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2012 Tax How Com

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2012 Tax How Com

2012 tax how com 6. 2012 tax how com   How To Report Table of Contents Where To ReportGifts. 2012 tax how com Statutory employees. 2012 tax how com Vehicle Provided by Your Employer ReimbursementsAccountable Plans Nonaccountable Plans Rules for Independent Contractors and Clients How To Use Per Diem Rate TablesThe Two Substantiation Methods Transition Rules Completing Forms 2106 and 2106-EZInformation on use of cars. 2012 tax how com Standard mileage rate. 2012 tax how com Actual expenses. 2012 tax how com Car rentals. 2012 tax how com Hours of service limits. 2012 tax how com Allocating your reimbursement. 2012 tax how com 1. 2012 tax how com Limit on meals and entertainment. 2012 tax how com 2. 2012 tax how com Limit on miscellaneous itemized deductions. 2012 tax how com 3. 2012 tax how com Limit on total itemized deductions. 2012 tax how com Special Rules This chapter explains where and how to report the expenses discussed in this publication. 2012 tax how com It discusses reimbursements and how to treat them under accountable and nonaccountable plans. 2012 tax how com It also explains rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees. 2012 tax how com The chapter ends with illustrations of how to report travel, entertainment, gift, and car expenses on Forms 2106 and 2106-EZ. 2012 tax how com Where To Report This section provides general information on where to report the expenses discussed in this publication. 2012 tax how com Self-employed. 2012 tax how com   You must report your income and expenses on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if you are a sole proprietor, or on Schedule F (Form 1040) if you are a farmer. 2012 tax how com You do not use Form 2106 or 2106-EZ. 2012 tax how com    If you claim car or truck expenses, you must provide certain information on the use of your vehicle. 2012 tax how com You provide this information on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Form 4562. 2012 tax how com   If you file Schedule C (Form 1040): Report your travel expenses, except meals, on line 24a, Report your deductible meals (actual cost or standard meal allowance) and entertainment on line 24b, Report your gift expenses and transportation expenses, other than car expenses, on line 27a, and Report your car expenses on line 9. 2012 tax how com Complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization. 2012 tax how com   If you file Schedule C-EZ (Form 1040), report the total of all business expenses on line 2. 2012 tax how com You can only include 50% of your meals and entertainment in that total. 2012 tax how com If you include car expenses, you must also complete Part III of the form. 2012 tax how com    If you file Schedule F (Form 1040): Report your car expenses on line 10. 2012 tax how com Attach Form 4562 and provide information on the use of your car in Part V of Form 4562. 2012 tax how com Report all other business expenses discussed in this publication on line 32. 2012 tax how com You can only include 50% of your meals and entertainment on that line. 2012 tax how com See your form instructions for more information on how to complete your tax return. 2012 tax how com Both self-employed and an employee. 2012 tax how com   If you are both self-employed and an employee, you must keep separate records for each business activity. 2012 tax how com Report your business expenses for self-employment on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040), as discussed earlier. 2012 tax how com Report your business expenses for your work as an employee on Form 2106 or 2106-EZ, as discussed next. 2012 tax how com Employees. 2012 tax how com    If you are an employee, you generally must complete Form 2106 to deduct your travel, transportation, and entertainment expenses. 2012 tax how com However, you can use the shorter Form 2106-EZ instead of Form 2106 if you meet all of the following conditions. 2012 tax how com You are an employee deducting expenses attributable to your job. 2012 tax how com You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). 2012 tax how com If you claim car expenses, you use the standard mileage rate. 2012 tax how com   For more information on how to report your expenses on Forms 2106 and 2106-EZ, see Completing Forms 2106 and 2106-EZ , later. 2012 tax how com Gifts. 2012 tax how com   If you did not receive any reimbursements (or the reimbursements were all included in box 1 of your Form W-2), the only business expense you are claiming is for gifts, and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. 2012 tax how com Instead, claim the amount of your deductible gifts directly on line 21 of Schedule A (Form 1040). 2012 tax how com Statutory employees. 2012 tax how com    If you received a Form W-2 and the “Statutory employee” box in box 13 was checked, report your income and expenses related to that income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). 2012 tax how com Do not complete Form 2106 or 2106-EZ. 2012 tax how com   Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain homeworkers. 2012 tax how com If you are entitled to a reimbursement from your employer but you do not claim it, you cannot claim a deduction for the expenses to which that unclaimed reimbursement applies. 2012 tax how com Reimbursement for personal expenses. 2012 tax how com    If your employer reimburses you for nondeductible personal expenses, such as for vacation trips, your employer must report the reimbursement as wage income in box 1 of your Form W-2. 2012 tax how com You cannot deduct personal expenses. 2012 tax how com Income-producing property. 2012 tax how com   If you have travel or transportation expenses related to income-producing property, report your deductible expenses on the form appropriate for that activity. 2012 tax how com   For example, if you have rental real estate income and expenses, report your expenses on Schedule E (Form 1040), Supplemental Income and Loss. 2012 tax how com See Publication 527, Residential Rental Property, for more information on the rental of real estate. 2012 tax how com If you have deductible investment-related transportation expenses, report them on Schedule A (Form 1040), line 23. 2012 tax how com Vehicle Provided by Your Employer If your employer provides you with a car, you may be able to deduct the actual expenses of operating that car for business purposes. 2012 tax how com The amount you can deduct depends on the amount that your employer included in your income and the business and personal miles you drove during the year. 2012 tax how com You cannot use the standard mileage rate. 2012 tax how com Value reported on Form W-2. 2012 tax how com   Your employer can figure and report either the actual value of your personal use of the car or the value of the car as if you used it only for personal purposes (100% income inclusion). 2012 tax how com Your employer must separately state the amount if 100% of the annual lease value was included in your income. 2012 tax how com If you are unsure of the amount included on your Form W-2, ask your employer. 2012 tax how com Full value included in your income. 2012 tax how com   You can deduct the value of the business use of an employer-provided car if your employer reported 100% of the value of the car in your income. 2012 tax how com On your 2013 Form W-2, the amount of the value will be included in box 1, Wages, tips, other compensation, and box 14. 2012 tax how com    To claim your expenses, complete Form 2106, Part II, Sections A and C. 2012 tax how com Enter your actual expenses on line 23 of Section C and include the entire value of the employer-provided car on line 25. 2012 tax how com Complete the rest of the form. 2012 tax how com Less than full value included in your income. 2012 tax how com   If less than the full annual lease value of the car was included on your Form W-2, this means that your Form W-2 only includes the value of your personal use of the car. 2012 tax how com Do not enter this value on your Form 2106 because it is not deductible. 2012 tax how com   If you paid any actual costs (that your employer did not provide or reimburse you for) to operate the car, you can deduct the business portion of those costs. 2012 tax how com Examples of costs that you may have are gas, oil, and repairs. 2012 tax how com Complete Form 2106, Part II, Sections A and C. 2012 tax how com Enter your actual costs on line 23 of Section C and leave line 25 blank. 2012 tax how com Complete the rest of the form. 2012 tax how com Reimbursements This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed in this publication. 2012 tax how com If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. 2012 tax how com This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses, and the tax treatment of your reimbursements and expenses. 2012 tax how com It also covers rules for independent contractors. 2012 tax how com No reimbursement. 2012 tax how com   You are not reimbursed or given an allowance for your expenses if you are paid a salary or commission with the understanding that you will pay your own expenses. 2012 tax how com In this situation, you have no reimbursement or allowance arrangement, and you do not have to read this section on reimbursements. 2012 tax how com Instead, see Completing Forms 2106 and 2106-EZ , later, for information on completing your tax return. 2012 tax how com Reimbursement, allowance, or advance. 2012 tax how com   A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses. 2012 tax how com Arrangements include per diem and car allowances. 2012 tax how com    A per diem allowance is a fixed amount of daily reimbursement your employer gives you for your lodging, meals, and incidental expenses when you are away from home on business. 2012 tax how com (The term “ incidental expenses ” is defined in chapter 1 under Standard Meal Allowance. 2012 tax how com ) A car allowance is an amount your employer gives you for the business use of your car. 2012 tax how com   Your employer should tell you what method of reimbursement is used and what records you must provide. 2012 tax how com Employers. 2012 tax how com   If you are an employer and you reimburse employee business expenses, how you treat this reimbursement on your employee's Form W-2 depends in part on whether you have an accountable plan. 2012 tax how com Reimbursements treated as paid under an accountable plan, as explained next, are not reported as pay. 2012 tax how com Reimbursements treated as paid under nonaccountable plans , as explained later, are reported as pay. 2012 tax how com See Publication 15 (Circular E), Employer's Tax Guide, for information on employee pay. 2012 tax how com Accountable Plans To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules: Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. 2012 tax how com You must adequately account to your employer for these expenses within a reasonable period of time. 2012 tax how com You must return any excess reimbursement or allowance within a reasonable period of time. 2012 tax how com “ Adequate accounting ” and “ returning excess reimbursements ” are discussed later. 2012 tax how com An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer. 2012 tax how com Reasonable period of time. 2012 tax how com   The definition of reasonable period of time depends on the facts and circumstances of your situation. 2012 tax how com However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. 2012 tax how com You receive an advance within 30 days of the time you have an expense. 2012 tax how com You adequately account for your expenses within 60 days after they were paid or incurred. 2012 tax how com You return any excess reimbursement within 120 days after the expense was paid or incurred. 2012 tax how com You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement. 2012 tax how com Employee meets accountable plan rules. 2012 tax how com   If you meet the three rules for accountable plans, your employer should not include any reimbursements in your income in box 1 of your Form W-2. 2012 tax how com If your expenses equal your reimbursements, you do not complete Form 2106. 2012 tax how com You have no deduction since your expenses and reimbursement are equal. 2012 tax how com    If your employer included reimbursements in box 1 of your Form W-2 and you meet all the rules for accountable plans, ask your employer for a corrected Form W-2. 2012 tax how com Accountable plan rules not met. 2012 tax how com   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules. 2012 tax how com All reimbursements that fail to meet all three rules for accountable plans are generally treated as having been reimbursed under a nonaccountable plan (discussed later). 2012 tax how com Failure to return excess reimbursements. 2012 tax how com   If you are reimbursed under an accountable plan, but you fail to return, within a reasonable time, any amounts in excess of the substantiated amounts, the amounts paid in excess of the substantiated expenses are treated as paid under a nonaccountable plan. 2012 tax how com See Reasonable period of time , earlier, and Returning Excess Reimbursements , later. 2012 tax how com Reimbursement of nondeductible expenses. 2012 tax how com   You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some of which are deductible as employee business expenses and some of which are not deductible. 2012 tax how com The reimbursements you receive for the nondeductible expenses do not meet rule (1) for accountable plans, and they are treated as paid under a nonaccountable plan. 2012 tax how com Example. 2012 tax how com Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. 2012 tax how com The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan. 2012 tax how com The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. 2012 tax how com If you are an employee who receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting to your employer for the expenses and voluntarily returning excess reimbursements to the employer. 2012 tax how com Adequate Accounting One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. 2012 tax how com You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. 2012 tax how com (See Table 5-1 in chapter 5 for details you need to enter in your record and documents you need to prove certain expenses. 2012 tax how com ) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. 2012 tax how com See Per Diem and Car Allowances , later. 2012 tax how com You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. 2012 tax how com This includes amounts you charged to your employer by credit card or other method. 2012 tax how com You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. 2012 tax how com You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted. 2012 tax how com Per Diem and Car Allowances If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. 2012 tax how com A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all the following conditions apply. 2012 tax how com Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business. 2012 tax how com The allowance is similar in form to and not more than the federal rate (defined later). 2012 tax how com You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1 ) within a reasonable period of time. 2012 tax how com You are not related to your employer (as defined next). 2012 tax how com If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement. 2012 tax how com If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. 2012 tax how com In this case, you must be able to prove your expenses to the IRS. 2012 tax how com Related to employer. 2012 tax how com   You are related to your employer if: Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant, Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer. 2012 tax how com You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership, estate, or trust that owns the stock or if a member of your family or your partner owns the stock. 2012 tax how com The federal rate. 2012 tax how com   The federal rate can be figured using any one of the following methods. 2012 tax how com For per diem amounts: The regular federal per diem rate. 2012 tax how com The standard meal allowance. 2012 tax how com The high-low rate. 2012 tax how com For car expenses: The standard mileage rate. 2012 tax how com A fixed and variable rate (FAVR). 2012 tax how com    For per diem amounts, use the rate in effect for the area where you stop for sleep or rest. 2012 tax how com Regular federal per diem rate. 2012 tax how com   The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meals, and incidental expenses (or meals and incidental expenses only) while they are traveling away from home in a particular area. 2012 tax how com The rates are different for different locations. 2012 tax how com Your employer should have these rates available. 2012 tax how com You can also find federal per diem rates at www. 2012 tax how com gsa. 2012 tax how com gov/perdiem. 2012 tax how com The standard meal allowance. 2012 tax how com   The standard meal allowance (discussed in chapter 1) is the federal rate for meals and incidental expenses (M&IE). 2012 tax how com The rate for most small localities in the United States is $46 a day. 2012 tax how com Most major cities and many other localities qualify for higher rates. 2012 tax how com You can find this information on the Internet at www. 2012 tax how com gsa. 2012 tax how com gov/perdiem. 2012 tax how com   You receive an allowance only for meals and incidental expenses when your employer does one of the following. 2012 tax how com Provides you with lodging (furnishes it in kind). 2012 tax how com Reimburses you, based on your receipts, for the actual cost of your lodging. 2012 tax how com Pays the hotel, motel, etc. 2012 tax how com , directly for your lodging. 2012 tax how com Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck. 2012 tax how com Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled. 2012 tax how com High-low rate. 2012 tax how com   This is a simplified method of computing the federal per diem rate for travel within the continental United States. 2012 tax how com It eliminates the need to keep a current list of the per diem rates for each city. 2012 tax how com   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 (including $65 for M&IE) for certain high-cost locations. 2012 tax how com All other areas have a per diem amount of $163 (including $52 for M&IE). 2012 tax how com For more information, see Notice 2012-63, which can be found on the Internet at www. 2012 tax how com irs. 2012 tax how com gov/irb/2012-42_IRB/ar12. 2012 tax how com html. 2012 tax how com    Effective October 1, 2013, the per diem rate for certain high-cost locations increased to $251 (including $65 for M&IE). 2012 tax how com The rate for all other locations increased to $170 (including $52 for M&IE). 2012 tax how com Employers who did not use the high-low method during the first 9 months of 2013 cannot begin to use it before 2014. 2012 tax how com For more information, see Notice 2013-65, which can be found on the Internet at www. 2012 tax how com irs. 2012 tax how com gov/pub/irs-drop/n-13–65. 2012 tax how com pdf and Revenue Procedure 2011-47 at www. 2012 tax how com irs. 2012 tax how com gov/irb/2011-42_IRB/ar12. 2012 tax how com html. 2012 tax how com Prorating the standard meal allowance on partial days of travel. 2012 tax how com   The standard meal allowance is for a full 24-hour day of travel. 2012 tax how com If you travel for part of a day, such as on the days you depart and return, you must prorate the full-day M&IE rate. 2012 tax how com This rule also applies if your employer uses the regular federal per diem rate or the high-low rate. 2012 tax how com   You can use either of the following methods to figure the federal M&IE for that day. 2012 tax how com Method 1: For the day you depart, add 3/4 of the standard meal allowance amount for that day. 2012 tax how com For the day you return, add 3/4 of the standard meal allowance amount for the preceding day. 2012 tax how com Method 2: Prorate the standard meal allowance using any method you consistently apply in accordance with reasonable business practice. 2012 tax how com For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel away from home from 9 a. 2012 tax how com m. 2012 tax how com of one day to 5 p. 2012 tax how com m. 2012 tax how com of the next day as being no more than the federal rate. 2012 tax how com This is true even though a federal employee would be limited to a reimbursement of M&IE for only 1½ days of the federal M&IE rate. 2012 tax how com The standard mileage rate. 2012 tax how com   This is a set rate per mile that you can use to compute your deductible car expenses. 2012 tax how com For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. 2012 tax how com Fixed and variable rate (FAVR). 2012 tax how com   This is an allowance your employer may use to reimburse your car expenses. 2012 tax how com Under this method, your employer pays an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your variable operating costs (such as gas, oil, etc. 2012 tax how com ) plus a flat amount to cover your fixed costs (such as depreciation (or lease payments), insurance, etc. 2012 tax how com ). 2012 tax how com If your employer chooses to use this method, your employer will request the necessary records from you. 2012 tax how com Reporting your expenses with a per diem or car allowance. 2012 tax how com   If your reimbursement is in the form of an allowance received under an accountable plan, the following facts affect your reporting. 2012 tax how com The federal rate. 2012 tax how com Whether the allowance or your actual expenses were more than the federal rate. 2012 tax how com The following discussions explain where to report your expenses depending upon how the amount of your allowance compares to the federal rate. 2012 tax how com Allowance less than or equal to the federal rate. 2012 tax how com   If your allowance is less than or equal to the federal rate, the allowance will not be included in box 1 of your Form W-2. 2012 tax how com You do not need to report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance. 2012 tax how com   However, if your actual expenses are more than your allowance, you can complete Form 2106 and deduct the excess amount on Schedule A (Form 1040). 2012 tax how com If you are using actual expenses, you must be able to prove to the IRS the total amount of your expenses and reimbursements for the entire year. 2012 tax how com If you are using the standard meal allowance or the standard mileage rate, you do not have to prove that amount. 2012 tax how com Example 1. 2012 tax how com In April, Jeremy takes a 2-day business trip to Denver. 2012 tax how com The federal rate for Denver is $215 per day. 2012 tax how com As required by his employer's accountable plan, he accounts for the time (dates), place, and business purpose of the trip. 2012 tax how com His employer reimburses him $215 a day ($430 total) for living expenses. 2012 tax how com Jeremy's living expenses in Denver are not more than $215 a day. 2012 tax how com Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his return. 2012 tax how com Example 2. 2012 tax how com In June, Matt takes a 2-day business trip to Boston. 2012 tax how com Matt's employer uses the high-low method to reimburse employees. 2012 tax how com Since Boston is a high-cost area, Matt is given an advance of $242 a day ($484 total) for his lodging, meals, and incidental expenses. 2012 tax how com Matt's actual expenses totaled $700. 2012 tax how com Since Matt's $700 of expenses are more than his $484 advance, he includes the excess expenses when he itemizes his deductions. 2012 tax how com Matt completes Form 2106 (showing all of his expenses and reimbursements). 2012 tax how com He must also allocate his reimbursement between his meals and other expenses as discussed later under Completing Forms 2106 and 2106-EZ . 2012 tax how com Example 3. 2012 tax how com Nicole drives 10,000 miles in 2013 for business. 2012 tax how com Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. 2012 tax how com Her employer pays her a mileage allowance of 40 cents a mile. 2012 tax how com Since Nicole's $5,650 expense computed under the standard mileage rate (10,000 miles x 56½ cents) is more than her $4,000 reimbursement (10,000 miles × 40 cents), she itemizes her deductions to claim the excess expense. 2012 tax how com Nicole completes Form 2106 (showing all her expenses and reimbursements) and enters $1,650 ($5,650 − $4,000) as an itemized deduction. 2012 tax how com Allowance more than the federal rate. 2012 tax how com   If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal rate in box 12 of your Form W-2. 2012 tax how com This amount is not taxable. 2012 tax how com However, the excess allowance will be included in box 1 of your Form W-2. 2012 tax how com You must report this part of your allowance as if it were wage income. 2012 tax how com   If your actual expenses are less than or equal to the federal rate, you do not complete Form 2106 or claim any of your expenses on your return. 2012 tax how com   However, if your actual expenses are more than the federal rate, you can complete Form 2106 and deduct those excess expenses. 2012 tax how com You must report on Form 2106 your reimbursements up to the federal rate (as shown in box 12 of your Form W-2) and all your expenses. 2012 tax how com You should be able to prove these amounts to the IRS. 2012 tax how com Example 1. 2012 tax how com Laura lives and works in Austin. 2012 tax how com In July her employer sent her to Albuquerque for 4 days on business. 2012 tax how com Laura's employer paid the hotel directly for her lodging and reimbursed Laura $65 a day ($260 total) for meals and incidental expenses. 2012 tax how com Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $56 per day. 2012 tax how com Table 6-1. 2012 tax how com Reporting Travel, Entertainment, Gift, and Car Expenses and Reimbursements IF the type of reimbursement (or  other expense allowance)  arrangement is under: THEN the employer reports on Form W-2: AND the employee reports on  Form 2106: * An accountable plan with: Actual expense reimbursement: Adequate accounting made and excess returned. 2012 tax how com No amount. 2012 tax how com No amount. 2012 tax how com Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned. 2012 tax how com The excess amount as wages in box 1. 2012 tax how com No amount. 2012 tax how com Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned. 2012 tax how com No amount. 2012 tax how com All expenses and reimbursements only if excess expenses are claimed. 2012 tax how com Otherwise, form is not filed. 2012 tax how com Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned. 2012 tax how com The excess amount as wages in box 1. 2012 tax how com The amount up to the federal rate is reported only in box 12—it is not reported in box 1. 2012 tax how com No amount. 2012 tax how com Per diem or mileage allowance exceeds the federal rate: Adequate accounting up to the federal rate only and excess not returned. 2012 tax how com The excess amount as wages in box 1. 2012 tax how com The amount up to the federal rate is reported only in box 12—it is not reported in box 1. 2012 tax how com All expenses (and reimbursements reported on Form W-2, box 12) only if expenses in excess of the federal rate are claimed. 2012 tax how com Otherwise, form is not filed. 2012 tax how com A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan. 2012 tax how com The entire amount as wages in box 1. 2012 tax how com All expenses. 2012 tax how com No reimbursement plan: The entire amount as wages in box 1. 2012 tax how com All expenses. 2012 tax how com * You may be able to use Form 2106-EZ. 2012 tax how com See Completing Forms 2106 and 2106-EZ . 2012 tax how com Her employer included the $36 that was more than the federal rate (($65 − $56) × 4) in box 1 of Laura's Form W-2. 2012 tax how com Her employer shows $224 ($56 a day × 4) in box 12 of her Form W-2. 2012 tax how com This amount is not included in Laura's income. 2012 tax how com Laura does not have to complete Form 2106; however, she must include the $36 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2). 2012 tax how com Example 2. 2012 tax how com Joe also lives in Austin and works for the same employer as Laura. 2012 tax how com In May the employer sent Joe to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. 2012 tax how com The employer reimbursed Joe $75 a day for his meals and incidental expenses. 2012 tax how com The federal rate for San Diego is $71 a day. 2012 tax how com Joe can prove that his actual meal expenses totaled $380. 2012 tax how com His employer's accountable plan will not pay more than $75 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $380. 2012 tax how com However, he does account for the time, place, and business purpose of the trip. 2012 tax how com This is Joe's only business trip this year. 2012 tax how com Joe was reimbursed $300 ($75 × 4 days), which is $16 more than the federal rate of $284 ($71 × 4 days). 2012 tax how com The employer includes the $16 as income on Joe's Form W-2 in box 1. 2012 tax how com The employer also enters $284 in box 12 of Joe's Form W-2. 2012 tax how com Joe completes Form 2106 to figure his deductible expenses. 2012 tax how com He enters the total of his actual expenses for the year ($380) on Form 2106. 2012 tax how com He also enters the reimbursements that were not included in his income ($284). 2012 tax how com His total deductible expense, before the 50% limit, is $96. 2012 tax how com After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $48, as an itemized deduction. 2012 tax how com Example 3. 2012 tax how com Debbie drives 10,000 miles in 2013 for business. 2012 tax how com Under her employer's accountable plan, she gets reimbursed 60 cents a mile, which is more than the standard mileage rate. 2012 tax how com Her total reimbursement is $6,000. 2012 tax how com Debbie's employer must include the reimbursement amount up to the standard mileage rate, $5,650 (10,000 × 56½ cents), in box 12 of her Form W-2. 2012 tax how com That amount is not taxable. 2012 tax how com Her employer must also include $350 ($6,000 − $5,650) in box 1 of her Form W-2. 2012 tax how com This is the reimbursement that is more than the standard mileage rate. 2012 tax how com If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete Form 2106. 2012 tax how com If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses and reimbursement (shown in box 12 of her Form W-2). 2012 tax how com She would then claim the excess expenses as an itemized deduction. 2012 tax how com Returning Excess Reimbursements Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business expenses to the person paying the reimbursement or allowance. 2012 tax how com Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. 2012 tax how com For example, if you received a travel advance and you did not spend all the money on business-related expenses or you do not have proof of all your expenses, you have an excess reimbursement. 2012 tax how com “ Adequate accounting ” and “ reasonable period of time ” were discussed earlier in this chapter. 2012 tax how com Travel advance. 2012 tax how com   You receive a travel advance if your employer provides you with an expense allowance before you actually have the expense, and the allowance is reasonably expected to be no more than your expense. 2012 tax how com Under an accountable plan, you are required to adequately account to your employer for this advance and to return any excess within a reasonable period of time. 2012 tax how com   If you do not adequately account for or do not return any excess advance within a reasonable period of time, the amount you do not account for or return will be treated as having been paid under a nonaccountable plan (discussed later). 2012 tax how com Unproved amounts. 2012 tax how com   If you do not prove that you actually traveled on each day for which you received a per diem or car allowance (proving the elements described in Table 5-1 ), you must return this unproved amount of the travel advance within a reasonable period of time. 2012 tax how com If you do not do this, the unproved amount will be considered paid under a nonaccountable plan (discussed later). 2012 tax how com Per diem allowance more than federal rate. 2012 tax how com   If your employer's accountable plan pays you an allowance that is higher than the federal rate, you do not have to return the difference between the two rates for the period you can prove business-related travel expenses. 2012 tax how com However, the difference will be reported as wages on your Form W-2. 2012 tax how com This excess amount is considered paid under a nonaccountable plan (discussed later). 2012 tax how com Example. 2012 tax how com Your employer sends you on a 5-day business trip to Phoenix in March 2013 and gives you a $400 ($80 × 5 days) advance to cover your meals and incidental expenses. 2012 tax how com The federal per diem for meals and incidental expenses for Phoenix is $71. 2012 tax how com Your trip lasts only 3 days. 2012 tax how com Under your employer's accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. 2012 tax how com For the 3 days you did travel you do not have to return the $27 difference between the allowance you received and the federal rate for Phoenix (($80 − $71) × 3 days). 2012 tax how com However, the $27 will be reported on your Form W-2 as wages. 2012 tax how com Nonaccountable Plans A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans. 2012 tax how com In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan: Excess reimbursements you fail to return to your employer, and Reimbursement of nondeductible expenses related to your employer's business. 2012 tax how com See Reimbursement of nondeductible expenses , earlier, under Accountable Plans. 2012 tax how com An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will be treated as a nonaccountable plan. 2012 tax how com This is because you are entitled to receive the full amount of your pay whether or not you have any business expenses. 2012 tax how com If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer. 2012 tax how com Reporting your expenses under a nonaccountable plan. 2012 tax how com   Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay. 2012 tax how com Your employer will report the total in box 1 of your Form W-2. 2012 tax how com    You must complete Form 2106 or 2106-EZ and itemize your deductions to deduct your expenses for travel, transportation, meals, or entertainment. 2012 tax how com Your meal and entertainment expenses will be subject to the 50% limit discussed in chapter 2. 2012 tax how com Also, your total expenses will be subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. 2012 tax how com Example 1. 2012 tax how com Kim's employer gives her $1,000 a month ($12,000 total for the year) for her business expenses. 2012 tax how com Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend. 2012 tax how com Kim is being reimbursed under a nonaccountable plan. 2012 tax how com Her employer will include the $12,000 on Kim's Form W-2 as if it were wages. 2012 tax how com If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions. 2012 tax how com Example 2. 2012 tax how com Kevin is paid $2,000 a month by his employer. 2012 tax how com On days that he travels away from home on business, his employer designates $50 a day of his salary as paid to reimburse his travel expenses. 2012 tax how com Because his employer would pay Kevin his monthly salary whether or not he was traveling away from home, the arrangement is a nonaccountable plan. 2012 tax how com No part of the $50 a day designated by his employer is treated as paid under an accountable plan. 2012 tax how com Rules for Independent Contractors and Clients This section provides rules for independent contractors who incur expenses on behalf of a client or customer. 2012 tax how com The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers. 2012 tax how com You are considered an independent contractor if you are self-employed and you perform services for a customer or client. 2012 tax how com Accounting to Your Client If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. 2012 tax how com If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. 2012 tax how com You must keep adequate records of these expenses whether or not you account to your client for these expenses. 2012 tax how com If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. 2012 tax how com See 50% Limit in chapter 2. 2012 tax how com Adequate accounting. 2012 tax how com   As a self-employed person, you adequately account by reporting your actual expenses. 2012 tax how com You should follow the recordkeeping rules in chapter 5 . 2012 tax how com How to report. 2012 tax how com   For information on how to report expenses on your tax return, see Self-employed at the beginning of this chapter. 2012 tax how com Required Records for Clients or Customers If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give, in the course of your business, to an independent contractor for travel or gift expenses incurred on your behalf. 2012 tax how com However, you must keep records if: You reimburse the contractor for entertainment expenses incurred on your behalf, and The contractor adequately accounts to you for these expenses. 2012 tax how com Contractor adequately accounts. 2012 tax how com   If the contractor adequately accounts to you for entertainment expenses, you (the client or customer) must keep records documenting each element of the expense, as explained in chapter 5 . 2012 tax how com Use your records as proof for a deduction on your tax return. 2012 tax how com If entertainment expenses are accounted for separately, you are subject to the 50% limit on entertainment. 2012 tax how com If the contractor adequately accounts to you for reimbursed amounts, you do not have to report the amounts on an information return. 2012 tax how com Contractor does not adequately account. 2012 tax how com    If the contractor does not adequately account to you for allowances or reimbursements of entertainment expenses, you do not have to keep records of these items. 2012 tax how com You are not subject to the 50% limit on entertainment in this case. 2012 tax how com You can deduct the reimbursements or allowances as payment for services if they are ordinary and necessary business expenses. 2012 tax how com However, you must file Form 1099-MISC to report amounts paid to the independent contractor if the total of the reimbursements and any other fees is $600 or more during the calendar year. 2012 tax how com How To Use Per Diem Rate Tables This section contains information about the per diem rate substantiation methods available and the choice of rates you must make for the last 3 months of the year. 2012 tax how com The Two Substantiation Methods High-low method. 2012 tax how com   IRS notices list the localities that are treated under the high-low substantiation method as high-cost localities for all or part of the year. 2012 tax how com Notice 2012–63, available at www. 2012 tax how com irs. 2012 tax how com gov/irb/2012–42_IRB/ar12. 2012 tax how com html, lists the localities that are eligible for $242 ($65 meals and incidental expenses (M&IE)) per diem, effective October 1, 2012. 2012 tax how com For travel on or after October 1, 2012, all other localities within CONUS are eligible for $163 ($52 M&IE) per diem under the high-low method. 2012 tax how com   Notice 2013–65, available at www. 2012 tax how com irs. 2012 tax how com gov/pub/irs-drop/n-13–65. 2012 tax how com pdf, lists the localities that are eligible for $251 ($65 M&IE) per diem, effective October 1, 2013. 2012 tax how com For travel on or after October 1, 2013, the per diem for all other localities increased to $170 ($52 M&IE). 2012 tax how com Regular federal per diem rate method. 2012 tax how com   Regular federal per diem rates are published by the General Services Administration (GSA). 2012 tax how com Both tables include the separate rate for meals and incidental expenses (M&IE) for each locality. 2012 tax how com The rates listed for FY2013 at www. 2012 tax how com gsa. 2012 tax how com gov/perdiem are effective October 1, 2012 and those listed for FY2014 are effective October 1, 2013. 2012 tax how com The standard rate for all locations within CONUS not specifically listed for FY2013 is $123 ($77 for lodging and $46 for M&IE). 2012 tax how com For FY2014, this rate increased to $129 ($83 for lodging and $46 for M&IE). 2012 tax how com Transition Rules The transition period covers the last 3 months of the calendar year, from the time that new rates are effective (generally October 1) through December 31. 2012 tax how com During this period, you generally may change to the new rates or finish out the year with the rates you had been using. 2012 tax how com High-low method. 2012 tax how com   If you use the high-low substantiation method, when new rates become effective (generally October 1) you can either continue with the rates you used for the first part of the year or change to the new rates. 2012 tax how com However, you must continue using the high-low method for the rest of the calendar year (through December 31). 2012 tax how com If you are an employer, you must use the same rates for all employees reimbursed under the high-low method during that calendar year. 2012 tax how com   The new rates and localities for the high-low method are included each year in a notice that is generally published in mid-to-late-September. 2012 tax how com You can find the notice in the weekly Internal Revenue Bulletin (IRB) on the Internet at www. 2012 tax how com irs. 2012 tax how com gov/irb. 2012 tax how com Federal per diem rate method. 2012 tax how com   New CONUS per diem rates become effective on October 1 of each year and remain in effect through September 30 of the following year. 2012 tax how com Employees being reimbursed under the per diem rate method during the first 9 months of a year (January 1–September 30) must continue under the same method through the end of that calendar year (December 31). 2012 tax how com However, for travel by these employees from October 1 through December 31, you can choose to continue using the same per diem rates or use the new rates. 2012 tax how com   The new federal CONUS per diem rates are published each year, generally early in September, on the Internet. 2012 tax how com Go to www. 2012 tax how com gsa. 2012 tax how com gov/perdiem. 2012 tax how com Per diem rates for localities listed for FY2014 may change at any time. 2012 tax how com To be sure you have the most current rate, check www. 2012 tax how com gsa. 2012 tax how com gov/perdiem. 2012 tax how com Completing Forms 2106 and 2106-EZ This section briefly describes how employees complete Forms 2106 and 2106-EZ. 2012 tax how com Table 6-1 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. 2012 tax how com The instructions for the forms have more information on completing them. 2012 tax how com If you are self-employed, do not file Form 2106 or 2106-EZ. 2012 tax how com Report your expenses on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). 2012 tax how com See the instructions for the form that you must file. 2012 tax how com Form 2106-EZ. 2012 tax how com   You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. 2012 tax how com You can use this form if you meet all the following conditions. 2012 tax how com You are an employee deducting ordinary and necessary expenses attributable to your job. 2012 tax how com You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). 2012 tax how com If you are claiming car expenses, you are using the standard mileage rate. 2012 tax how com Car expenses. 2012 tax how com   If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. 2012 tax how com These are generally figured on Form 2106, Part II, and then claimed on Form 2106, Part I, line 1, Column A. 2012 tax how com Car expenses using the standard mileage rate can also be figured on Form 2106-EZ by completing Part II and Part I, line 1. 2012 tax how com Information on use of cars. 2012 tax how com   If you claim any deduction for the business use of a car, you must answer certain questions and provide information about the use of the car. 2012 tax how com The information relates to the following items. 2012 tax how com Date placed in service. 2012 tax how com Mileage (total, business, commuting, and other personal mileage). 2012 tax how com Percentage of business use. 2012 tax how com After-work use. 2012 tax how com Use of other vehicles. 2012 tax how com Whether you have evidence to support the deduction. 2012 tax how com Whether or not the evidence is written. 2012 tax how com Employees must complete Form 2106, Part II, Section A, or Form 2106-EZ, Part II, to provide this information. 2012 tax how com Standard mileage rate. 2012 tax how com   If you claim a deduction based on the standard mileage rate instead of your actual expenses, you must complete Form 2106, Part II, Section B. 2012 tax how com The amount on line 22 (Section B) is carried to Form 2106, Part I, line 1. 2012 tax how com In addition, on Part 1, line 2, you can deduct parking fees and tolls that apply to the business use of the car. 2012 tax how com If you file Form 2106-EZ, complete Part I, line 1, for the standard mileage rate and line 2 for parking fees and tolls. 2012 tax how com See Standard Mileage Rate in chapter 4 for information on using this rate. 2012 tax how com Actual expenses. 2012 tax how com   If you claim a deduction based on actual car expenses, you cannot use Form 2106-EZ. 2012 tax how com You must complete Form 2106, Part II, Section C. 2012 tax how com In addition, unless you lease your car, you must complete Section D to show your depreciation deduction and any section 179 deduction you claim. 2012 tax how com   If you are still using a car that is fully depreciated, continue to complete Section C. 2012 tax how com Since you have no depreciation deduction, enter zero on line 28. 2012 tax how com In this case, do not complete Section D. 2012 tax how com Car rentals. 2012 tax how com   If you claim car rental expenses on Form 2106, line 24a, you may have to reduce that expense by an inclusion amount as described in chapter 4. 2012 tax how com If so, you can show your car expenses and any inclusion amount as follows. 2012 tax how com Compute the inclusion amount without taking into account your business use percentage for the tax year. 2012 tax how com Report the inclusion amount from (1) on Form 2106, Part II, line 24b. 2012 tax how com Report on line 24c the net amount of car rental expenses (total car rental expenses minus the inclusion amount computed in (1)). 2012 tax how com The net amount of car rental expenses will be adjusted on Form 2106, Part II, line 27, to reflect the percentage of business use for the tax year. 2012 tax how com Transportation expenses. 2012 tax how com   Show your transportation expenses that did not involve overnight travel on Form 2106, line 2, Column A, or on Form 2106-EZ, Part I, line 2. 2012 tax how com Also include on this line business expenses you have for parking fees and tolls. 2012 tax how com Do not include expenses of operating your car or expenses of commuting between your home and work. 2012 tax how com Employee business expenses other than meals and entertainment. 2012 tax how com   Show your other employee business expenses on Form 2106, lines 3 and 4, Column A, or Form 2106-EZ, lines 3 and 4. 2012 tax how com Do not include expenses for meals and entertainment on those lines. 2012 tax how com Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home expenses, and trade and professional publications. 2012 tax how com    If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included in box 1 of your Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. 2012 tax how com Claim these amounts directly on Schedule A (Form 1040), line 21. 2012 tax how com List the type and amount of each expense on the dotted lines and include the total on line 21. 2012 tax how com Meal and entertainment expenses. 2012 tax how com   Show the full amount of your expenses for business-related meals and entertainment on Form 2106, line 5, Column B. 2012 tax how com Include meals while away from your tax home overnight and other business meals and entertainment. 2012 tax how com Enter 50% of the line 8, Column B, meal and entertainment expenses on line 9, Column B. 2012 tax how com   If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5 and multiply the total by 50%. 2012 tax how com Enter the result on line 5. 2012 tax how com Hours of service limits. 2012 tax how com   If you are subject to the Department of Transportation's “hours of service” limits (as explained earlier under Individuals subject to “hours of service” limits in chapter 2), use 80% instead of 50% for meals while away from your tax home. 2012 tax how com Reimbursements. 2012 tax how com   Enter on Form 2106, line 7 (you cannot use Form 2106-EZ) the amounts your employer (or third party) reimbursed you that were not reported to you in box 1 of your Form W-2. 2012 tax how com This includes any amount reported under code L in box 12 of Form W-2. 2012 tax how com Allocating your reimbursement. 2012 tax how com   If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you may have to allocate your reimbursement. 2012 tax how com This is necessary when your employer pays your reimbursement in the following manner: Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and Does not clearly identify how much is for deductible meals and/or entertainment. 2012 tax how com You must allocate that single payment so that you know how much to enter on Form 2106, line 7, Column A and Column B. 2012 tax how com Example. 2012 tax how com Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. 2012 tax how com The $12,000 payment consisted of $5,000 for airfare and $7,000 for meals, entertainment, and car expenses. 2012 tax how com The employer did not clearly show how much of the $7,000 was for the cost of deductible meals and entertainment. 2012 tax how com Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for meals and entertainment, and $4,000 for car expenses). 2012 tax how com Since the airfare allowance was clearly identified, Rob knows that $5,000 of the payment goes in Column A, line 7, of Form 2106. 2012 tax how com To allocate the remaining $7,000, Rob uses the worksheet from the Instructions for Form 2106. 2012 tax how com His completed worksheet follows. 2012 tax how com Reimbursement Allocation Worksheet (Keep for your records)   1. 2012 tax how com Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2 $7,000   2. 2012 tax how com Enter the total amount of your expenses for the periods covered by this reimbursement 8,500   3. 2012 tax how com Of the amount on line 2, enter your total expense for meals and entertainment 4,500   4. 2012 tax how com Divide line 3 by line 2. 2012 tax how com Enter the result as a decimal (rounded to at least three places) . 2012 tax how com 529   5. 2012 tax how com Multiply line 1 by line 4. 2012 tax how com Enter the result here and in Column B, line 7 3,703   6. 2012 tax how com Subtract line 5 from line 1. 2012 tax how com Enter the result here and in Column A, line 7 $3,297 On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000) in Column B. 2012 tax how com After you complete the form. 2012 tax how com   After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on the appropriate line of your tax return. 2012 tax how com For most taxpayers, this is line 21 of Schedule A (Form 1040). 2012 tax how com However, if you are a government official paid on a fee basis, a performing artist, an Armed Forces reservist, or a disabled employee with impairment-related work expenses, see Special Rules , later. 2012 tax how com Limits on employee business expenses. 2012 tax how com   Your employee business expenses may be subject to either of the limits described next. 2012 tax how com They are figured in the following order on the specified form. 2012 tax how com 1. 2012 tax how com Limit on meals and entertainment. 2012 tax how com   Certain meal and entertainment expenses are subject to a 50% limit. 2012 tax how com If you are an employee, you figure this limit on line 9 of Form 2106 or line 5 of Form 2106-EZ. 2012 tax how com (See 50% Limit in chapter 2. 2012 tax how com ) 2. 2012 tax how com Limit on miscellaneous itemized deductions. 2012 tax how com   If you are an employee, deduct your employee business expenses (as figured on Form 2106 or 2106-EZ) on line 21 of Schedule A (Form 1040). 2012 tax how com Most miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of-adjusted-gross-income limit. 2012 tax how com This limit is figured on line 26 of Schedule A (Form 1040). 2012 tax how com 3. 2012 tax how com Limit on total itemized deductions. 2012 tax how com   If your adjusted gross income (line 38 of Form 1040) is more than $300,000 ($150,000 if you are married filing separately), the total of certain itemized deductions, including employee business expenses, may be limited. 2012 tax how com See your form instructions for information on how to figure this limit. 2012 tax how com Special Rules This section discusses special rules that apply only to Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses. 2012 tax how com Armed Forces Reservists Traveling More Than 100 Miles From Home If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. 2012 tax how com The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. 2012 tax how com See Per Diem and Car Allowances , earlier, for more information. 2012 tax how com Any expenses in excess of these amounts can be claimed only as a miscellaneous itemized deduction subject to the 2% limit. 2012 tax how com Member of a reserve component. 2012 tax how com   You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; the Army National Guard of the United States; the Air National Guard of the United States; or the Reserve Corps of the Public Health Service. 2012 tax how com How to report. 2012 tax how com   If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106 or Form 2106-EZ. 2012 tax how com Then include your expenses for reserve travel over 100 miles from home, up to the federal rate, from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. 2012 tax how com Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance as an itemized deduction on Schedule A (Form 1040), line 21. 2012 tax how com   You cannot deduct expenses of travel that does not take you more than 100 miles from home as an adjustment to gross income. 2012 tax how com Instead, you must complete Form 2106 or 2106-EZ and deduct those expenses as an itemized deduction on Schedule A (Form 1040), line 21. 2012 tax how com Officials Paid on a Fee Basis Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions on Schedule A (Form 1040). 2012 tax how com Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. 2012 tax how com They can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction. 2012 tax how com If you are a fee-basis official, include your employee business expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. 2012 tax how com Expenses of Certain Performing Artists If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. 2012 tax how com To qualify, you must meet all of the following requirements. 2012 tax how com During the tax year, you perform services in the performing arts as an employee for at least two employers. 2012 tax how com You receive at least $200 each from any two of these employers. 2012 tax how com Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services. 2012 tax how com Your adjusted gross income is not more than $16,000 before deducting these business expenses. 2012 tax how com Special rules for married persons. 2012 tax how com   If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. 2012 tax how com If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. 2012 tax how com However, requirement (4) applies to your and your spouse's combined adjusted gross income. 2012 tax how com Where to report. 2012 tax how com   If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. 2012 tax how com Then you include your performing-arts-related expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. 2012 tax how com   If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. 2012 tax how com Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040), line 21. 2012 tax how com Impairment-Related Work Expenses of Disabled Employees If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to most other employee business expenses. 2012 tax how com After you complete Form 2106 or 2106-EZ, enter your impairment-related work expenses from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 28, and identify the type and amount of this expense on the dotted line next to line 28. 2012 tax how com Enter your employee business expenses that are unrelated to your disability from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 21. 2012 tax how com Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to be able to work. 2012 tax how com You are disabled if you have: A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working. 2012 tax how com You can deduct impairment-related expenses as business expenses if they are: Necessary for you to do your work satisfactorily, For goods and services not required or used, other than incidentally, in your personal activities, and Not specifically covered under other income tax laws. 2012 tax how com Example 1. 2012 tax how com You are blind. 2012 tax how com You must use a reader to do your work. 2012 tax how com You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. 2012 tax how com The reader's services are only for your work. 2012 tax how com You can deduct your expenses for the reader as business expenses. 2012 tax how com Example 2. 2012 tax how com You are deaf. 2012 tax how com You must use a sign language interpreter during meetings while you are at work. 2012 tax how com The interpreter's services are used only for your work. 2012 tax how com You can deduct your expenses for the interpreter as business expenses. 2012 tax how com Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 05-Feb-2014

The 2012 Tax How Com

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