature Description Maximum benefit You can reduce your income subject to tax by up to $2,500. 2011 tax return form 1040 Loan qualifications Your student loan: •  must have been taken out solely to pay qualified education expenses, and   • cannot be from a related person or made under a qualified employer plan. 2011 tax return form 1040 Student qualifications The student must be: • you, your spouse, or your dependent, and   • enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution. 2011 tax return form 1040 Time limit on deduction You can deduct interest paid during the remaining period of your student loan. 2011 tax return form 1040 Phaseout The amount of your deduction depends on your income level. 2011 tax return form 1040 Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. 2011 tax return form 1040 It includes both required and voluntary interest payments. 2011 tax return form 1040 Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period when the student is an eligible student. 2011 tax return form 1040 Loans from the following sources are not qualified student loans. 2011 tax return form 1040 A related person. 2011 tax return form 1040 A qualified employer plan. 2011 tax return form 1040 Exceptions. 2011 tax return form 1040   For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents. 2011 tax return form 1040 An individual can be your dependent even if you are the dependent of another taxpayer. 2011 tax return form 1040 An individual can be your dependent even if the individual files a joint return with a spouse. 2011 tax return form 1040 An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). 2011 tax return form 1040    Reasonable period of time. 2011 tax return form 1040   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. 2011 tax return form 1040   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. 2011 tax return form 1040 The expenses relate to a specific academic period. 2011 tax return form 1040 The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. 2011 tax return form 1040   If neither of the above situations applies, the reasonable period of time is determined based on all the relevant facts and circumstances. 2011 tax return form 1040 Academic period. 2011 tax return form 1040   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. 2011 tax return form 1040 In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. 2011 tax return form 1040 Eligible student. 2011 tax return form 1040   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. 2011 tax return form 1040 Enrolled at least half-time. 2011 tax return form 1040   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. 2011 tax return form 1040   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. 2011 tax return form 1040 However, the standard may not be lower than any of those established by the U. 2011 tax return form 1040 S. 2011 tax return form 1040 Department of Education under the Higher Education Act of 1965. 2011 tax return form 1040 Related person. 2011 tax return form 1040   You cannot deduct interest on a loan you get from a related person. 2011 tax return form 1040 Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. 2011 tax return form 1040 ), Your lineal descendants (children, grandchildren, etc. 2011 tax return form 1040 ), and Certain corporations, partnerships, trusts, and exempt organizations. 2011 tax return form 1040 Qualified employer plan. 2011 tax return form 1040   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. 2011 tax return form 1040 Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. 2011 tax return form 1040 They include amounts paid for the following items. 2011 tax return form 1040 Tuition and fees. 2011 tax return form 1040 Room and board. 2011 tax return form 1040 Books, supplies, and equipment. 2011 tax return form 1040 Other necessary expenses (such as transportation). 2011 tax return form 1040 The cost of room and board qualifies only to the extent that it is not more than: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. 2011 tax return form 1040 Eligible educational institution. 2011 tax return form 1040   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 2011 tax return form 1040 S. 2011 tax return form 1040 Department of Education. 2011 tax return form 1040 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 2011 tax return form 1040   Certain educational institutions located outside the United States also participate in the U. 2011 tax return form 1040 S. 2011 tax return form 1040 Department of Education's Federal Student Aid (FSA) programs. 2011 tax return form 1040   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. 2011 tax return form 1040   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. 2011 tax return form 1040 The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. 2011 tax return form 1040    The educational institution should be able to tell you if it is an eligible educational institution. 2011 tax return form 1040 Adjustments to qualified education expenses. 2011 tax return form 1040   You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowships). 2011 tax return form 1040 See chapter 4 of Publication 970 for details. 2011 tax return form 1040 Include as Interest In addition to simple interest on the loan, certain loan origination fees, capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans can be student loan interest if all other requirements are met. 2011 tax return form 1040 Loan origination fee. 2011 tax return form 1040   In general, this is a one-time fee charged by the lender when a loan is made. 2011 tax return form 1040 To be deductible as interest, the fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. 2011 tax return form 1040 A loan origination fee treated as interest accrues over the life of the loan. 2011 tax return form 1040 Capitalized interest. 2011 tax return form 1040    This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. 2011 tax return form 1040 Interest on revolving lines of credit. 2011 tax return form 1040   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. 2011 tax return form 1040 See Qualified Education Expenses , earlier. 2011 tax return form 1040 Interest on refinanced student loans. 2011 tax return form 1040   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. 2011 tax return form 1040 If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. 2011 tax return form 1040 Voluntary interest payments. 2011 tax return form 1040   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. 2011 tax return form 1040 Do Not Include as Interest You cannot claim a student loan interest deduction for any of the following items. 2011 tax return form 1040 Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. 2011 tax return form 1040 Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. 2011 tax return form 1040 Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. 2011 tax return form 1040 For more information, see Student Loan Repayment Assistance in chapter 5 of Publication 970. 2011 tax return form 1040 Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. 2011 tax return form 1040 Your filing status is any filing status except married filing separately. 2011 tax return form 1040 No one else is claiming an exemption for you on his or her tax return. 2011 tax return form 1040 You are legally obligated to pay interest on a qualified student loan. 2011 tax return form 1040 You paid interest on a qualified student loan. 2011 tax return form 1040 Interest paid by others. 2011 tax return form 1040   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. 2011 tax return form 1040 See chapter 4 of Publication 970 for more information. 2011 tax return form 1040 No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest). 2011 tax return form 1040 How Much Can You Deduct Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. 2011 tax return form 1040 However, the amount determined above is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). 2011 tax return form 1040 You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). 2011 tax return form 1040 For details on figuring your MAGI, see chapter 4 of Publication 970. 2011 tax return form 1040 How Do You Figure the Deduction Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. 2011 tax return form 1040 However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 in chapter 4 of Publication 970. 2011 tax return form 1040 To help you figure your student loan interest deduction, you should receive Form 1098-E, Student Loan Interest Statement. 2011 tax return form 1040 Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. 2011 tax return form 1040 For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. 2011 tax return form 1040 Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. 2011 tax return form 1040 However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. 2011 tax return form 1040 For information on allocating payments between interest and principal, see chapter 4 of Publication 970. 2011 tax return form 1040 To claim the deduction, enter the allowable amount on Form 1040, line 33, or Form 1040A, line 18. 2011 tax return form 1040 Tuition and Fees Deduction You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). 2011 tax return form 1040 You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. 2011 tax return form 1040 The qualified expenses must be for higher education, as explained later under What Expenses Qualify . 2011 tax return form 1040 The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. 2011 tax return form 1040 Table 19-2 summarizes the features of the tuition and fees deduction. 2011 tax return form 1040 You may be able to take a credit for your education expenses instead of a deduction. 2011 tax return form 1040 You can choose the one that will give you the lower tax. 2011 tax return form 1040 See chapter 35, Education Credits, for details about the credits. 2011 tax return form 1040 Can You Claim the Deduction The following rules will help you determine if you can claim the tuition and fees deduction. 2011 tax return form 1040 Who Can Claim the Deduction Generally, you can claim the tuition and fees deduction if all three of the following requirements are met. 2011 tax return form 1040 You paid qualified education expenses of higher education in 2013 for academic periods beginning in 2013 and those beginning in the first three months of 2014. 2011 tax return form 1040 You paid the education expenses for an eligible student. 2011 tax return form 1040 The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption (defined in chapter 3) on your tax return. 2011 tax return form 1040 Qualified education expenses are defined under What Expenses Qualify . 2011 tax return form 1040 Eligible students are defined later under Who Is an Eligible Student . 2011 tax return form 1040 Who Cannot Claim the Deduction You cannot claim the tuition and fees deduction if any of the following apply. 2011 tax return form 1040 Your filing status is married filing separately. 2011 tax return form 1040 Another person can claim an exemption for you as a dependent on his or her tax return. 2011 tax return form 1040 You cannot take the deduction even if the other person does not actually claim that exemption. 2011 tax return form 1040 Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return). 2011 tax return form 1040 You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. 2011 tax return form 1040 More information on nonresident aliens can be found in Publication 519, U. 2011 tax return form 1040 S. 2011 tax return form 1040 Tax Guide for Aliens. 2011 tax return form 1040 You or anyone else claims an American opportunity or lifetime learning credit in 2013 with respect to expenses of the student for whom the qualified education expenses were paid. 2011 tax return form 1040 However, a state tax credit will not disqualify you from claiming a tuition and fees deduction. 2011 tax return form 1040 Table 19-2. 2011 tax return form 1040 Tuition and Fees Deduction at a Glance Do not rely on this table alone. 2011 tax return form 1040 Refer to the text for more details. 2011 tax return form 1040 Question   Answer What is the maximum benefit?   You can reduce your income subject to tax by up to $4,000. 2011 tax return form 1040 Where is the deduction taken?   As an adjustment to income on Form 1040, line 34, or Form 1040A, line 19. 2011 tax return form 1040 For whom must the expenses be paid?   A student enrolled in an eligible educational institution who is either: you, your spouse, or your dependent for whom you claim an exemption. 2011 tax return form 1040 What tuition and fees are deductible?   Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board. 2011 tax return form 1040 What Expenses Qualify The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. 2011 tax return form 1040 Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period (defined earlier under Student Loan Interest Deduction ) beginning in 2013 or in the first 3 months of 2014. 2011 tax return form 1040 Payments with borrowed funds. 2011 tax return form 1040   You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. 2011 tax return form 1040 Use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. 2011 tax return form 1040 Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. 2011 tax return form 1040 Student withdraws from class(es). 2011 tax return form 1040   You can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws. 2011 tax return form 1040 Qualified Education Expenses For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. 2011 tax return form 1040 Eligible educational institution. 2011 tax return form 1040   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 2011 tax return form 1040 S. 2011 tax return form 1040 Department of Education. 2011 tax return form 1040 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 2011 tax return form 1040 The educational institution should be able to tell you if it is an eligible educational institution. 2011 tax return form 1040   Certain educational institutions located outside the United States also participate in the U. 2011 tax return form 1040 S. 2011 tax return form 1040 Department of Education's Federal Student Aid (FSA) programs. 2011 tax return form 1040 Academic period. 2011 tax return form 1040    An academic period is any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible educational institution. 2011 tax return form 1040 If an eligible educational institution uses credit hours and does not have academic terms, each payment period may be treated as an academic period. 2011 tax return form 1040 Related expenses. 2011 tax return form 1040   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses for the tuition and fees deduction only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. 2011 tax return form 1040 Prepaid expenses. 2011 tax return form 1040   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring the tuition and fees deduction. 2011 tax return form 1040 See Academic period, earlier. 2011 tax return form 1040 For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring the tuition and fees deduction for 2013 only if you meet all the other requirements. 2011 tax return form 1040    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 tuition and fees deduction. 2011 tax return form 1040 No Double Benefit Allowed You cannot do any of the following. 2011 tax return form 1040 Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense. 2011 tax return form 1040 Deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American opportunity or lifetime learning credit for that same student in the same year. 2011 tax return form 1040 Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). 2011 tax return form 1040 For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. 2011 tax return form 1040 See Figuring the Taxable Portion of a Distribution in chapter 7 (Coverdell ESA) and chapter 8 (QTP) of Publication 970. 2011 tax return form 1040 Deduct qualified education expenses that have been paid with tax-free interest on U. 2011 tax return form 1040 S. 2011 tax return form 1040 savings bonds (Form 8815). 2011 tax return form 1040 See Figuring the Tax-Free Amount in chapter 10 of Publication 970. 2011 tax return form 1040 Deduct qualified education expenses that have been paid with tax-free educational assistance such as a scholarship, grant, or employer-provided educational assistance. 2011 tax return form 1040 See Adjustments to qualified education expenses, later. 2011 tax return form 1040 Adjustments to qualified education expenses. 2011 tax return form 1040   For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. 2011 tax return form 1040 The result is the amount of adjusted qualified education expenses for each student. 2011 tax return form 1040 Tax-free educational assistance. 2011 tax return form 1040   For tax-free educational assistance you received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance to that academic period. 2011 tax return form 1040 See Academic period, earlier. 2011 tax return form 1040   This includes: The tax-free part of scholarships and fellowships, including Pell grants (see chapter 1 of Publication 970), The tax-free part of any employer-provided educational assistance (see chapter 11 of Publication 970), Veterans' educational assistance (see chapter 1 of Publication 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 2011 tax return form 1040 Generally, any scholarship or fellowship you receive is treated as tax-free educational assistance. 2011 tax return form 1040 However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent you include it in gross income (if you are required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 2011 tax return form 1040 970, chapter 1. 2011 tax return form 1040 The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 2011 tax return form 1040 970, chapter 1. 2011 tax return form 1040 You may be able to increase the combined value of your tuition and fees deduction and certain educational assistance if you include some or all of the educational assistance in income in the year it is received. 2011 tax return form 1040 For details, see Adjustments to Qualified Education Expenses in chapter 6 of Pub. 2011 tax return form 1040 970. 2011 tax return form 1040 Some tax-free educational assistance received in 2013 may be treated as a refund of qualified education expenses paid in 2013. 2011 tax return form 1040 This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). 2011 tax return form 1040 If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. 2011 tax return form 1040 If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. 2011 tax return form 1040 Refunds. 2011 tax return form 1040   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or may require you to include some or all of the refund in your gross income for the year the refund is received. 2011 tax return form 1040 See chapter 6 of Pub. 2011 tax return form 1040 970 for more information. 2011 tax return form 1040 Some tax-free educational assistance received after 2013 may be treated as a refund. 2011 tax return form 1040 See Tax-free educational assistance, earlier. 2011 tax return form 1040 Refunds received in 2013. 2011 tax return form 1040    For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. 2011 tax return form 1040 Refunds received after 2013 but before your income tax return is filed. 2011 tax return form 1040   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. 2011 tax return form 1040 Refunds received after 2013 and after your income tax return is filed. 2011 tax return form 1040   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received after you file your 2013 income tax return, you may need to include some or all of the refund in your gross income for the year the refund is received. 2011 tax return form 1040 See chapter 6 of Pub. 2011 tax return form 1040 970 for more information. 2011 tax return form 1040 Coordination with Coverdell education savings accounts and qualified tuition programs. 2011 tax return form 1040    Reduce your qualified education expenses by any qualified education expenses used to figure the exclusion from gross income of (a) interest received under an education savings bond program, or (b) any distribution from a Coverdell education savings account or qualified tuition program (QTP). 2011 tax return form 1040 For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. 2011 tax return form 1040 Amounts that do not reduce qualified education expenses. 2011 tax return form 1040   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. 2011 tax return form 1040   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. 2011 tax return form 1040 The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses. 2011 tax return form 1040 The use of the money is not restricted. 2011 tax return form 1040 Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. 2011 tax return form 1040 This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. 2011 tax return form 1040 Sports, games, hobbies, and noncredit courses. 2011 tax return form 1040   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. 2011 tax return form 1040 However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. 2011 tax return form 1040 Comprehensive or bundled fees. 2011 tax return form 1040   Some eligible educational institutions combine all of their fees for an academic period into one amount. 2011 tax return form 1040 If you do not receive, or do not have access to, an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. 2011 tax return form 1040 The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. 2011 tax return form 1040 See How Do You Figure the Deduction , later, for more information about Form 1098-T. 2011 tax return form 1040 Who Is an Eligible Student For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (defined earlier). 2011 tax return form 1040 Who Can Claim a Dependent's Expenses Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must: Have paid the expenses, and Claim an exemption for the student as a dependent. 2011 tax return form 1040 Table 19-3 summarizes who can claim the deduction. 2011 tax return form 1040 How Much Can You Deduct The maximum tuition and fees deduction in 2013 is $4,000, $2,000, or $0, depending on the amount of your MAGI. 2011 tax return form 1040 For details on figuring your MAGI, see chapter 6 of Publication 970. 2011 tax return form 1040 How Do You Figure the Deduction Figure the deduction using Form 8917. 2011 tax return form 1040 To help you figure your tuition and fees deduction, you should receive Form 1098-T, Tuition Statement. 2011 tax return form 1040 Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. 2011 tax return form 1040 To claim the deduction, enter the allowable amount on Form 1040, line 34, or Form 1040A, line 19, and attach your completed Form 8917. 2011 tax return form 1040 Table 19-3. 2011 tax return form 1040 Who Can Claim a Dependent's Expenses Do not rely on this table alone. 2011 tax return form 1040 See Who Can Claim a Dependent's Expenses in chapter 6 of Publication 970. 2011 tax return form 1040 IF your dependent is an eligible student and you. 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 AND. 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 THEN. 2011 tax return form 1040 . 2011 tax return form 1040 . 2011 tax return form 1040 claim an exemption for your dependent you paid all qualified education expenses for your dependent only you can deduct the qualified education expenses that you paid. 2011 tax return form 1040 Your dependent cannot take a deduction. 2011 tax return form 1040 claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction. 2011 tax return form 1040 do not claim an exemption for your dependent you paid all qualified education expenses no one is allowed to take a deduction. 2011 tax return form 1040 do not claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction. 2011 tax return form 1040 Educator Expenses If you were an eligible educator in 2013, you can deduct on Form 1040, line 23, or Form 1040A, line 16, up to $250 of qualified expenses you paid in 2013. 2011 tax return form 1040 If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. 2011 tax return form 1040 However, neither spouse can deduct more than $250 of his or her qualified expenses on Form 1040, line 23, or Form 1040A, line 16. 2011 tax return form 1040 You may be able to deduct expenses that are more than the $250 (or $500) limit on Schedule A (Form 1040), line 21. 2011 tax return form 1040 Eligible educator. 2011 tax return form 1040   An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. 2011 tax return form 1040 Qualified expenses. 2011 tax return form 1040   Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. 2011 tax return form 1040 An ordinary expense is one that is common and accepted in your educational field. 2011 tax return form 1040 A necessary expense is one that is helpful and appropriate for your profession as an educator. 2011 tax return form 1040 An expense does not have to be required to be considered necessary. 2011 tax return form 1040   Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. 2011 tax return form 1040   You must reduce your qualified expenses by the following amounts. 2011 tax return form 1040 Excludable U. 2011 tax return form 1040 S. 2011 tax return form 1040 series EE and I savings bond interest from Form 8815. 2011 tax return form 1040 See Figuring the Tax-Free Amount in chapter 10 of Publication 970. 2011 tax return form 1040 Nontaxable qualified tuition program earnings or distributions. 2011 tax return form 1040 See Figuring the Taxable Portion of a Distribution in chapter 8 of Publication 970. 2011 tax return form 1040 Nontaxable distribution of earnings from a Coverdell education savings account. 2011 tax return form 1040 See Figuring the Taxable Portion of a Distribution in chapter 7 of Publication 970. 2011 tax return form 1040 Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2. 2011 tax return form 1040 Prev  Up  Next   Home   More Online Publications