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2012 Free Taxes Online

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2012 Free Taxes Online

2012 free taxes online 2. 2012 free taxes online   Filing Requirements and Required Disclosures Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Annual Information ReturnsSupporting Organization Annual Information Return Unrelated Business Income Tax ReturnEstimated tax. 2012 free taxes online Employment Tax ReturnsException. 2012 free taxes online FUTA tax exception. 2012 free taxes online FICA tax exemption election. 2012 free taxes online Revoking the election. 2012 free taxes online Definitions. 2012 free taxes online Effect on employees. 2012 free taxes online Political Organization Income Tax ReturnExempt function. 2012 free taxes online Political organization taxable income. 2012 free taxes online Separate fund. 2012 free taxes online Failure to file. 2012 free taxes online Failure to pay on time. 2012 free taxes online Reporting Requirements for a Political OrganizationForm 8871 Form 8872 Donee Information ReturnCharitable deduction property. 2012 free taxes online Publicly traded securities. 2012 free taxes online Exceptions. 2012 free taxes online Form 8283. 2012 free taxes online Information Provided to DonorsDisclosure of Quid Pro Quo Contributions Acknowledgment of Charitable Contributions of $250 or More Acknowledgment of Vehicle Contribution Qualified Intellectual Property Report of Cash Received Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting FormsAnnual Information Return Public Inspection of Exemption Application Political Organization Reporting Forms Required DisclosuresSolicitation of Nondeductible Contributions Sales of Information or Services Available Free From Government Dues Used for Lobbying or Political Activities Prohibited Tax Shelter Transactions Miscellaneous RulesOrganizational Changes and Exempt Status Introduction Most exempt organizations (including private foundations) must file various returns and reports at some time during (or following the close of) their accounting period. 2012 free taxes online Topics - This chapter discusses: Annual information returns Unrelated business income tax return Employment tax returns Political organization income tax return Reporting requirements for a political organization Donee information return Information provided to donors Report of cash received Public inspection of exemption applications, annual returns, and political organizations reporting forms Required disclosures Miscellaneous rules Useful Items - You may want to see: Publication 15 Circular E, Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits 598 Tax on Unrelated Business Income of Exempt Organizations Form (and Instructions) 941 Employer's Quarterly Federal Tax Return 990 Return of Organization Exempt From Income Tax 990-EZ Short Form Return of Organization Exempt From Income Tax Schedule A (Form 990 or 990-EZ) Public Charity Status and Public Support Schedule B (Form 990, 990-EZ, or 990-PF) Schedule of Contributors Schedule C (Form 990 or 990-EZ) Political Campaign and Lobbying Activities Schedule D (Form 990) Supplemental Financial Statements Schedule E (Form 990 or 990-EZ) Schools Schedule F (Form 990) Statement of Activities Outside the United States Schedule G (Form 990 or 990-EZ) Supplemental Information Regarding Fundraising or Gaming Activities Schedule H (Form 990) Hospitals Schedule I (Form 990) Grants and Other Assistance to Organizations, Governments, and Individuals in the United States Schedule J (Form 990) Compensation Information Schedule K (Form 990) Supplemental Information on Tax-Exempt Bonds Schedule L (Form 990 or 990-EZ) Transactions With Interested Persons Schedule M (Form 990) Noncash Contributions Schedule N (Form 990 or 990-EZ) Liquidation, Termination, Dissolution, or Significant Disposition of Assets Schedule O (Form 990 or 990-EZ) Supplemental Information to Form 990 Schedule R (Form 990) Related Organizations and Unrelated Partnerships 990-PF Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation 990-BL Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons 990-T Exempt Organization Business Income Tax Return 990-W Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations 1120-POL U. 2012 free taxes online S. 2012 free taxes online Income Tax Return for Certain Political Organizations 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code 5768 Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation 6069 Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction 7004 Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns 8274 Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare Taxes 8282 Donee Information Return 8300 Report of Cash Payments Over $10,000 Received in a Trade or Business 8453-X Political Organization Declaration for Electronic Filing of Notice of Section 527 Status 8822-B Change of Address-Business 8868 Application for Extension of Time to File an Exempt Organization Return 8870 Information Return for Transfers Associated with Certain Personal Benefits Contracts 8871 Political Organization Notice of Section 527 Status 8872 Political Organization Report of Contributions and Expenditures 8886-T Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction 8899 Notice of Income from Donated Intellectual Property 8940 Request for Miscellaneous Determination See chapter 6 for information about getting these publications and forms. 2012 free taxes online Annual Information Returns Every organization exempt from federal income tax under section 501(a) must file an Annual Exempt Organization Return except: A church, an interchurch organization of local units of a church, a convention or association of churches, An integrated auxiliary of a church, A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs, A school below college level affiliated with a church or operated by a religious order, Church-affiliated mission societies if more than half of their activities are conducted in, or are directed at persons in, foreign countries, An exclusively religious activity of any religious order, A state institution, the income of which is excluded from gross income under section 115, A corporation described in section 501(c)(1) that is organized under an Act of Congress, an instrumentality of the United States, and is exempt from Federal income taxes, A stock bonus, pension, or profit-sharing trust that qualifies under section 401 (required to file Form 5500, Annual Return/Report of Employee Benefit Plan), A religious or apostolic organization described in section 501(d) (required to file Form 1065, U. 2012 free taxes online S. 2012 free taxes online Return of Partnership Income), A governmental unit or an affiliate of a governmental unit that meets the requirements of Revenue Procedure 95-48, 1995-2 C. 2012 free taxes online B. 2012 free taxes online 418, www. 2012 free taxes online irs. 2012 free taxes online gov/pub/irs-tege/rp1995-48. 2012 free taxes online pdf, A private foundation described in section 501(c)(3) and exempt under section 501(a) (required to file Form 990-PF, Return of Private Foundation), A political organization that is a state or local committee of a political party, a political committee of a state or local candidate, a caucus or association of state or local officials, or required to report under the Federal Election Campaign Act of 1971 as a political committee, An exempt organization (other than a private foundation) that normally has annual gross receipts of $50,000 or less, or A foreign organization, or an organization located in a U. 2012 free taxes online S. 2012 free taxes online possession, that normally has annual gross receipts from sources within the United States of $50,000 or less. 2012 free taxes online Supporting Organization Annual Information Return For tax years ending after August 17, 2006, all section 509(a)(3) supporting organizations are required to file Form 990 or 990-EZ with the IRS regardless of the organization's gross receipts, unless it qualifies as one of the following: An integrated auxiliary of a church; The exclusively religious activities of a religious order; or An organization, the gross receipts of which are normally not more than $5,000, that supports a section 509(a)(3) religious order. 2012 free taxes online If the organization is described in item (3) above, then it must submit Form 990-N (e-Postcard) unless it voluntarily files Form 990 or 990-EZ. 2012 free taxes online On its annual information return, at Part I, Schedule A (Form 990 or 990-EZ) a supporting organization must: List the section 509(a)(3) organizations to which it provides support, Indicate whether it is a Type I, Type II, or Type III supporting organization, and Certify that the organization is not controlled directly or indirectly by disqualified persons (other than by foundation managers and other than one or more publicly supported organizations). 2012 free taxes online Annual Electronic Filing Requirement for Small Tax-Exempt Organizations Small tax-exempt organizations with annual gross receipts normally $50,000 or less must submit Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, with the IRS each year, if they choose not to file a Form 990 or 990-EZ. 2012 free taxes online Form 990-N requires the following information: The organization's legal name, and mailing address; Any name under which it operates and does business; Its Internet website address (if any); Its taxpayer identification number; The name and address of a principal officer; Organization's annual tax period; Verification that the organization's annual gross receipts are normally $50,000 or less; and Notification if the organization has terminated. 2012 free taxes online Form 990-N is due by the 15th day of the fifth month after the close of the tax year. 2012 free taxes online For tax years beginning after December 31, 2006, any organization that fails to meet its annual reporting requirement for 3 consecutive years will automatically lose its tax-exempt status. 2012 free taxes online To regain its exempt status an organization will have to reapply for recognition as a tax-exempt organization. 2012 free taxes online Exceptions. 2012 free taxes online   This filing requirement does not apply to: Churches, their integrated auxiliaries, and conventions or associations of churches; Organizations that are included in a group return; Private foundations required to file Form 990-PF; and Section 509(a)(3) supporting organizations required to file Form 990 or Form 990-EZ. 2012 free taxes online Forms 990 and 990-EZ Exempt organizations, other than private foundations, must file their annual information returns on Form 990 or 990-EZ, unless excepted from filing or allowed to submit Form 990-N, described earlier. 2012 free taxes online Generally, political organizations with gross receipts of $25,000 ($100,000 for a qualified state or local political organization (QSLPO)) or more for the tax year are required to file Form 990 or 990-EZ unless specifically excepted from filing the annual return. 2012 free taxes online The following political organizations are not required to file Form 990 or Form 990-EZ. 2012 free taxes online A state or local committee of a political party. 2012 free taxes online A political committee of a state or local candidate. 2012 free taxes online A caucus or association of state or local officials. 2012 free taxes online A political organization that is required to report as a political committee under the Federal Election Campaign Act. 2012 free taxes online A 501(c) organization that has expenditures for influencing or attempting to influence the selection, nomination, election, or appointment of any individual for a federal, state, or local public office. 2012 free taxes online Form 990-EZ. 2012 free taxes online   This is a shortened version of Form 990. 2012 free taxes online It is designed for use by small exempt organizations and nonexempt charitable trusts. 2012 free taxes online   Beginning in tax year 2010, an organization can file either Form 990 or 990-EZ if it meets the following: Its gross receipts during the year are less than $200,000. 2012 free taxes online Its total assets (line 25, column (B) of Form 990-EZ) at the end of the year are less than $500,000. 2012 free taxes online If your organization does not meet either of these conditions, you cannot file Form 990-EZ. 2012 free taxes online Instead you must file Form 990. 2012 free taxes online Group return. 2012 free taxes online   A group return on Form 990 may be filed by a central, parent, or like organization for two or more local organizations, none of which is a private foundation. 2012 free taxes online This return is in addition to the central organization's separate annual return if it must file a return. 2012 free taxes online It cannot be included in the group return. 2012 free taxes online See the instructions for Form 990 for the conditions under which this procedure may be used. 2012 free taxes online    In any year that an organization is properly included as a subordinate organization on a group return, it should not file its own Form 990. 2012 free taxes online Schedule A (Form 990 or 990-EZ). 2012 free taxes online   Organizations, other than private foundations, that are described in section 501(c)(3) and that are otherwise required to file Form 990 or 990-EZ must also complete Schedule A of that form. 2012 free taxes online Schedule B (Form 990, Form 990-EZ, or 990-PF). 2012 free taxes online   Organizations that file Form 990 or 990-EZ use this schedule to provide required information regarding their contributors. 2012 free taxes online Schedule O (Form 990). 2012 free taxes online   Organizations that file Form 990 must use this schedule to provide required additional information or if additional space is needed. 2012 free taxes online   Other schedules may be required to be filed with Form 990 or 990-EZ. 2012 free taxes online See the instructions for Form 990 or the instructions for Form 990-EZ for more information. 2012 free taxes online Report significant new or changed program services and changes to organizational documents. 2012 free taxes online    An organization should report new significant program services or significant changes in how it conducts program services, and significant changes to its organizational documents, on its Form 990 rather than in a letter to EO Determinations. 2012 free taxes online EO Determinations no longer issues letters confirming the tax-exempt status of organizations that report new services or significant changes, or changes to organizational documents. 2012 free taxes online See Miscellaneous Rules, Organization Changes and Exempt Status, later. 2012 free taxes online Form 990-PF All private foundations exempt under section 501(c)(3) must file Form 990-PF. 2012 free taxes online These organizations are discussed in chapter 3. 2012 free taxes online Electronic Filing You may be required to file Form 990, Form 990-EZ, or Form 990-PF, and related forms, schedules, and attachments electronically. 2012 free taxes online If an organization is required to file a return electronically but does not, the organization is considered to have not filed its return. 2012 free taxes online See Regulations section 301. 2012 free taxes online 6033-4 for more information. 2012 free taxes online The IRS may waive the requirement to file electronically in cases of undue hardship. 2012 free taxes online For information on filing a waiver, see Notice 2010-13, 2010-4 I. 2012 free taxes online R. 2012 free taxes online B. 2012 free taxes online 327, available at www. 2012 free taxes online irs. 2012 free taxes online gov/ir/2010-04_IRSB/ar14. 2012 free taxes online html. 2012 free taxes online Form 990. 2012 free taxes online   An organization is required to file Form 990 electronically if it files at least 250 returns during the calendar year and has total assets of $10 million or more at the end of the tax year. 2012 free taxes online Form 990-PF. 2012 free taxes online   An organization is required to file Form 990-PF electronically if it files at least 250 returns during the calendar year. 2012 free taxes online Due Date Forms 990, 990-EZ, or 990-PF must be filed by the 15th day of the fifth month after the end of your organization's accounting period. 2012 free taxes online Thus, for a calendar year taxpayer, Forms 990, 990-EZ, or 990-PF is due May 15 of the following year. 2012 free taxes online Extension of time to file. 2012 free taxes online   Use Form 8868 to request an automatic 3-month extension of time to file Forms 990, 990-EZ, or 990-PF and also to apply for an additional (not automatic) 3-month extension if needed. 2012 free taxes online   Do not apply for both the automatic 3-month extension and the additional 3-month extension at the same time. 2012 free taxes online For more information, see Form 8868 and its instructions. 2012 free taxes online   When filing Form 8868 for an automatic 3-month extension, neither a signature, nor an explanation is required. 2012 free taxes online However, when filing Form 8868 for an additional 3-month extension, both a signature and an explanation are required. 2012 free taxes online Application for exemption pending. 2012 free taxes online   An organization that claims to be exempt under section 501(a) but has not established its exempt status by the due date for filing an information return must complete and file Form 990, 990-EZ, 990–N or 990-PF (if it considers itself a private foundation), unless the organization is exempt from Form 990-series filing requirements. 2012 free taxes online If the organization's application is pending with the IRS, it must so indicate on Forms 990, 990-EZ, or 990-PF (whichever applies) by checking the application pending block at the top of page 1 of the return. 2012 free taxes online For more information on the filing requirements, see the Instructions for Forms 990, 990-EZ, and 990-PF. 2012 free taxes online State reporting requirements. 2012 free taxes online   Copies of Forms 990, 990-EZ, or 990-PF may be used to satisfy state reporting requirements. 2012 free taxes online See the instructions for those forms. 2012 free taxes online Form 8870. 2012 free taxes online   Organizations that filed a Form 990, 990-EZ, or 990-PF, and paid premiums or received transfers on certain life insurance, annuity, and endowment contracts (personal benefit contracts), must file Form 8870. 2012 free taxes online For more information, see Form 8870 and the instructions for that form. 2012 free taxes online Automatic Revocation If the organization fails to file a Form 990, 990-EZ, or 990-PF, or fails to submit a Form 990-N, as required, for 3 consecutive years, it will automatically lose its tax-exempt status by operation of law. 2012 free taxes online The list of organizations whose tax-exempt status has been automatically revoked is available on IRS. 2012 free taxes online gov. 2012 free taxes online This list (Auto-Revocation List) may be viewed and searched on Exempt Organizations Select Check. 2012 free taxes online The Auto-Revocation List includes each organization's name, Employer Identification Number (EIN) and last known address. 2012 free taxes online It also includes the effective date of the automatic revocation and the date it was posted to the list. 2012 free taxes online The IRS updates the list monthly to include additional organizations that lose their tax-exempt status. 2012 free taxes online Tax Effect of Loss of Tax-Exempt Status If your organization’s tax-exempt status is automatically revoked, you may be required to file one of the following federal income tax returns and pay any applicable income taxes: Form 1120, U. 2012 free taxes online S. 2012 free taxes online Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of your organization’s tax year, or Form 1041, U. 2012 free taxes online S. 2012 free taxes online Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of your organization’s tax year. 2012 free taxes online In addition, a section 501(c)(3) organization that loses its tax-exempt status cannot receive tax-deductible contributions and will not be identified in the IRS Business Master File extract as eligible to received tax-deductible contributions, or be included in Exempt Organizations Select Check (Pub 78 database). 2012 free taxes online An organization whose exemption was automatically revoked must apply for tax exemption in order to regain its tax exemption (even if it was not originally required to apply). 2012 free taxes online In some situations, an organization may be able to obtain exemption retroactive to its date of revocation. 2012 free taxes online For more information about automatic revocation, go to IRS. 2012 free taxes online gov and select Charities & Non-Profits and then select Revoked? Reinstated? Learn More. 2012 free taxes online Penalties Penalties for failure to file. 2012 free taxes online   Generally, an exempt organization that fails to file a required return must pay a penalty of $20 a day for each day the failure continues. 2012 free taxes online The same penalty will apply if the organization does not give all the information required on the return or does not give the correct information. 2012 free taxes online Maximum penalty. 2012 free taxes online   The maximum penalty for any one return is the smaller of $10,000 or 5% of the organization's gross receipts for the year. 2012 free taxes online Organization with gross receipts over $1 million. 2012 free taxes online   For an organization that has gross receipts of over $1 million for the year, the penalty is $100 a day up to a maximum of $50,000. 2012 free taxes online Managers. 2012 free taxes online   If the organization is subject to this penalty, the IRS may specify a date by which the return or correct information must be supplied by the organization. 2012 free taxes online Failure to comply with this demand will result in a penalty imposed upon the manager of the organization, or upon any other person responsible for filing a correct return. 2012 free taxes online The penalty is $10 a day for each day that a return is not filed after the period given for filing. 2012 free taxes online The maximum penalty imposed on all persons with respect to any one return is $5,000. 2012 free taxes online Exception for reasonable cause. 2012 free taxes online   No penalty will be imposed if reasonable cause for failure to file timely can be shown. 2012 free taxes online Unrelated Business Income Tax Return Even though your organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. 2012 free taxes online Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. 2012 free taxes online If your organization has $1,000 or more of unrelated business income, you must file Form 990-T in addition to your required annual information return. 2012 free taxes online Estimated tax. 2012 free taxes online   Quarterly estimated tax payments are due if your organization expects to owe $500 or more in tax including unrelated business income. 2012 free taxes online Use Form 990-W to figure your organization's estimated tax payments. 2012 free taxes online Travel tour programs. 2012 free taxes online   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose to which tax exemption was granted to the organization. 2012 free taxes online   Whether travel tour activities conducted by an organization are substantially related to the organization's tax exempt purpose is determined by looking at all the relevant facts and circumstances, including, but not limited to, how a travel tour is developed, promoted, and operated. 2012 free taxes online Example. 2012 free taxes online ABC, a university alumni association, is tax exempt as an educational organization under section 501(c)(3). 2012 free taxes online As part of its activities, ABC operates a travel tour program. 2012 free taxes online The program is open to all current members of ABC and their guests. 2012 free taxes online ABC works with travel agents to schedule approximately ten tours annually to various destinations around the world. 2012 free taxes online Members of ABC pay $1,000 to XYZ Travel Agency to participate in a tour. 2012 free taxes online XYZ pays ABC a per person fee for each participant. 2012 free taxes online Although the literature advertising the tours encourages ABC members to continue their lifelong learning by joining the tours, and a faculty member of ABC's related university frequently joins the tour as a guest of the alumni association, none of the tours include any scheduled instruction or curriculum related to the destinations being visited. 2012 free taxes online The travel tours made available to ABC's members do not contribute importantly to the accomplishment of ABC's educational purpose. 2012 free taxes online Rather, ABC's program is designed to generate revenues for ABC by regularly offering its members travel services. 2012 free taxes online Therefore, ABC's tour program is an unrelated trade or business. 2012 free taxes online For additional information on unrelated business income, see Publication 598 and the Instructions for Form 990-T. 2012 free taxes online Employment Tax Returns Every employer, including an organization exempt from federal income tax, who pays wages to employees is responsible for withholding, depositing, paying, and reporting federal income tax, social security and Medicare (FICA) taxes, and federal unemployment tax (FUTA), unless that employer is specifically excepted by law from those requirements, or if the taxes clearly do not apply. 2012 free taxes online For more information, obtain a copy of Publication 15, which summarizes the responsibilities of an employer, Publication 15-A, Publication 15-B, and Form 941. 2012 free taxes online Small Business Health Care Tax Credit. 2012 free taxes online   If your small tax-exempt organization provides health care coverage for your workers you may qualify for the small business health care tax credit. 2012 free taxes online Go to IRS. 2012 free taxes online gov and select Affordable Care Act Tax Provisions for more details. 2012 free taxes online See Small Business Health Care Tax Credit at www. 2012 free taxes online irs. 2012 free taxes online gov/newsroom/article/0,,id=223666,00. 2012 free taxes online html. 2012 free taxes online Expanded Work Opportunity Tax Credit Available for Hiring Qualified Veterans. 2012 free taxes online   The VOW to Hire Heroes Act of 2011 made changes to the Work Opportunity Tax Credit (WOTC). 2012 free taxes online The Act added two new categories to the existing qualified veteran targeted group and made the WOTC available to certain tax-exempt employers as a credit against the employer's share of social security tax. 2012 free taxes online The Act allows employers to claim the WOTC for veterans certified as qualified veterans and who begin work before January 1, 2013. 2012 free taxes online This tax credit was extended through December 31, 2013, under the American Taxpayer Relief Act, passed on January 1, 2013. 2012 free taxes online   The credit can be as high as $6,240 for qualified tax-exempt organizations. 2012 free taxes online The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. 2012 free taxes online The amount of the credit for qualified tax-exempt organizations may not exceed the organization's employer social security tax for the period for which the credit is claimed. 2012 free taxes online   All employers must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. 2012 free taxes online The process for certifying veterans for this credit is the same for all employers. 2012 free taxes online For more information, see Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit and the instructions to Form 8850. 2012 free taxes online Notice 2012-13, 2012-9 I. 2012 free taxes online R. 2012 free taxes online B. 2012 free taxes online 421, also provides additional guidance on submission Form 8850. 2012 free taxes online   Organizations described in section 501(c) and exempt from taxation under section 501(a) may claim the credit for qualified veterans who begin work on or after Nov. 2012 free taxes online 22, 2011, and before January 1, 2013. 2012 free taxes online After the required certification is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, Form 5884-C. 2012 free taxes online File Form 5884-C after filing the related employment tax return for the employment tax period for which the credit is claimed. 2012 free taxes online It is recommended that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit as the forms are processed separately. 2012 free taxes online In addition to Form 5884-C and its instructions, tax-exempt employers should see Notice 2012-13 and the Frequently Asked Questions & Answers for more details for claiming the credit. 2012 free taxes online Trust fund recovery penalty. 2012 free taxes online   If any person required to collect, truthfully account for, and pay over any of these taxes willfully fails to satisfy any of these requirements or willfully tries in any way to evade or defeat any of them, that person will be subject to a penalty. 2012 free taxes online The penalty is equal to the tax evaded, not collected, or not accounted for and paid over. 2012 free taxes online The term person includes: An officer or employee of a corporation, or A member or employee of a partnership. 2012 free taxes online Exception. 2012 free taxes online   The penalty is not imposed on any unpaid volunteer director or member of a board of trustees of an exempt organization if the unpaid volunteer serves solely in an honorary capacity, does not participate in the day-to-day or financial operations of the organization, and does not have actual knowledge of the failure on which the penalty is imposed. 2012 free taxes online   This exception does not apply if it results in no one being liable for the penalty. 2012 free taxes online FICA and FUTA tax exceptions. 2012 free taxes online   Payments for services performed by a minister of a church in the exercise of the ministry, or a member of a religious order performing duties required by the order, are generally not subject to FICA or FUTA taxes. 2012 free taxes online FUTA tax exception. 2012 free taxes online   Payments for services performed by an employee of a religious, charitable, educational, or other organization described in section 501(c)(3) that are generally subject to FICA taxes if the payments are $100 or more for the year, are not subject to FUTA taxes. 2012 free taxes online FICA tax exemption election. 2012 free taxes online   Churches and qualified church-controlled organizations can elect exemption from employer FICA taxes by filing Form 8274. 2012 free taxes online   To elect the exemption, Form 8274 must be filed before the first date on which a quarterly employment tax return would otherwise be due from the electing organization. 2012 free taxes online The organization can make the election only if it is opposed for religious reasons to the payment of FICA taxes. 2012 free taxes online   The election applies to payments for services of current and future employees other than services performed in an unrelated trade or business. 2012 free taxes online Revoking the election. 2012 free taxes online   The election can be revoked by the IRS if the organization fails to file Form W-2, Wage and Tax Statement, for 2 years and fails to furnish certain information upon request by the IRS. 2012 free taxes online Such revocation will apply retroactively to the beginning of the 2-year period. 2012 free taxes online Definitions. 2012 free taxes online   For purposes of this election, the term church means a church, a convention or association of churches, or an elementary or secondary school that is controlled, operated, or principally supported by a church or by a convention or association of churches. 2012 free taxes online   The term qualified church-controlled organization means any church-controlled section 501(c)(3) tax-exempt organization, other than an organization that both: Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public at other than a nominal charge that is substantially less than the cost of providing such goods, services, or facilities, and Normally receives more than 25% of its support from the sum of governmental sources and receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities that are not unrelated trades or businesses. 2012 free taxes online Effect on employees. 2012 free taxes online   If a church or qualified church-controlled organization has made an election, payment for services performed for that church or organization, other than in an unrelated trade or business, will not be subject to FICA taxes. 2012 free taxes online However, the employee, unless otherwise exempt, will be subject to self-employment tax on the income. 2012 free taxes online The tax applies to income of $108. 2012 free taxes online 28 or more for the tax year from that church or organization, and no deductions for trade or business expenses are allowed against this self-employment income. 2012 free taxes online   Schedule SE (Form 1040), Self-Employment Tax, should be attached to the employee's income tax return. 2012 free taxes online Political Organization Income Tax Return Generally, a political organization is treated as an organization exempt from tax. 2012 free taxes online Certain political organizations, however, must file an annual income tax return, Form 1120-POL, U. 2012 free taxes online S. 2012 free taxes online Income Tax Return for Certain Political Organizations, for any year they have political organization taxable income in excess of the $100 specific deduction allowed under section 527. 2012 free taxes online A political organization that has $25,000 ($100,000 for a qualified state or local political organization) or more in gross receipts for the tax year must file Form 990 or Form 990-EZ (and Schedule B of the form), unless excepted. 2012 free taxes online See Forms 990 and 990-EZ , earlier. 2012 free taxes online Political organization. 2012 free taxes online   A political organization is a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function. 2012 free taxes online Exempt function. 2012 free taxes online   An exempt function means influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, local public office or office in a political organization, or the election of the Presidential or Vice Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. 2012 free taxes online It also includes certain office expenses of a holder of public office or an office in a political organization. 2012 free taxes online Certain political organizations are required to notify the IRS that they are section 527 organizations. 2012 free taxes online These organizations must use Form 8871. 2012 free taxes online Some of these section 527 organizations must use Form 8872 to file periodic reports with the IRS disclosing their contributions and expenditures. 2012 free taxes online For a discussion on these forms, see Reporting Requirements for a Political Organization, later. 2012 free taxes online Political organization taxable income. 2012 free taxes online   Political organization taxable income is the excess of: Gross income for the tax year (excluding exempt function income) minus Deductions directly connected with the earning of gross income. 2012 free taxes online To figure taxable income, allow for a $100 specific deduction, but do not allow for the net operating loss deduction, the dividends-received deduction, and other special deductions for corporations. 2012 free taxes online Exempt organization not a political organization. 2012 free taxes online   An organization exempt under section 501(c) that spends any amount for an exempt function must file Form 1120-POL for any year which it has political taxable income. 2012 free taxes online These organizations must include in gross income the lesser of: The total amount of its exempt function expenditures, or The organization's net investment income. 2012 free taxes online Separate fund. 2012 free taxes online   A section 501(c) organization can set up a separate segregated fund that will be treated as an independent political organization. 2012 free taxes online The earnings and expenditures made by the separate fund will not be attributed to the section 501(c) organization. 2012 free taxes online Section 501(c)(3) organizations are precluded from, and may suffer loss of exemption for, engaging in any political campaign on behalf of, or in opposition to, any candidate for public office. 2012 free taxes online Due date. 2012 free taxes online   Form 1120-POL is due by the 15th day of the 3rd month after the end of the tax year. 2012 free taxes online Thus, for a calendar year taxpayer, Form 1120-POL is due on March 15 of the following year. 2012 free taxes online If any due date falls on a Saturday, Sunday, or legal holiday, the organization can file the return on the next business day. 2012 free taxes online    Form 1120-POL is not required of an exempt organization that makes expenditures for political purposes if its gross income does not exceed its directly connected deductions by more than $100 for the tax year. 2012 free taxes online Extension of time to file. 2012 free taxes online    Use Form 7004 to request an automatic 6-month extension of time to file Form 1120-POL. 2012 free taxes online The extension will be granted if you complete Form 7004 properly, make a proper estimate of the tax (if applicable), file Form 1120-POL by the due date, and pay any tax due. 2012 free taxes online Failure to file. 2012 free taxes online   A political organization that fails to file Form 1120-POL is subject to a penalty equal to 5% of the tax due for each month (or partial month) the return is late up to a maximum of 25% of the tax due, unless the organization shows the failure was due to reasonable cause. 2012 free taxes online For more information about filing Form 1120-POL, refer to the instructions accompanying the form. 2012 free taxes online Failure to pay on time. 2012 free taxes online   An organization that does not pay the tax when due generally may have to pay a penalty of 1/2 of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. 2012 free taxes online The penalty will not be imposed if the organization can show that the failure to pay on time was due to reasonable cause. 2012 free taxes online Reporting Requirements for a Political Organization Certain political organizations are required to notify the IRS that the organization is to be treated as a section 527 political organization. 2012 free taxes online The organization is also required to periodically report certain contributions received and expenditures made by the organization. 2012 free taxes online To notify the IRS of section 527 treatment, an organization must file Form 8871. 2012 free taxes online To report contributions and expenditures, certain tax-exempt political organizations must file Form 8872. 2012 free taxes online Form 8871 A political organization must electronically file Form 8871 to notify the IRS that it is to be treated as a section 527 organization. 2012 free taxes online However, an organization is not required to file Form 8871 if: It reasonably expects its annual gross receipts to always be less than $25,000. 2012 free taxes online It is a political committee required to report under the Federal Election Campaign Act of 1971 (FECA) (2 U. 2012 free taxes online S. 2012 free taxes online C. 2012 free taxes online 431(4)). 2012 free taxes online It is a state or local candidate committee. 2012 free taxes online It is a state or local committee of a political party. 2012 free taxes online It is a section 501(c) organization that has made an “exempt function expenditure. 2012 free taxes online ” All other political organizations are required to file Form 8871. 2012 free taxes online An organization must provide on Form 8871: Its name and address (including any business address, if different) and its electronic mailing address; Its purpose; The names and addresses of its officers, highly compensated employees, contact person, custodian of records, and members of its board of directors; The name and address of, and relationship to, any related entities (within the meaning of section 168(h)(4)); and Whether it intends to claim an exemption from filing Form 8872, Form 990, or Form 990-EZ. 2012 free taxes online Employer identification number. 2012 free taxes online   If your organization needs an EIN, you can apply for one: Online—Click on the Employer ID Numbers (EINs) link at www. 2012 free taxes online IRS. 2012 free taxes online gov/businesses/small. 2012 free taxes online By telephone at 1-800-829-4933 from 7:00 a. 2012 free taxes online m. 2012 free taxes online to 10:00 p. 2012 free taxes online m. 2012 free taxes online in the organization's local time zone. 2012 free taxes online By mailing or faxing Form SS-4. 2012 free taxes online   If you previously applied for an EIN and have not yet received it, or you are unsure whether you have an EIN, please call our toll-free customer account services number, 1-877-829-5500, for assistance. 2012 free taxes online Due dates. 2012 free taxes online   The initial Form 8871 must be filed within 24 hours of the date on which the organization was established. 2012 free taxes online If there is a material change, an amended Form 8871 must be filed within 30 days of the material change. 2012 free taxes online When the organization terminates its existence, it must file a final Form 8871 within 30 days of termination. 2012 free taxes online   If the due date falls on a Saturday, Sunday, or legal holiday, the organization can file on the next business day. 2012 free taxes online How to file. 2012 free taxes online   An organization must file Form 8871 electronically via the IRS Internet website at www. 2012 free taxes online IRS. 2012 free taxes online gov/polorgs (Keyword: political orgs). 2012 free taxes online Form 8453-X, Political Organization Declaration for Electronic Filing of Notice of Section 527 Status. 2012 free taxes online   After electronically submitting Form 8871, the political organization must print, sign, and mail Form 8453-X to the IRS. 2012 free taxes online Upon receipt of the Form 8453-X, the IRS will send the organization a username and password that must be used to file an amended or final Form 8871 or to electronically file Form 8872. 2012 free taxes online Penalties Failure to file. 2012 free taxes online   An organization that is required to file Form 8871, but fails to do so on a timely basis, will not be treated as a tax-exempt section 527 organization for any period before the date Form 8871 is filed. 2012 free taxes online Also, the taxable income of the organization for that period will include its exempt function income (including contributions received, membership dues, and political fundraising receipts) minus any deductions directly connected with the production of that income. 2012 free taxes online   Failure to file an amended Form 8871 will cause the organization not to be treated as a tax-exempt section 527 organization. 2012 free taxes online If an organization is treated as not being a tax-exempt section 527 organization, the taxable income of the organization will be determined by considering any exempt function income and deductions during the period beginning on the date of the material change and ending on the date that the amended Form 8871 is filed. 2012 free taxes online    The tax is computed by multiplying the organization's taxable income by the highest corporate tax rate. 2012 free taxes online Fraudulent returns. 2012 free taxes online   Any individual or corporation that willfully delivers or discloses to the IRS any list, return, account, statement or other document known to be fraudulent or false as to any material matter will be fined not more than $10,000 ($50,000 in the case of a corporation) or imprisoned for not more than 1 year or both. 2012 free taxes online Waiver of penalties. 2012 free taxes online   The IRS may waive any additional tax assessed on an organization for failure to file Form 8871 if the failure was due to reasonable cause and not willful neglect. 2012 free taxes online Additional information. 2012 free taxes online   For more information on Form 8871, see the form and its instructions. 2012 free taxes online For a discussion on the public inspection requirements for the form, see Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting Forms , later. 2012 free taxes online Form 8872 Every tax-exempt section 527 political organization that accepts a contribution or makes an expenditure, for an exempt function during the calendar year, must file Form 8872 except: A political organization that is not required to file Form 8871 (discussed earlier). 2012 free taxes online A political organization that is subject to tax on its income because it did not file or amend Form 8871. 2012 free taxes online A qualified state or local political organization (QSLPO), discussed below. 2012 free taxes online All other tax-exempt section 527 organizations that accept contributions or make expenditures for an exempt function are required to file Form 8872. 2012 free taxes online Qualified state or local political organization. 2012 free taxes online   A state or local political organization may be a QSLPO if: All of its political activities relate solely to state or local public office (or office in a state or local political organization). 2012 free taxes online It is subject to a state law that requires it to report (and it does report) to a state agency information about contributions and expenditures that is similar to the information that the organization would otherwise be required to report to the IRS. 2012 free taxes online The state agency and the organization make the reports publicly available. 2012 free taxes online No federal candidate or office holder: Controls or materially participates in the direction of the organization, Solicits contributions for the organization, or Directs the disbursements of the organization. 2012 free taxes online Information required on Form 8872. 2012 free taxes online   If an organization pays an individual $500 or more for the calendar year, the organization is required to disclose the individual's name, address, occupation, employer, amount of the expense, the date the expense was paid, and the purpose of the expense on Form 8872. 2012 free taxes online   If an organization receives contributions of $200 or more from one contributor for the calendar year, the organization must disclose the donor's name, address, occupation, employer, and the date the contributions were made. 2012 free taxes online   For additional information that is required, see Form 8872. 2012 free taxes online Due dates. 2012 free taxes online   The due dates for filing Form 8872 vary depending on whether the form is due for a reporting period that occurs during a calendar year in which a regularly scheduled election is held, or any other calendar year (a nonelection year). 2012 free taxes online   If the due date falls on a Saturday, Sunday, or legal holiday, the organization can file on the next business day. 2012 free taxes online Election year filing. 2012 free taxes online    In election years, Form 8872 must be filed on either a quarterly or a monthly basis. 2012 free taxes online Both a pre-election report and a post-election report are also required to be filed in an election year. 2012 free taxes online An election year is any year in which a regularly scheduled general election for federal office is held (an even-numbered year). 2012 free taxes online Nonelection year filing. 2012 free taxes online    In nonelection years, the form must be filed on a semiannual or monthly basis. 2012 free taxes online A complete listing of these filing periods are in the Form 8872 Instructions. 2012 free taxes online A nonelection year is any odd-numbered year. 2012 free taxes online How to file. 2012 free taxes online   Form 8872 can be filed either electronically or by mail. 2012 free taxes online However, organizations that have, or expect to have, contributions or expenditures of $50,000 or more for the year must file electronically. 2012 free taxes online    To file by mail, send Form 8872 to the:   Department of the Treasury Internal Revenue Service Center Ogden, UT 84201-0027 Electronic filing. 2012 free taxes online   File electronically via the IRS internet website at www. 2012 free taxes online IRS. 2012 free taxes online gov/polorgs. 2012 free taxes online You will need a user ID and password to electronically file Form 8872. 2012 free taxes online Organizations that have completed the electronic filing of Form 8871 and submitted a completed and signed Form 8453-X will receive a username and password in the mail. 2012 free taxes online   Organizations that have completed the electronic filing of Form 8871, but have not received their user ID and password can request one by writing to the following address: Internal Revenue Service Attn: Request for 8872 Password Mail Stop 6273 Ogden, UT 84201 Lost username and password. 2012 free taxes online   If you have forgotten or misplaced the username and password issued to your organization after you filed your initial Form 8871, send a letter requesting a new username and password to the address under Electronic filing. 2012 free taxes online You can also fax your request to (801) 620-3249. 2012 free taxes online It may take 3-6 weeks for your new username and password to arrive, as they will be mailed to the organization. 2012 free taxes online Penalty A penalty will be imposed if the organization is required to file Form 8872 and it: Fails to file the form by the due date, or Files the form but fails to report all of the information required or reports incorrect information. 2012 free taxes online The penalty is 35% of the total amount of contributions and expenditures to which a failure relates. 2012 free taxes online Fraudulent returns. 2012 free taxes online   Any individual or corporation that willfully delivers or discloses any list, return, account, statement, or other document known to be fraudulent or false as to any material matter will be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned for not more than 1 year, or both. 2012 free taxes online Waiver of penalties. 2012 free taxes online   The IRS may waive any additional tax assessed on an organization for failure to file Form 8872 if the failure was due to reasonable cause and not willful neglect. 2012 free taxes online Donee Information Return Dispositions of donated property. 2012 free taxes online   If an organization receives charitable deduction property and within three years sells, exchanges, or otherwise disposes of the property, the organization must file Form 8282, Donee Information Return. 2012 free taxes online However, an organization is not required to file Form 8282 if: The property is valued at $500 or less, or The property is consumed or distributed for charitable purposes. 2012 free taxes online   Form 8282 must be filed with the IRS within 125 days after the disposition. 2012 free taxes online Additionally, a copy of Form 8282 must be given to the donor. 2012 free taxes online If the organization fails to file the required information return, penalties may apply. 2012 free taxes online Charitable deduction property. 2012 free taxes online   This is any property (other than money or publicly traded securities) for which the donee organization signed an appraisal summary or Form 8283, Noncash Charitable Contributions. 2012 free taxes online Publicly traded securities. 2012 free taxes online   These are securities for which market quotations are readily available on an established securities market as of the date of the contribution. 2012 free taxes online Appraisal summary. 2012 free taxes online   If the value of the donated property exceeds $5,000, the donor must get a qualified appraisal for contributions of property, see the Exceptions. 2012 free taxes online below. 2012 free taxes online Exceptions. 2012 free taxes online   A written appraisal is not needed if the property is: Nonpublicly traded stock of $10,000 or less, A vehicle (including a car, boat, or airplane), if your deduction for the vehicle is limited to the gross proceeds from its sale, Intellectual property, Certain securities considered to have market quotations readily available (see Regulations section 1. 2012 free taxes online 170A-13(c)(7)(xi)(B)), Inventory and other property donated by a corporation that are qualified contributions for the care of the ill, the needy, or infants, within the meaning of section 170(e)(3)(A), or Any donation of stock in trade, inventory, or property held primarily for sale to customers in the ordinary course of your trade or business. 2012 free taxes online   The donee organization is not a qualified appraiser for the purpose of valuing the donated property. 2012 free taxes online For more information, get Publication 561, Determining the Value of Donated Property. 2012 free taxes online Form 8283. 2012 free taxes online   For noncash donations over $5,000, the donor must attach Form 8283 to the tax return to support the charitable deduction. 2012 free taxes online The donee must sign Part IV of Section B, Form 8283 unless publicly traded securities are donated. 2012 free taxes online The person who signs for the donee must be an official authorized to sign the donee's tax or information returns, or a person specifically authorized to sign by that official. 2012 free taxes online The signature does not represent concurrence in the appraised value of the contributed property. 2012 free taxes online A signed acknowledgment represents receipt of the property described on Form 8283 on the date specified on the form. 2012 free taxes online The signature also indicates knowledge of the information reporting requirements on dispositions, as previously discussed. 2012 free taxes online A copy of Form 8283 must be given to the donee. 2012 free taxes online Information Provided to Donors In some situations, a donor must obtain certain information from a donee organization to obtain a deduction for a charitable contribution. 2012 free taxes online In other situations, the donee organization is required to provide information to the donor. 2012 free taxes online A charitable organization must give a donor a disclosure statement for a quid pro quo contribution over $75. 2012 free taxes online (See Disclosure statement. 2012 free taxes online later. 2012 free taxes online ) This is a payment a donor makes to a charity partly as a contribution and partly for goods or services. 2012 free taxes online See Quid pro quo contribution below for an example. 2012 free taxes online Failure to make the required disclosure may result in a penalty to the organization. 2012 free taxes online A donor cannot deduct a charitable contribution of $250 or more unless the donor has a written acknowledgment from the charitable organization. 2012 free taxes online In certain circumstances, an organization may be able to meet both of these requirements with the same written document. 2012 free taxes online Disclosure of Quid Pro Quo Contributions A charitable organization must provide a written disclosure statement to donors of a quid pro quo contribution over $75. 2012 free taxes online Quid pro quo contribution. 2012 free taxes online   A contribution made by a donor in exchange for goods or services is known as a quid pro quo contribution. 2012 free taxes online Your charitable organization must provide the donor a written statement informing the donor of the fair market value of the items or services it provided in exchange for the contribution. 2012 free taxes online Generally, a written statement is required for each payment, whenever the contribution portion is over $75. 2012 free taxes online Example. 2012 free taxes online If a donor gives your charity $100 and receives a concert ticket valued at $40, the donor has made a quid pro quo contribution. 2012 free taxes online In this example, the charitable part of the payment is $60. 2012 free taxes online Even though the deductible part of the payment is not more than $75, a written statement must be filed because the total payment is more than $75. 2012 free taxes online If your organization fails to disclose quid pro quo contributions, the organization may be subject to a penalty. 2012 free taxes online Disclosure statement. 2012 free taxes online   The required written disclosure statement must: Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the fair market value of goods or services provided by the charity, and Provide the donor with a good faith estimate of the fair market value of the goods or services that the donor received. 2012 free taxes online The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. 2012 free taxes online If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the organization to provide another statement when it actually receives the contribution. 2012 free taxes online   No disclosure statement is required if any of the following are true. 2012 free taxes online The goods or services given to a donor have insubstantial value as described in Revenue Procedure 90-12, 1990-1 C. 2012 free taxes online B. 2012 free taxes online 471, Revenue Procedure 90-12, and Revenue Procedure 92-49, 1992-1 C. 2012 free taxes online B. 2012 free taxes online 507 (as adjusted for inflation), Revenue Procedure 92-49. 2012 free taxes online There is no donative element involved in a particular transaction with a charity (for example, there is generally no donative element involved in a visitor's purchase from a museum gift shop). 2012 free taxes online There is only an intangible religious benefit provided to the donor. 2012 free taxes online The intangible religious benefit must be provided to the donor by an organization organized exclusively for religious purposes, and must be of a type that generally is not sold in a commercial transaction outside the donative context. 2012 free taxes online For example, a donor who, for a payment, is granted admission to a religious ceremony for which there is no admission charge is provided an intangible religious benefit. 2012 free taxes online A donor is not provided intangible religious benefits for payments made for tuition for education leading to a recognized degree, travel services, or consumer goods. 2012 free taxes online The donor makes a payment of $75 or less per year and receives only annual membership benefits that consist of: Any rights or privileges (other than the right to purchase tickets for college athletic events) that the taxpayer can exercise often during the membership period, such as free or discounted admissions or parking or preferred access to goods or services, or Admission to events that are open only to members and the cost per person of which is within the limits for low-cost articles described in Revenue Procedure 90-12 (as adjusted for inflation), Revenue Procedure 90-12. 2012 free taxes online Good faith estimate of fair market value (FMV). 2012 free taxes online   An organization can use any reasonable method to estimate the FMV of goods or services it provided to a donor, as long as it applies the method in good faith. 2012 free taxes online   The organization can estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. 2012 free taxes online Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued. 2012 free taxes online Example 1. 2012 free taxes online A charity provides a 1-hour tennis lesson with a tennis professional for the first $500 payment it receives. 2012 free taxes online The tennis professional provides 1-hour lessons on a commercial basis for $100. 2012 free taxes online A good faith estimate of the lesson's FMV is $100. 2012 free taxes online Example 2. 2012 free taxes online For a payment of $50,000, a museum allows a donor to hold a private event in a room of the museum. 2012 free taxes online A good faith estimate of the FMV of the right to hold the event in the museum can be made by using the cost of renting a hotel ballroom with a capacity, amenities, and atmosphere comparable to the museum room, even though the hotel ballroom lacks the unique art displayed in the museum room. 2012 free taxes online If the hotel ballroom rents for $2,500, a good faith estimate of the FMV of the right to hold the event in the museum is $2,500. 2012 free taxes online Example 3. 2012 free taxes online For a payment of $1,000, a charity provides an evening tour of a museum conducted by a well-known artist. 2012 free taxes online The artist does not provide tours on a commercial basis. 2012 free taxes online Tours of the museum normally are free to the public. 2012 free taxes online A good faith estimate of the FMV of the evening museum tour is $0 even though it is conducted by the artist. 2012 free taxes online Penalty for failure to disclose. 2012 free taxes online   A penalty is imposed on a charity that does not make the required disclosure of a quid pro quo contribution of more than $75. 2012 free taxes online The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing. 2012 free taxes online The charity can avoid the penalty if it can show that the failure was due to reasonable cause. 2012 free taxes online Acknowledgment of Charitable Contributions of $250 or More A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization. 2012 free taxes online The donor must get the acknowledgment by the earlier of: The date the donor files the original return for the year the contribution is made, or The due date, including extensions, for filing the return. 2012 free taxes online The donor is responsible for requesting and obtaining the written acknowledgment from the donee. 2012 free taxes online A charitable organization that receives a payment made as a contribution is treated as the donee organization for this purpose even if the organization (according to the donor's instructions or otherwise) distributes the amount received to one or more charities. 2012 free taxes online Quid pro quo contribution. 2012 free taxes online   If the donee provides goods or services to the donor in exchange for the contribution (a quid pro quo contribution), the acknowledgment must include a good faith estimate of the value of the goods or services. 2012 free taxes online See Disclosure of Quid Pro Quo Contributions earlier. 2012 free taxes online Form of acknowledgment. 2012 free taxes online   Although there is no prescribed format for the written acknowledgment, it must provide enough information to substantiate the amount of the contribution. 2012 free taxes online For more information, see IRS Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements. 2012 free taxes online Cash contributions. 2012 free taxes online   To deduct a contribution of cash, a check, or other monetary gift (regardless of the amount), a donor must maintain a bank record or a written communication from the donee organization showing the donee's name, date, and amount of the contribution. 2012 free taxes online In the case of a lump-sum contribution (rather than a contribution by payroll deduction) made through the Combined Federal Campaign or a similar program such as a United Way Campaign, the written communication must include the name of the donee organization that is the ultimate recipient of the charitable contribution. 2012 free taxes online Contributions by payroll deduction. 2012 free taxes online   An organization may substantiate an employee's contribution by deduction from its payroll by: A pay stub, Form W-2, or other document showing a contribution to a donee organization, together with A pledge card or other document from the donee organization that shows its name. 2012 free taxes online   For contributions of $250 or more, the document must state that the donee organization provides no goods or services for any payroll contributions. 2012 free taxes online The amount withheld from each payment of wages to a taxpayer is treated as a separate contribution. 2012 free taxes online Acknowledgment of Vehicle Contribution If an exempt organization receives a contribution of a qualified vehicle with a claimed value of more than $500, the donee organization is required to provide a contemporaneous written acknowledgment to the donor. 2012 free taxes online The donee organization can use a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, for the contemporaneous written acknowledgment. 2012 free taxes online See section 3. 2012 free taxes online 03 of Notice 2005-44 for guidance on the information that must be included in a contemporaneous written acknowledgment and the deadline for furnishing the acknowledgment to the donor. 2012 free taxes online Any donee organization that provides a contemporaneous written acknowledgment to a donor is required to report to the IRS the information contained in the acknowledgment. 2012 free taxes online The report is due by February 28 (March 31 if filing electronically) of the year following the year in which the donee organization provides the acknowledgment to the donor. 2012 free taxes online The organization must file the report on Copy A of Form 1098-C. 2012 free taxes online An organization that files Form 1098-C on paper should send it with Form 1096, Annual Summary and Transmittal of U. 2012 free taxes online S. 2012 free taxes online Information Returns. 2012 free taxes online See the Instructions for Form 1096 for the correct filing location. 2012 free taxes online An organization that is required to file 250 or more Forms 1098-C during the calendar year must file the forms electronically or magnetically. 2012 free taxes online Specifications for filing Form 1098-C electronically or magnetically can be found in Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically at www. 2012 free taxes online IRS. 2012 free taxes online gov/pub/irs-pdf/p1220. 2012 free taxes online pdf. 2012 free taxes online Acknowledgment For a contribution of a qualified vehicle with a claimed value of $500 or less, do not file Form 1098-C. 2012 free taxes online However, you can use it as the contemporaneous written acknowledgment under section 170(f)(8) by providing the donor with Copy C only. 2012 free taxes online See the Instructions for Form 1098-C. 2012 free taxes online Generally, the organization should complete Form 1098-C as the written acknowledgment to the donor and the IRS. 2012 free taxes online The contents of the acknowledgment depend upon whether the organization: Sells a qualified vehicle without any significant intervening use or material improvement, Intends to make a significant intervening use of or material improvement to a qualified vehicle prior to sale, or Sells a qualified vehicle to a needy individual at a price significantly below fair market value, or a gratuitous transfer to a needy individual in direct furtherance of a charitable purpose of the organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. 2012 free taxes online For more information on the acknowledgment, see Notice 2005-44, 2005-25 I. 2012 free taxes online R. 2012 free taxes online B. 2012 free taxes online 1287, at www. 2012 free taxes online irs. 2012 free taxes online gov/irb/2005-25_IRB/2005-25_IRB/ar09. 2012 free taxes online html. 2012 free taxes online Material improvements or significant intervening use. 2012 free taxes online   To constitute significant intervening use, the organization must actually use the vehicle to substantially further the organization's regularly conducted activities, and the use must be significant, not incidental. 2012 free taxes online Factors in determining whether a use is a significant intervening use depend on the nature, extent, frequency, and duration. 2012 free taxes online For this purpose, use includes providing transportation on a regular basis for a significant period of time or significant use directly related to training in vehicle repair. 2012 free taxes online Use does not include the use of a vehicle to provide training in business skills, such as marketing or sales. 2012 free taxes online Examples of significant use include: Driving a vehicle every day for 1 year to deliver meals to needy individuals, if delivering meals is an activity regularly conducted by the organization. 2012 free taxes online Driving a vehicle for 10,000 miles over a 1-year period to deliver meals to needy individuals, if delivering meals is an activity regularly conducted by the organization. 2012 free taxes online   Material improvements include major repairs and additions that improve the condition of the vehicle in a manner that significantly increases the value. 2012 free taxes online To be a material improvement, the improvement cannot be funded by an additional payment to the organization from the donor of the vehicle. 2012 free taxes online Material improvements do not include cleaning, minor repairs, routine maintenance, painting, removal of dents or scratches, cleaning or repair of upholstery, and installation of theft deterrent devices. 2012 free taxes online Penalties. 2012 free taxes online   If your charitable organization receives contributions of used motor vehicles, boats, and airplanes valued over $500 it may be subject to a penalty if it knowingly: Fails to furnish an acknowledgement in a timely manner, showing the required information, or Furnishes a false or fraudulent acknowledgement of the contribution. 2012 free taxes online    Other penalties may apply. 2012 free taxes online See Part O in the 2012 General Instructions for Certain Information Returns. 2012 free taxes online   An acknowledgment containing a certification will be presumed to be false or fraudulent if the qualified vehicle is sold to a buyer other than a needy individual without a significant intervening use or material improvement within 6 months of the date of the contribution. 2012 free taxes online   If a charity sells a donated vehicle at auction, the IRS will not accept as substantiation an acknowledgment from the charity stating that the vehicle is to be transferred to a needy individual for significantly below fair market value. 2012 free taxes online Vehicles sold at auction are not sold at prices significantly below fair market value, and the IRS will not treat vehicles sold at auction as qualifying for this exception. 2012 free taxes online   The penalty for a false or fraudulent acknowledgment where the donee certifies that the vehicle will not be transferred for money, other property, or services before completion of material improvements or significant intervening use or the donee certifies that the vehicle is to be transferred to a needy individual for significantly below fair market value in furtherance of the donee's charitable purpose is the larger of $5,000 or the claimed value of the vehicle multiplied by 39. 2012 free taxes online 6%. 2012 free taxes online   The penalty for an acknowledgment relating to a qualified vehicle being sold in an arm's length transaction to an unrelated party is the larger of the gross proceeds from the sale or the sales price stated in the acknowledgment multiplied by 39. 2012 free taxes online 6%. 2012 free taxes online Qualified Intellectual Property A taxpayer who contributes qualified intellectual property to a charity may be entitled to a charitable deduction, in addition to any initial deduction allowed in the year of contribution. 2012 free taxes online The additional deduction is based on a specified percentage of the qualified donee income with respect to the qualified intellectual property. 2012 free taxes online To qualify for the additional charitable deduction, the donor must provide notice to the donee at the time of the contribution that the donor intends to treat the contribution as qualified intellectual property contribution for purposes of sections 170(m) and 6050L. 2012 free taxes online Every donee organization described in section 170(c) (except a private foundation as defined in section 509(a) that is not described in section 170(b)(1)(F)) that receives or accrues net income from a charitable gift of qualified intellectual property must file Form 8899. 2012 free taxes online Form 8899. 2012 free taxes online   Form 8899, Notice of Income From Donated Intellectual Property, is used by a donee to report net income from qualified intellectual property to the donor of the property and to the IRS and is due by the last day of the first full month following the close of the donee’s tax year. 2012 free taxes online This form must be filed for each tax year of the donee in which the donated property produces net income, but only if all or part of that tax year occurs during the 10-year period beginning on the date of the contribution and that tax year does not begin after the expiration of the legal life of the donated property. 2012 free taxes online Qualified donee income. 2012 free taxes online   Qualified donee income is any net income received by or accrued to the donee that is properly allocable to the qualified intellectual property for the tax year of the donee which ends within or with the tax year of the donor. 2012 free taxes online Income is not treated as allocated to qualified intellectual property if it is received or accrued after the earlier of the expiration of the legal life of the qualified intellectual property, or the 10-year period beginning with the date of
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  • Group Warns Consumers Not to Take the Bait in Phishing Scams
    Identity thieves are using a new scheme dubbed "phishing" to trick people into providing their Social Security numbers, financial account numbers, passwords, PIN numbers, and other personal information, and anyone with a telephone or email can be a victim, warns the National Consumers League (NCL). Based on complaints reported to NCL's National Fraud Information Center/Internet Fraud Watch database since last December, when the phishing category was added, this method of ID theft is now the fourth most common Internet scam.
  • Phishing Attack Uses Better Business Bureau Name to Trap Consumers and Businesses
    Better Business Bureau is alerting consumers and businesses about a phishing scheme that uses both e-mail messages and blog posts directing recipients and viewers to register software with BBB. BBB wants the public to know that such messages and posts are not coming from any element of the BBB System, and that this attack has not affected BBB computer systems or networks nor has any data been compromised.
  • Phishing Scams
    Learn to not get hooked by "phishing" scams that use spam or pop-up messages to deceive you into disclosing your credit card numbers, bank account information, Social Security number, passwords, or other sensitive information.
  • Spammers Using Google, Outlook Calendars to Get Your Attention
    Spammers are starting to use the meeting invite features of both Google Calendar and Microsoft Outlook to send messages advertising the latest designer watches and prescription drugs.
  • Spear Phishers: Angling to Steal Your Financial Info
    It's a real-life, classic case of phishing a virtual trap set by cyber thieves that uses official-looking e-mails to lure you to fake websites and trick you into revealing your personal information. It's also an example of an even more mischievous type of phishing known as spear phishing,a rising cyber threat that you need to know about.

The 2012 Free Taxes Online

2012 free taxes online Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. 2012 free taxes online General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. 2012 free taxes online Several assets. 2012 free taxes online Special situations. 2012 free taxes online Schedule D (Form 1040). 2012 free taxes online Form 4797. 2012 free taxes online How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 2012 free taxes online The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. 2012 free taxes online The installment sales method cannot be used for the following. 2012 free taxes online Sale of inventory. 2012 free taxes online   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. 2012 free taxes online See Sale of a Business under Other Rules, later. 2012 free taxes online Dealer sales. 2012 free taxes online   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. 2012 free taxes online This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. 2012 free taxes online However, the rule does not apply to an installment sale of property used or produced in farming. 2012 free taxes online Special rule. 2012 free taxes online   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. 2012 free taxes online For more information, see section 453(l). 2012 free taxes online Stock or securities. 2012 free taxes online   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. 2012 free taxes online You must report the entire gain on the sale in the year in which the trade date falls. 2012 free taxes online Installment obligation. 2012 free taxes online   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 2012 free taxes online General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 2012 free taxes online See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. 2012 free taxes online Sale at a loss. 2012 free taxes online   If your sale results in a loss, you cannot use the installment method. 2012 free taxes online If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. 2012 free taxes online Unstated interest. 2012 free taxes online   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. 2012 free taxes online See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 2012 free taxes online Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. 2012 free taxes online Each payment on an installment sale usually consists of the following three parts. 2012 free taxes online Interest income. 2012 free taxes online Return of your adjusted basis in the property. 2012 free taxes online Gain on the sale. 2012 free taxes online In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 2012 free taxes online You do not include in income the part that is the return of your basis in the property. 2012 free taxes online Basis is the amount of your investment in the property for installment sale purposes. 2012 free taxes online Interest Income You must report interest as ordinary income. 2012 free taxes online Interest is generally not included in a down payment. 2012 free taxes online However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 2012 free taxes online Interest provided in the agreement is called stated interest. 2012 free taxes online If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 2012 free taxes online See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 2012 free taxes online Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 2012 free taxes online A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). 2012 free taxes online Figuring adjusted basis for installment sale purposes. 2012 free taxes online   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. 2012 free taxes online When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 2012 free taxes online Worksheet A. 2012 free taxes online Figuring Adjusted Basis and Gross Profit Percentage 1. 2012 free taxes online Enter the selling price for the property   2. 2012 free taxes online Enter your adjusted basis for the property     3. 2012 free taxes online Enter your selling expenses     4. 2012 free taxes online Enter any depreciation recapture     5. 2012 free taxes online Add lines 2, 3, and 4. 2012 free taxes online  This is your adjusted basis for installment sale purposes   6. 2012 free taxes online Subtract line 5 from line 1. 2012 free taxes online If zero or less, enter -0-. 2012 free taxes online  This is your gross profit     If the amount entered on line 6 is zero, stop here. 2012 free taxes online You cannot use the installment method. 2012 free taxes online   7. 2012 free taxes online Enter the contract price for the property   8. 2012 free taxes online Divide line 6 by line 7. 2012 free taxes online This is your gross profit percentage   Selling price. 2012 free taxes online   The selling price is the total cost of the property to the buyer and includes any of the following. 2012 free taxes online Any money you are to receive. 2012 free taxes online The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). 2012 free taxes online Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 2012 free taxes online Any of your selling expenses the buyer pays. 2012 free taxes online   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 2012 free taxes online Adjusted basis for installment sale purposes. 2012 free taxes online   Your adjusted basis is the total of the following three items. 2012 free taxes online Adjusted basis. 2012 free taxes online Selling expenses. 2012 free taxes online Depreciation recapture. 2012 free taxes online Adjusted basis. 2012 free taxes online   Basis is your investment in the property for installment sale purposes. 2012 free taxes online The way you figure basis depends on how you acquire the property. 2012 free taxes online The basis of property you buy is generally its cost. 2012 free taxes online The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 2012 free taxes online   While you own property, various events may change your original basis. 2012 free taxes online Some events, such as adding rooms or making permanent improvements, increase basis. 2012 free taxes online Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 2012 free taxes online The result is adjusted basis. 2012 free taxes online   For more information on how to figure basis and adjusted basis, see Publication 551. 2012 free taxes online For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. 2012 free taxes online Selling expenses. 2012 free taxes online   Selling expenses relate to the sale of the property. 2012 free taxes online They include commissions, attorney fees, and any other expenses paid on the sale. 2012 free taxes online Selling expenses are added to the basis of the sold property. 2012 free taxes online Depreciation recapture. 2012 free taxes online   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 2012 free taxes online See Depreciation Recapture Income under Other Rules, later. 2012 free taxes online Gross profit. 2012 free taxes online   Gross profit is the total gain you report on the installment method. 2012 free taxes online   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 2012 free taxes online If the property you sold was your home, subtract from the gross profit any gain you can exclude. 2012 free taxes online See Sale of Your Home , later, under Reporting Installment Sale Income. 2012 free taxes online Contract price. 2012 free taxes online   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 2012 free taxes online Gross profit percentage. 2012 free taxes online   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 2012 free taxes online This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 2012 free taxes online   The gross profit percentage generally remains the same for each payment you receive. 2012 free taxes online However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. 2012 free taxes online Example. 2012 free taxes online You sell property at a contract price of $6,000 and your gross profit is $1,500. 2012 free taxes online Your gross profit percentage is 25% ($1,500 ÷ $6,000). 2012 free taxes online After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 2012 free taxes online The remainder (balance) of each payment is the tax-free return of your adjusted basis. 2012 free taxes online Amount to report as installment sale income. 2012 free taxes online   Multiply the payments you receive each year (less interest) by the gross profit percentage. 2012 free taxes online The result is your installment sale income for the tax year. 2012 free taxes online In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 2012 free taxes online A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 2012 free taxes online For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. 2012 free taxes online Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. 2012 free taxes online You then must refigure the gross profit percentage for the remaining payments. 2012 free taxes online Refigure your gross profit using Worksheet B. 2012 free taxes online You will spread any remaining gain over future installments. 2012 free taxes online Worksheet B. 2012 free taxes online New Gross Profit Percentage — Selling Price Reduced 1. 2012 free taxes online Enter the reduced selling  price for the property   2. 2012 free taxes online Enter your adjusted  basis for the  property     3. 2012 free taxes online Enter your selling  expenses     4. 2012 free taxes online Enter any depreciation  recapture     5. 2012 free taxes online Add lines 2, 3, and 4. 2012 free taxes online   6. 2012 free taxes online Subtract line 5 from line 1. 2012 free taxes online  This is your adjusted  gross profit   7. 2012 free taxes online Enter any installment sale  income reported in  prior year(s)   8. 2012 free taxes online Subtract line 7 from line 6   9. 2012 free taxes online Future installments   10. 2012 free taxes online Divide line 8 by line 9. 2012 free taxes online  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2012 free taxes online Example. 2012 free taxes online In 2011, you sold land with a basis of $40,000 for $100,000. 2012 free taxes online Your gross profit was $60,000. 2012 free taxes online You received a $20,000 down payment and the buyer's note for $80,000. 2012 free taxes online The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. 2012 free taxes online Your gross profit percentage is 60%. 2012 free taxes online You reported a gain of $12,000 on each payment received in 2011 and 2012. 2012 free taxes online In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. 2012 free taxes online The new gross profit percentage, 46. 2012 free taxes online 67%, is figured on Example—Worksheet B. 2012 free taxes online You will report a gain of $7,000 (46. 2012 free taxes online 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. 2012 free taxes online Example — Worksheet B. 2012 free taxes online New Gross Profit Percentage — Selling Price Reduced 1. 2012 free taxes online Enter the reduced selling  price for the property 85,000 2. 2012 free taxes online Enter your adjusted  basis for the  property 40,000   3. 2012 free taxes online Enter your selling  expenses -0-   4. 2012 free taxes online Enter any depreciation  recapture -0-   5. 2012 free taxes online Add lines 2, 3, and 4. 2012 free taxes online 40,000 6. 2012 free taxes online Subtract line 5 from line 1. 2012 free taxes online  This is your adjusted  gross profit 45,000 7. 2012 free taxes online Enter any installment sale  income reported in  prior year(s) 24,000 8. 2012 free taxes online Subtract line 7 from line 6 21,000 9. 2012 free taxes online Future installments 45,000 10. 2012 free taxes online Divide line 8 by line 9. 2012 free taxes online  This is your new gross profit percentage* 46. 2012 free taxes online 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2012 free taxes online Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. 2012 free taxes online You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. 2012 free taxes online See Schedule D (Form 1040) and Form 4797 , later. 2012 free taxes online If the property was your main home, you may be able to exclude part or all of the gain. 2012 free taxes online See Sale of Your Home , later. 2012 free taxes online Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 2012 free taxes online Attach it to your tax return for each year. 2012 free taxes online Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. 2012 free taxes online Which parts to complete. 2012 free taxes online   Which part to complete depends on whether you are filing the form for the year of sale or a later year. 2012 free taxes online Year of sale. 2012 free taxes online   Complete lines 1 through 4, Part I, and Part II. 2012 free taxes online If you sold property to a related party during the year, also complete Part III. 2012 free taxes online Later years. 2012 free taxes online   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. 2012 free taxes online   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. 2012 free taxes online (After December 31, 1986, the installment method is not available for the sale of marketable securities. 2012 free taxes online ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. 2012 free taxes online Complete Part III unless you received the final payment during the tax year. 2012 free taxes online   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. 2012 free taxes online Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. 2012 free taxes online Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. 2012 free taxes online Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). 2012 free taxes online If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. 2012 free taxes online Your gain is long-term if you owned the property for more than 1 year when you sold it. 2012 free taxes online Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. 2012 free taxes online All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. 2012 free taxes online For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. 2012 free taxes online If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. 2012 free taxes online ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. 2012 free taxes online See Publication 523 for information about excluding the gain. 2012 free taxes online If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. 2012 free taxes online Seller-financed mortgage. 2012 free taxes online   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. 2012 free taxes online   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. 2012 free taxes online   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. 2012 free taxes online   If either person fails to include the other person's SSN, a $50 penalty will be assessed. 2012 free taxes online Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. 2012 free taxes online The following topics are discussed. 2012 free taxes online Electing out of the installment method. 2012 free taxes online Payments received or considered received. 2012 free taxes online Escrow account. 2012 free taxes online Depreciation recapture income. 2012 free taxes online Sale to a related person. 2012 free taxes online Like-kind exchange. 2012 free taxes online Contingent payment sale. 2012 free taxes online Single sale of several assets. 2012 free taxes online Sale of a business. 2012 free taxes online Unstated interest and original issue discount. 2012 free taxes online Disposition of an installment obligation. 2012 free taxes online Repossession. 2012 free taxes online Interest on deferred tax. 2012 free taxes online Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 2012 free taxes online To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. 2012 free taxes online Notes, mortgages, and land contracts are examples of obligations that are included at FMV. 2012 free taxes online You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. 2012 free taxes online If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). 2012 free taxes online Example. 2012 free taxes online You sold a parcel of land for $50,000. 2012 free taxes online You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. 2012 free taxes online The buyer gave you a note for $40,000. 2012 free taxes online The note had an FMV of $40,000. 2012 free taxes online You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. 2012 free taxes online The land cost $25,000, and you owned it for more than one year. 2012 free taxes online You decide to elect out of the installment method and report the entire gain in the year of sale. 2012 free taxes online Gain realized:     Selling price $50,000 Minus: Property's adj. 2012 free taxes online basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. 2012 free taxes online basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. 2012 free taxes online You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. 2012 free taxes online The interest on the note is ordinary income and is reported as interest income each year. 2012 free taxes online How to elect out. 2012 free taxes online   To make this election, do not report your sale on Form 6252. 2012 free taxes online Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. 2012 free taxes online When to elect out. 2012 free taxes online   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 2012 free taxes online Automatic six-month extension. 2012 free taxes online   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). 2012 free taxes online Write “Filed pursuant to section 301. 2012 free taxes online 9100-2” at the top of the amended return and file it where the original return was filed. 2012 free taxes online Revoking the election. 2012 free taxes online   Once made, the election can be revoked only with IRS approval. 2012 free taxes online A revocation is retroactive. 2012 free taxes online You will not be allowed to revoke the election if either of the following applies. 2012 free taxes online One of the purposes is to avoid federal income tax. 2012 free taxes online The tax year in which any payment was received has closed. 2012 free taxes online Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 2012 free taxes online In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 2012 free taxes online These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 2012 free taxes online However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. 2012 free taxes online Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 2012 free taxes online Include these expenses in the selling and contract prices when figuring the gross profit percentage. 2012 free taxes online Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 2012 free taxes online Mortgage not more than basis. 2012 free taxes online   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 2012 free taxes online It is considered a recovery of your basis. 2012 free taxes online The contract price is the selling price minus the mortgage. 2012 free taxes online Example. 2012 free taxes online You sell property with an adjusted basis of $19,000. 2012 free taxes online You have selling expenses of $1,000. 2012 free taxes online The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). 2012 free taxes online The selling price is $25,000 ($15,000 + $10,000). 2012 free taxes online Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 2012 free taxes online The contract price is $10,000 ($25,000 − $15,000 mortgage). 2012 free taxes online Your gross profit percentage is 50% ($5,000 ÷ $10,000). 2012 free taxes online You report half of each $2,000 payment received as gain from the sale. 2012 free taxes online You also report all interest you receive as ordinary income. 2012 free taxes online Mortgage more than basis. 2012 free taxes online   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 2012 free taxes online The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 2012 free taxes online   To figure the contract price, subtract the mortgage from the selling price. 2012 free taxes online This is the total amount (other than interest) you will receive directly from the buyer. 2012 free taxes online Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 2012 free taxes online The contract price is then the same as your gross profit from the sale. 2012 free taxes online    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 2012 free taxes online Example. 2012 free taxes online The selling price for your property is $9,000. 2012 free taxes online The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 2012 free taxes online Your adjusted basis in the property is $4,400. 2012 free taxes online You have selling expenses of $600, for a total installment sale basis of $5,000. 2012 free taxes online The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 2012 free taxes online This amount is included in the contract price and treated as a payment received in the year of sale. 2012 free taxes online The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. 2012 free taxes online Report 100% of each payment (less interest) as gain from the sale. 2012 free taxes online Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 2012 free taxes online Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. 2012 free taxes online You are considered to receive a payment equal to the outstanding canceled debt. 2012 free taxes online Example. 2012 free taxes online Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. 2012 free taxes online On April 4, 2013, she bought the land for $70,000. 2012 free taxes online At that time, $30,000 of her loan to you was outstanding. 2012 free taxes online She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. 2012 free taxes online She did not assume an existing mortgage. 2012 free taxes online She canceled the $30,000 debt you owed her. 2012 free taxes online You are considered to have received a $30,000 payment at the time of the sale. 2012 free taxes online Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 2012 free taxes online If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 2012 free taxes online Compare the debt to your installment sale basis in the property being sold. 2012 free taxes online If the debt is less than your installment sale basis, none of it is treated as a payment. 2012 free taxes online If it is more, only the difference is treated as a payment. 2012 free taxes online If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 2012 free taxes online These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . 2012 free taxes online However, they apply only to the following types of debt the buyer assumes. 2012 free taxes online Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 2012 free taxes online Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 2012 free taxes online If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 2012 free taxes online The value of the assumed debt is then considered a payment to you in the year of sale. 2012 free taxes online Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. 2012 free taxes online However, see Like-Kind Exchange , later. 2012 free taxes online Generally, the amount of the payment is the property's FMV on the date you receive it. 2012 free taxes online Exception. 2012 free taxes online   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 2012 free taxes online See Unstated Interest and Original Issue Discount (OID) , later. 2012 free taxes online Debt not payable on demand. 2012 free taxes online   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. 2012 free taxes online This is true even if the debt is guaranteed by a third party, including a government agency. 2012 free taxes online Fair market value (FMV). 2012 free taxes online   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 2012 free taxes online Third-party note. 2012 free taxes online   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 2012 free taxes online Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 2012 free taxes online The excess of the note's face value over its FMV is interest. 2012 free taxes online Exclude this interest in determining the selling price of the property. 2012 free taxes online However, see Exception under Property Used As a Payment, earlier. 2012 free taxes online Example. 2012 free taxes online You sold real estate in an installment sale. 2012 free taxes online As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. 2012 free taxes online The FMV of the third-party note at the time of the sale was $30,000. 2012 free taxes online This amount, not $50,000, is a payment to you in the year of sale. 2012 free taxes online The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 2012 free taxes online The remaining 40% is interest taxed as ordinary income. 2012 free taxes online Bond. 2012 free taxes online   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 2012 free taxes online For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. 2012 free taxes online    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 2012 free taxes online However, see Exception under Property Used As a Payment, earlier. 2012 free taxes online Buyer's note. 2012 free taxes online   The buyer's note (unless payable on demand) is not considered payment on the sale. 2012 free taxes online However, its full face value is included when figuring the selling price and the contract price. 2012 free taxes online Payments you receive on the note are used to figure your gain in the year received. 2012 free taxes online Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. 2012 free taxes online This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. 2012 free taxes online It does not apply to the following dispositions. 2012 free taxes online Sales of property used or produced in farming. 2012 free taxes online Sales of personal-use property. 2012 free taxes online Qualifying sales of time-shares and residential lots. 2012 free taxes online The net debt proceeds are the gross debt minus the direct expenses of getting the debt. 2012 free taxes online The amount treated as a payment is considered received on the later of the following dates. 2012 free taxes online The date the debt becomes secured. 2012 free taxes online The date you receive the debt proceeds. 2012 free taxes online A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. 2012 free taxes online For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. 2012 free taxes online Limit. 2012 free taxes online   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. 2012 free taxes online The total contract price on the installment sale. 2012 free taxes online Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. 2012 free taxes online Installment payments. 2012 free taxes online   The pledge rule accelerates the reporting of the installment obligation payments. 2012 free taxes online Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. 2012 free taxes online Exception. 2012 free taxes online   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. 2012 free taxes online The debt was outstanding on December 17, 1987. 2012 free taxes online The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. 2012 free taxes online   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. 2012 free taxes online   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. 2012 free taxes online Any excess is treated as a payment on the installment obligation. 2012 free taxes online Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. 2012 free taxes online These sales cannot be reported on the installment method. 2012 free taxes online The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. 2012 free taxes online When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. 2012 free taxes online Example. 2012 free taxes online You sell property for $100,000. 2012 free taxes online The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. 2012 free taxes online You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. 2012 free taxes online You report the entire gain in the year of sale. 2012 free taxes online Escrow established in a later year. 2012 free taxes online   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. 2012 free taxes online Substantial restriction. 2012 free taxes online   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. 2012 free taxes online For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. 2012 free taxes online Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. 2012 free taxes online Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 2012 free taxes online Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. 2012 free taxes online The recapture income is also included in Part I of Form 6252. 2012 free taxes online However, the gain equal to the recapture income is reported in full in the year of the sale. 2012 free taxes online Only the gain greater than the recapture income is reported on the installment method. 2012 free taxes online For more information on depreciation recapture, see chapter 3 in Publication 544. 2012 free taxes online The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. 2012 free taxes online Determining gross profit is discussed under General Rules , earlier. 2012 free taxes online Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 2012 free taxes online If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. 2012 free taxes online These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. 2012 free taxes online Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. 2012 free taxes online Instead, all payments to be received are considered received in the year of sale. 2012 free taxes online However, see Exception , below. 2012 free taxes online Depreciable property for this rule is any property the purchaser can depreciate. 2012 free taxes online Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. 2012 free taxes online In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. 2012 free taxes online The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. 2012 free taxes online Exception. 2012 free taxes online   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. 2012 free taxes online You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. 2012 free taxes online Related person. 2012 free taxes online   Related persons include the following. 2012 free taxes online A person and all controlled entities with respect to that person. 2012 free taxes online A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. 2012 free taxes online Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. 2012 free taxes online Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. 2012 free taxes online   For information about which entities are controlled entities, see section 1239(c). 2012 free taxes online Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. 2012 free taxes online The related person makes the second disposition before making all payments on the first disposition. 2012 free taxes online The related person disposes of the property within 2 years of the first disposition. 2012 free taxes online This rule does not apply if the property involved is marketable securities. 2012 free taxes online Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. 2012 free taxes online See Exception , later. 2012 free taxes online Related person. 2012 free taxes online   Related persons include the following. 2012 free taxes online Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. 2012 free taxes online A partnership or estate and a partner or beneficiary. 2012 free taxes online A trust (other than a section 401(a) employees trust) and a beneficiary. 2012 free taxes online A trust and an owner of the trust. 2012 free taxes online Two corporations that are members of the same controlled group as defined in section 267(f). 2012 free taxes online The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 2012 free taxes online A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. 2012 free taxes online An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. 2012 free taxes online A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. 2012 free taxes online The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 2012 free taxes online Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 2012 free taxes online An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. 2012 free taxes online A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. 2012 free taxes online An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. 2012 free taxes online Example 1. 2012 free taxes online In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. 2012 free taxes online His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. 2012 free taxes online His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). 2012 free taxes online He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. 2012 free taxes online 50). 2012 free taxes online Bob made no improvements to the property and sold it to Alfalfa Inc. 2012 free taxes online , in 2013 for $600,000 after making the payment for that year. 2012 free taxes online The amount realized from the second disposition is $600,000. 2012 free taxes online Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . 2012 free taxes online 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). 2012 free taxes online Example 2. 2012 free taxes online Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. 2012 free taxes online The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . 2012 free taxes online 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. 2012 free taxes online They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. 2012 free taxes online In 2016, he receives the final $100,000 payment. 2012 free taxes online He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . 2012 free taxes online 50 Installment sale income for 2016 $ 50,000 Exception. 2012 free taxes online   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. 2012 free taxes online Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. 2012 free taxes online   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. 2012 free taxes online However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. 2012 free taxes online   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. 2012 free taxes online An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. 2012 free taxes online A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. 2012 free taxes online Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 2012 free taxes online These trades are known as like-kind exchanges. 2012 free taxes online The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. 2012 free taxes online You do not have to report any part of your gain if you receive only like-kind property. 2012 free taxes online However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. 2012 free taxes online For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. 2012 free taxes online Installment payments. 2012 free taxes online   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. 2012 free taxes online The contract price is reduced by the FMV of the like-kind property received in the trade. 2012 free taxes online The gross profit is reduced by any gain on the trade that can be postponed. 2012 free taxes online Like-kind property received in the trade is not considered payment on the installment obligation. 2012 free taxes online Example. 2012 free taxes online In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. 2012 free taxes online He also receives an installment note for $800,000 in the trade. 2012 free taxes online Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. 2012 free taxes online George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). 2012 free taxes online His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). 2012 free taxes online The contract price is $800,000 ($1,000,000 − $200,000). 2012 free taxes online The gross profit percentage is 75% ($600,000 ÷ $800,000). 2012 free taxes online He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. 2012 free taxes online He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). 2012 free taxes online Deferred exchanges. 2012 free taxes online   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. 2012 free taxes online Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. 2012 free taxes online If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. 2012 free taxes online See Regulations section 1. 2012 free taxes online 1031(k)-1(j)(2) for these rules. 2012 free taxes online Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. 2012 free taxes online This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. 2012 free taxes online If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. 2012 free taxes online For rules on using the installment method for a contingent payment sale, see Regulations section 15a. 2012 free taxes online 453-1(c). 2012 free taxes online Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. 2012 free taxes online You also have to allocate part of the selling price to each asset. 2012 free taxes online If you sell assets that constitute a trade or business, see Sale of a Business , later. 2012 free taxes online Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. 2012 free taxes online If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. 2012 free taxes online This becomes the net FMV. 2012 free taxes online A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. 2012 free taxes online However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. 2012 free taxes online It must be reported separately. 2012 free taxes online The remaining assets sold at a gain are reported together. 2012 free taxes online Example. 2012 free taxes online You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. 2012 free taxes online The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. 2012 free taxes online Your installment sale basis for each parcel was $15,000. 2012 free taxes online Your net gain was $85,000 ($130,000 − $45,000). 2012 free taxes online You report the gain on the installment method. 2012 free taxes online The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. 2012 free taxes online The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. 2012 free taxes online The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. 2012 free taxes online You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. 2012 free taxes online Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. 2012 free taxes online You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. 2012 free taxes online The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. 2012 free taxes online You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. 2012 free taxes online However, if parcel C was held for personal use, the loss is not deductible. 2012 free taxes online You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). 2012 free taxes online Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. 2012 free taxes online Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. 2012 free taxes online Assets sold at a loss. 2012 free taxes online Real and personal property eligible for the installment method. 2012 free taxes online Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. 2012 free taxes online Inventory. 2012 free taxes online   The sale of inventories of personal property cannot be reported on the installment method. 2012 free taxes online All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 2012 free taxes online   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 2012 free taxes online If you do not, each payment must be allocated between the inventory and the other assets sold. 2012 free taxes online   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. 2012 free taxes online Use your basis in the inventory to figure the cost of goods sold. 2012 free taxes online Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. 2012 free taxes online Residual method. 2012 free taxes online   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. 2012 free taxes online This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. 2012 free taxes online   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. 2012 free taxes online This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). 2012 free taxes online   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. 2012 free taxes online   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). 2012 free taxes online The consideration remaining after this reduction must be allocated among the various business assets in a certain order. 2012 free taxes online   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. 2012 free taxes online Certificates of deposit, U. 2012 free taxes online S. 2012 free taxes online Government securities, foreign currency, and actively traded personal property, including stock and securities. 2012 free taxes online Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. 2012 free taxes online However, see Regulations section 1. 2012 free taxes online 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. 2012 free taxes online Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. 2012 free taxes online All other assets except section 197 intangibles. 2012 free taxes online Section 197 intangibles except goodwill and going concern value. 2012 free taxes online Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 2012 free taxes online   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. 2012 free taxes online For example, if an asset is described in both (4) and (6), include it in (4). 2012 free taxes online Agreement. 2012 free taxes online   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. 2012 free taxes online This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 2012 free taxes online Reporting requirement. 2012 free taxes online   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 2012 free taxes online Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. 2012 free taxes online The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 2012 free taxes online Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. 2012 free taxes online The sale of a partnership interest is treated as the sale of a single capital asset. 2012 free taxes online The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. 2012 free taxes online (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. 2012 free taxes online ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. 2012 free taxes online The gain allocated to the other assets can be reported under the installment method. 2012 free taxes online For more information on the treatment of unrealized receivables and inventory, see Publication 541. 2012 free taxes online Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. 2012 free taxes online You received a $100,000 down payment and the buyer's note for $120,000. 2012 free taxes online The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. 2012 free taxes online The total selling price is $220,000. 2012 free taxes online Your selling expenses are $11,000. 2012 free taxes online The selling expenses are divided among all the assets sold, including inventory. 2012 free taxes online Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). 2012 free taxes online The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. 2012 free taxes online Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). 2012 free taxes online The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. 2012 free taxes online The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. 2012 free taxes online   Sale  Price Sale   Exp. 2012 free taxes online Adj. 2012 free taxes online   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. 2012 free taxes online A 71,000 3,550 63,800 3,650 Mch. 2012 free taxes online B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. 2012 free taxes online There is no depreciation recapture income because the building was depreciated using the straight line method. 2012 free taxes online All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. 2012 free taxes online Figure depreciation recapture in Part III of Form 4797. 2012 free taxes online The total depreciation recapture income reported in Part II of Form 4797 is $5,209. 2012 free taxes online This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). 2012 free taxes online These gains are reported in full in the year of sale and are not included in the installment sale computation. 2012 free taxes online Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. 2012 free taxes online The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. 2012 free taxes online The selling price equals the contract price for the installment sale ($108,500). 2012 free taxes online The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. 2012 free taxes online   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). 2012 free taxes online The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. 2012 free taxes online 95 Building— $9,600 ÷ $108,500 8. 2012 free taxes online 85 Goodwill— $17,575 ÷ $108,500 16. 2012 free taxes online 20 Total 48. 2012 free taxes online 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. 2012 free taxes online The selling price for the installment sale is $108,500. 2012 free taxes online This is 49. 2012 free taxes online 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). 2012 free taxes online The selling price of assets not reported on the installment method is $111,500. 2012 free taxes online This is 50. 2012 free taxes online 7% ($111,500 ÷ $220,000) of the total selling price. 2012 free taxes online Multiply principal payments by 49. 2012 free taxes online 3% to determine the part of the payment for the installment sale. 2012 free taxes online The balance, 50. 2012 free taxes online 7%, is for the part reported in the year of the sale. 2012 free taxes online The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. 2012 free taxes online When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. 2012 free taxes online Only the part for the installment sale (49. 2012 free taxes online 3%) is used in the installment sale computation. 2012 free taxes online The only payment received in 2013 is the down payment of $100,000. 2012 free taxes online The part of the payment for the installment sale is $49,300 ($100,000 × 49. 2012 free taxes online 3%). 2012 free taxes online This amount is used in the installment sale computation. 2012 free taxes online Installment income for 2013. 2012 free taxes online   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. 2012 free taxes online Income Land—22. 2012 free taxes online 95% of $49,300 $11,314 Building—8. 2012 free taxes online 85% of $49,300 4,363 Goodwill—16. 2012 free taxes online 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. 2012 free taxes online   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. 2012 free taxes online 3% of the total payments you receive on the buyer's note during the year. 2012 free taxes online Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 2012 free taxes online Interest provided in the contract is called stated interest. 2012 free taxes online If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 2012 free taxes online If section 483 applies to the contract, this interest is called unstated interest. 2012 free taxes online If section 1274 applies to the contract, this interest is called original issue discount (OID). 2012 free taxes online An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). 2012 free taxes online Treatment of unstated interest and OID. 2012 free taxes online   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 2012 free taxes online As a result, the buyer cannot deduct the unstated interest. 2012 free taxes online The seller must report the unstated interest as income. 2012 free taxes online   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 2012 free taxes online   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 2012 free taxes online Rules for the seller. 2012 free taxes online   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. 2012 free taxes online If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. 2012 free taxes online   Include the unstated interest in income based on your regular method of accounting. 2012 free taxes online Include OID in income over the term of the contract. 2012 free taxes online   The OID includible in income each year is based on the constant yield method described in section 1272. 2012 free taxes online (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. 2012 free taxes online )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. 2012 free taxes online Reduce the selling price by any stated principal treated as interest to determine the gain. 2012 free taxes online   Report unstated interest or OID on your tax return, in addition to stated interest. 2012 free taxes online Rules for the buyer. 2012 free taxes online   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. 2012 free taxes online These rules do not apply to personal-use property (for example, property not used in a trade or business). 2012 free taxes online Adequate stated interest. 2012 free taxes online   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. 2012 free taxes online The present value of a payment is determined based on the test rate of interest, defined next. 2012 free taxes online (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. 2012 free taxes online ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. 2012 free taxes online Test rate of interest. 2012 free taxes online   The test rate of interest for a contract is the 3-month rate. 2012 free taxes online The 3-month rate is the lower of the following applicable federal rates (AFRs). 2012 free taxes online The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. 2012 free taxes online The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. 2012 free taxes online Applicable federal rate (AFR). 2012 free taxes online   The AFR depends on the month the binding