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2013 State Tax Return

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2013 State Tax Return

2013 state tax return 3. 2013 state tax return   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). 2013 state tax return There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. 2013 state tax return There are also the limitations which may need to be applied if you have a net loss on Schedule E. 2013 state tax return There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. 2013 state tax return You may also have a gain or loss related to your rental property from a casualty or theft. 2013 state tax return This is considered separately from the income and expense information you report on Schedule E. 2013 state tax return Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). 2013 state tax return However, do not use that schedule to report a not-for-profit activity. 2013 state tax return See Not Rented for Profit , in chapter 4. 2013 state tax return There are also other rental situations in which forms other than Schedule E would be used. 2013 state tax return Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. 2013 state tax return , you normally report your rental income and expenses on Schedule E, Part I. 2013 state tax return List your total income, expenses, and depreciation for each rental property. 2013 state tax return Be sure to enter the number of fair rental and personal use days on line 2. 2013 state tax return If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. 2013 state tax return Complete lines 1 and 2 for each property. 2013 state tax return However, fill in lines 23a through 26 on only one Schedule E. 2013 state tax return On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. 2013 state tax return To find out if you need to attach Form 4562, see Form 4562 , later. 2013 state tax return If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. 2013 state tax return Form 6198, At-Risk Limitations. 2013 state tax return See At-Risk Rules , later. 2013 state tax return Also see Publication 925. 2013 state tax return Form 8582, Passive Activity Loss Limitations. 2013 state tax return See Passive Activity Limits , later. 2013 state tax return Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. 2013 state tax return If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. 2013 state tax return Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). 2013 state tax return Form 4562. 2013 state tax return   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. 2013 state tax return Otherwise, figure your depreciation on your own worksheet. 2013 state tax return You do not have to attach these computations to your return, but you should keep them in your records for future reference. 2013 state tax return   See Publication 946 for information on preparing Form 4562. 2013 state tax return Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. 2013 state tax return Providing substantial services. 2013 state tax return   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. 2013 state tax return Use Form 1065, U. 2013 state tax return S. 2013 state tax return Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). 2013 state tax return Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. 2013 state tax return For information, see Publication 334, Tax Guide for Small Business. 2013 state tax return Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. 2013 state tax return For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. 2013 state tax return Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. 2013 state tax return This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. 2013 state tax return If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). 2013 state tax return You will not be required to file Form 1065 for any year the election is in effect. 2013 state tax return Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. 2013 state tax return If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. 2013 state tax return For more information on qualified joint ventures, go to IRS. 2013 state tax return gov and enter “qualified joint venture” in the search box. 2013 state tax return Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. 2013 state tax return You must consider these rules in the order shown below. 2013 state tax return Both are discussed in this section. 2013 state tax return At-risk rules. 2013 state tax return These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. 2013 state tax return This applies only if the real property was placed in service after 1986. 2013 state tax return Passive activity limits. 2013 state tax return Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. 2013 state tax return However, there are exceptions. 2013 state tax return At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. 2013 state tax return Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. 2013 state tax return In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. 2013 state tax return You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. 2013 state tax return Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. 2013 state tax return See Publication 925 for a discussion of the at-risk rules. 2013 state tax return Form 6198. 2013 state tax return   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. 2013 state tax return Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. 2013 state tax return For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. 2013 state tax return For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. 2013 state tax return Deductions or losses from passive activities are limited. 2013 state tax return You generally cannot offset income, other than passive income, with losses from passive activities. 2013 state tax return Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. 2013 state tax return Any excess loss or credit is carried forward to the next tax year. 2013 state tax return Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. 2013 state tax return For a detailed discussion of these rules, see Publication 925. 2013 state tax return Real estate professionals. 2013 state tax return   If you are a real estate professional, complete line 43 of Schedule E. 2013 state tax return      You qualify as a real estate professional for the tax year if you meet both of the following requirements. 2013 state tax return More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. 2013 state tax return You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. 2013 state tax return If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. 2013 state tax return For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. 2013 state tax return   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. 2013 state tax return You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. 2013 state tax return   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. 2013 state tax return However, you can count your spouse's participation in an activity in determining if you materially participated. 2013 state tax return Real property trades or businesses. 2013 state tax return   A real property trade or business is a trade or business that does any of the following with real property. 2013 state tax return Develops or redevelops it. 2013 state tax return Constructs or reconstructs it. 2013 state tax return Acquires it. 2013 state tax return Converts it. 2013 state tax return Rents or leases it. 2013 state tax return Operates or manages it. 2013 state tax return Brokers it. 2013 state tax return Choice to treat all interests as one activity. 2013 state tax return   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. 2013 state tax return You can make this choice for any year that you qualify as a real estate professional. 2013 state tax return If you forgo making the choice for one year, you can still make it for a later year. 2013 state tax return   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. 2013 state tax return This is true even if you are not a real estate professional in any intervening year. 2013 state tax return (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. 2013 state tax return )   See the Instructions for Schedule E for information about making this choice. 2013 state tax return Material participation. 2013 state tax return   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. 2013 state tax return For details, see Publication 925 or the Instructions for Schedule C. 2013 state tax return Participating spouse. 2013 state tax return   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. 2013 state tax return Do this even if your spouse owns no interest in the activity or files a separate return for the year. 2013 state tax return Form 8582. 2013 state tax return    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. 2013 state tax return See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. 2013 state tax return   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. 2013 state tax return Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. 2013 state tax return Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). 2013 state tax return Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. 2013 state tax return This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. 2013 state tax return Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. 2013 state tax return Example. 2013 state tax return Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. 2013 state tax return $2,000 of Jane's $3,500 loss offsets her passive income. 2013 state tax return The remaining $1,500 loss can be deducted from her $40,000 wages. 2013 state tax return The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. 2013 state tax return Active participation. 2013 state tax return   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. 2013 state tax return Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. 2013 state tax return Example. 2013 state tax return Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. 2013 state tax return Mike had advertised and rented the house to the current tenant himself. 2013 state tax return He also collected the rents, which usually came by mail. 2013 state tax return All repairs were either made or contracted out by Mike. 2013 state tax return Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. 2013 state tax return Maximum special allowance. 2013 state tax return   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. 2013 state tax return   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. 2013 state tax return If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. 2013 state tax return   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. 2013 state tax return Modified adjusted gross income (MAGI). 2013 state tax return   This is your adjusted gross income from Form 1040, U. 2013 state tax return S. 2013 state tax return Individual Income Tax Return, line 38, or Form 1040NR, U. 2013 state tax return S. 2013 state tax return Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. 2013 state tax return S. 2013 state tax return savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). 2013 state tax return Form 8582 not required. 2013 state tax return   Do not complete Form 8582 if you meet all of the following conditions. 2013 state tax return Your only passive activities were rental real estate activities in which you actively participated. 2013 state tax return Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). 2013 state tax return If married filing separately, you lived apart from your spouse all year. 2013 state tax return You have no prior year unallowed losses from these (or any other passive) activities. 2013 state tax return You have no current or prior year unallowed credits from passive activities. 2013 state tax return Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). 2013 state tax return You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. 2013 state tax return   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. 2013 state tax return On lines 23a through 23e of your Schedule E, enter the applicable amounts. 2013 state tax return Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. 2013 state tax return You may be able to deduct the loss on your income tax return. 2013 state tax return Casualty. 2013 state tax return   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. 2013 state tax return Such events include a storm, fire, or earthquake. 2013 state tax return Theft. 2013 state tax return   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. 2013 state tax return Gain from casualty or theft. 2013 state tax return   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. 2013 state tax return Generally, you must report this gain. 2013 state tax return However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. 2013 state tax return To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. 2013 state tax return In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. 2013 state tax return The cost of the replacement property must be equal to or more than the net insurance or other payment you received. 2013 state tax return More information. 2013 state tax return   For information on business and nonbusiness casualty and theft losses, see Publication 547. 2013 state tax return How to report. 2013 state tax return    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. 2013 state tax return Follow the Instructions for Form 4684 for where to carry your net gain or loss. 2013 state tax return Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. 2013 state tax return In 2013, she rented it all 12 months for a monthly rental fee of $1,125. 2013 state tax return In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. 2013 state tax return Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. 2013 state tax return This means using the straight line method over a recovery period of 27. 2013 state tax return 5 years. 2013 state tax return She uses Table 2-2d to find her depreciation percentage. 2013 state tax return Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. 2013 state tax return For year 6, the rate is 3. 2013 state tax return 636%. 2013 state tax return Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. 2013 state tax return 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. 2013 state tax return Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. 2013 state tax return Marie also meets all of the requirements for not having to file Form 8582. 2013 state tax return She uses Schedule E, Part I, to report her rental income and expenses. 2013 state tax return She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. 2013 state tax return Form 4562 is not required. 2013 state tax return Prev  Up  Next   Home   More Online Publications
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The 2013 State Tax Return

2013 state tax return 4. 2013 state tax return   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. 2013 state tax return Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. 2013 state tax return Net unrelated income. 2013 state tax return Net unrelated loss. 2013 state tax return Control. 2013 state tax return Income from property financed with qualified 501(c)(3) bonds. 2013 state tax return Disposition of property received from taxable subsidiary and used in unrelated business. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. 2013 state tax return Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. 2013 state tax return Dividends, interest, annuities and other investment income. 2013 state tax return   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. 2013 state tax return Exception for insurance activity income of a controlled foreign corporation. 2013 state tax return   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. 2013 state tax return 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. 2013 state tax return Certain exceptions to this rule apply. 2013 state tax return For more information, see section 512(b)(17). 2013 state tax return Other exceptions. 2013 state tax return   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). 2013 state tax return Income from lending securities. 2013 state tax return   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. 2013 state tax return   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. 2013 state tax return The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. 2013 state tax return 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. 2013 state tax return Royalties. 2013 state tax return   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. 2013 state tax return   To be considered a royalty, a payment must relate to the use of a valuable right. 2013 state tax return Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. 2013 state tax return Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. 2013 state tax return However, royalties do not include payments for personal services. 2013 state tax return Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. 2013 state tax return   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. 2013 state tax return   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Exceptions. 2013 state tax return   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). 2013 state tax return Rents. 2013 state tax return   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. 2013 state tax return Rents from personal property are not excluded. 2013 state tax return However, special rules apply to “mixed leases” of both real and personal property. 2013 state tax return Mixed leases. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. 2013 state tax return   Property is placed in service when the lessee first may use it under the terms of a lease. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return   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). 2013 state tax return 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. 2013 state tax return Exception for rents based on net profit. 2013 state tax return   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. 2013 state tax return Exception for income from personal services. 2013 state tax return   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. 2013 state tax return 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. 2013 state tax return Other exceptions. 2013 state tax return   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. 2013 state tax return ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). 2013 state tax return See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. 2013 state tax return Income from research. 2013 state tax return   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. 2013 state tax return However, the extent of the exclusion depends on the nature of the organization and the type of research. 2013 state tax return   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. 2013 state tax return   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. 2013 state tax return   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. 2013 state tax return   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. 2013 state tax return In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. 2013 state tax return Gains and losses from disposition of property. 2013 state tax return   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. 2013 state tax return   It should be noted that the last exception relates only to cut timber. 2013 state tax return 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. 2013 state tax return Lapse or termination of options. 2013 state tax return   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. 2013 state tax return The exclusion applies only if the option is written in connection with the exempt organization's investment activities. 2013 state tax return 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. 2013 state tax return Exception. 2013 state tax return   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. 2013 state tax return Gain or loss on disposition of certain brownfield property. 2013 state tax return   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. 2013 state tax return See sections 512(b)(19) and 514(b)(1)(E). 2013 state tax return Income from services provided under federal license. 2013 state tax return   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. 2013 state tax return   This exclusion applies only if the following requirements are met. 2013 state tax return The trade or business must have been operated by the order or by the institution before May 27, 1959. 2013 state tax return The trade or business must provide services under a license issued by a federal regulatory agency. 2013 state tax return 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. 2013 state tax return The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. 2013 state tax return 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. 2013 state tax return Exception. 2013 state tax return    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). 2013 state tax return Member income of mutual or cooperative electric companies. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Exception. 2013 state tax return   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. 2013 state tax return The limit on dues paid by an associate member is $148 for 2011. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return They cannot be directly connected with excluded income. 2013 state tax return For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. 2013 state tax return 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. 2013 state tax return For an exception, see Expenses attributable to exploitation of exempt activities, later. 2013 state tax return Expenses attributable solely to unrelated business. 2013 state tax return   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. 2013 state tax return   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. 2013 state tax return Expenses attributable to dual use of facilities or personnel. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return Example 1. 2013 state tax return A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. 2013 state tax return The school provides the tennis courts, housing, and dining facilities. 2013 state tax return The contracted individual hires the instructors, recruits campers, and provides supervision. 2013 state tax return The income the school receives from this activity is from a dual use of the facilities and personnel. 2013 state tax return The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. 2013 state tax return Example 2. 2013 state tax return An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. 2013 state tax return The president devotes approximately 10% of his time to the unrelated business. 2013 state tax return 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. 2013 state tax return Expenses attributable to exploitation of exempt activities. 2013 state tax return   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. 2013 state tax return (See Exploitation of exempt functions under Not substantially related in chapter 3. 2013 state tax return ) 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. 2013 state tax return Exception. 2013 state tax return   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. 2013 state tax return The unrelated business exploits the exempt activity. 2013 state tax return The unrelated business is a type normally conducted for profit by taxable organizations. 2013 state tax return The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. 2013 state tax return 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. 2013 state tax return   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. 2013 state tax return ) Figuring unrelated business taxable income (UBTI). 2013 state tax return   The UBTI of an advertising activity is the amount shown in the following chart. 2013 state tax return IF gross advertising income is . 2013 state tax return . 2013 state tax return . 2013 state tax return THEN UBTI is . 2013 state tax return . 2013 state tax return . 2013 state tax return 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. 2013 state tax return Equal to or less than direct advertising costs Zero. 2013 state tax return   • Circulation income and readership costs are not taken into account. 2013 state tax return   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. 2013 state tax return   The terms used in the chart are explained in the following discussions. 2013 state tax return Periodical Income Gross advertising income. 2013 state tax return   This is all the income from the unrelated advertising activities of an exempt organization periodical. 2013 state tax return Circulation income. 2013 state tax return   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). 2013 state tax return It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. 2013 state tax return It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. 2013 state tax return Allocable membership receipts. 2013 state tax return   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. 2013 state tax return   The amount used to allocate membership receipts is the amount shown in the following chart. 2013 state tax return   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. 2013 state tax return 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. 2013 state tax return IF . 2013 state tax return . 2013 state tax return . 2013 state tax return THEN the amount used to allocate membership receipts is . 2013 state tax return . 2013 state tax return . 2013 state tax return 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return U is an exempt scientific organization with 10,000 members who pay annual dues of $15. 2013 state tax return One of U's activities is publishing a monthly periodical distributed to all of its members. 2013 state tax return U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. 2013 state tax return 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. 2013 state tax return 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). 2013 state tax return Example 2. 2013 state tax return Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). 2013 state tax return U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). 2013 state tax return Periodical Costs Direct advertising costs. 2013 state tax return   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return Readership costs. 2013 state tax return   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. 2013 state tax return Costs partly attributable to other activities. 2013 state tax return   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. 2013 state tax return When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. 2013 state tax return The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. 2013 state tax return Consolidated treatment, once adopted, must be followed consistently and is binding. 2013 state tax return This treatment can be changed only with the consent of the Internal Revenue Service. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Example. 2013 state tax return Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. 2013 state tax return 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. 2013 state tax return It is not engaged in for profit. 2013 state tax return Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. 2013 state tax return 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. 2013 state tax return Modifications Net operating loss deduction. 2013 state tax return   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. 2013 state tax return 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. 2013 state tax return For example, a loss from an unrelated trade or business is not diminished because dividend income was received. 2013 state tax return   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. 2013 state tax return This would reduce the loss that could be applied against unrelated business income of prior or future tax years. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return   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. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return Charitable contributions deduction. 2013 state tax return   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. 2013 state tax return   To be deductible, the contribution must be paid to another qualified organization. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return Deduction limits. 2013 state tax return   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. 2013 state tax return See the Instructions for Form 990-T for more information. 2013 state tax return    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. 2013 state tax return 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. 2013 state tax return   Contributions in excess of the limits just described may be carried over to the next 5 tax years. 2013 state tax return A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. 2013 state tax return Suspension of deduction limits for farmers and ranchers. 2013 state tax return   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. 2013 state tax return See the Instructions for Form 990-T for details. 2013 state tax return Specific deduction. 2013 state tax return   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. 2013 state tax return However, the specific deduction is not allowed in computing an NOL or the NOL deduction. 2013 state tax return   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. 2013 state tax return Exception. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return The local units cannot file separate returns. 2013 state tax return However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. 2013 state tax return 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. 2013 state tax return Example. 2013 state tax return X is an association of churches and is divided into local units A, B, C, and D. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return No distinction is made between limited and general partners. 2013 state tax return The organization is required to notify the partnership of its tax-exempt status. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return The partnership is required to provide the organization this information on Schedule K-1. 2013 state tax return Example. 2013 state tax return An exempt educational organization is a partner in a partnership that operates a factory. 2013 state tax return The partnership also holds stock in a corporation. 2013 state tax return 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. 2013 state tax return Different tax years. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return 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). 2013 state tax return These organizations must figure unrelated business taxable income under special rules. 2013 state tax return Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. 2013 state tax return ). 2013 state tax return (See Exclusions under Income, earlier. 2013 state tax return ) Therefore, they are generally subject to unrelated business income tax on this income. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Losses from nonexempt activities. 2013 state tax return   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. 2013 state tax return Example. 2013 state tax return 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. 2013 state tax return The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. 2013 state tax return Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. 2013 state tax return Modifications. 2013 state tax return   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). 2013 state tax return Exempt function income. 2013 state tax return   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. 2013 state tax return Exempt function income also includes income set aside for qualified purposes. 2013 state tax return Income that is set aside. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. 2013 state tax return These rules are explained in section 512(a)(3)(E)(ii). 2013 state tax return   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. 2013 state tax return In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return The income set aside must have been includible in gross income for that earlier year. 2013 state tax return Nonrecognition of gain. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return For details, see section 512(a)(4) and the regulations under that section. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. 2013 state tax return Excess qualifying specified payments. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   If a controlled participant is not required to file a U. 2013 state tax return S. 2013 state tax return income tax return, the participant must ensure that the copy or copies of the Regulations section 1. 2013 state tax return 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. 2013 state tax return S. 2013 state tax return Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. 2013 state tax return S. 2013 state tax return Corporation or a Foreign Corporation Engaged in a U. 2013 state tax return S. 2013 state tax return Trade or Business, or any Form 8865, Return of U. 2013 state tax return S. 2013 state tax return Persons With Respect to Certain Foreign Partnerships, filed for that participant. 2013 state tax return Addition to tax for valuation misstatements. 2013 state tax return   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. 2013 state tax return See section 512(b)(13)(E)(ii) for more information. 2013 state tax return Net unrelated income. 2013 state tax return   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. 2013 state tax return Net unrelated loss. 2013 state tax return   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. 2013 state tax return Control. 2013 state tax return   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. 2013 state tax return For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. 2013 state tax return   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). 2013 state tax return Income from property financed with qualified 501(c)(3) bonds. 2013 state tax return 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. 2013 state tax return No deduction is allowed for interest on the private activity bond. 2013 state tax return See sections 150(b)(3) and (c) for more information. 2013 state tax return Disposition of property received from taxable subsidiary and used in unrelated business. 2013 state tax return 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). 2013 state tax return The assets are treated as if sold at fair market value. 2013 state tax return Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. 2013 state tax return S. 2013 state tax return and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return In such a case the built-in appreciation is preserved in the replacement property received in the transaction. 2013 state tax return 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). 2013 state tax return 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. 2013 state tax return In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. 2013 state tax return 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. 2013 state tax return If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. 2013 state tax return Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return The amount of income included is proportionate to the debt on the property. 2013 state tax return 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). 2013 state tax return It includes rental real estate, tangible personal property, and corporate stock. 2013 state tax return 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. 2013 state tax return The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. 2013 state tax return 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. 2013 state tax return Example 1. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Example 2. 2013 state tax return X, an exempt organization, forms a partnership with A and B. 2013 state tax return 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. 2013 state tax return X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. 2013 state tax return The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. 2013 state tax return The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. 2013 state tax return The loan is secured by a mortgage on the entire office building. 2013 state tax return By agreement with Y bank, X is not personally liable for payment of the mortgage. 2013 state tax return X has acquisition indebtedness of $7 million. 2013 state tax return 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). 2013 state tax return Example 3. 2013 state tax return A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. 2013 state tax return 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. 2013 state tax return Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. 2013 state tax return The union has no outstanding debt on the property. 2013 state tax return 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. 2013 state tax return The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. 2013 state tax return Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. 2013 state tax return 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. 2013 state tax return Accordingly, the debt is not acquisition indebtedness. 2013 state tax return Change in use of property. 2013 state tax return   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. 2013 state tax return Example. 2013 state tax return Four years ago a university borrowed funds to acquire an apartment building as housing for married students. 2013 state tax return Last year, the university rented the apartment building to the public for nonexempt purposes. 2013 state tax return The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. 2013 state tax return Continued debt. 2013 state tax return   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. 2013 state tax return This is true even if the original property was not debt-financed property. 2013 state tax return Example. 2013 state tax return 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. 2013 state tax return The office building was not debt-financed property. 2013 state tax return The organization later sold the building for $1 million without repaying the $400,000 loan. 2013 state tax return It used the sale proceeds to buy an apartment building it rents to the general public. 2013 state tax return The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. 2013 state tax return Property acquired subject to mortgage or lien. 2013 state tax return   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. 2013 state tax return Example. 2013 state tax return An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. 2013 state tax return The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. 2013 state tax return Liens similar to a mortgage. 2013 state tax return   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. 2013 state tax return A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. 2013 state tax return 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. 2013 state tax return 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). 2013 state tax return Exception for property acquired by gift, bequest, or devise. 2013 state tax return   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. 2013 state tax return 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. 2013 state tax return   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). 2013 state tax return   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. 2013 state tax return Modifying existing debt. 2013 state tax return   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. 2013 state tax return 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. 2013 state tax return Extension or renewal. 2013 state tax return   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. 2013 state tax return   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. 2013 state tax return Debt increase. 2013 state tax return   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. 2013 state tax return Example. 2013 state tax return An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. 2013 state tax return These include the following. 2013 state tax return Debts incurred in performing an exempt purpose. 2013 state tax return Annuity obligations. 2013 state tax return Securities loans. 2013 state tax return Real property debts of qualified organizations. 2013 state tax return Certain Federal financing. 2013 state tax return Debt incurred in performing exempt purpose. 2013 state tax return   A debt incurred in performing an exempt purpose is not acquisition indebtedness. 2013 state tax return 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. 2013 state tax return Annuity obligation. 2013 state tax return   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. 2013 state tax return 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. 2013 state tax return 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. 2013 state tax return It must be payable over the lives of either one or two individuals living when issued. 2013 state tax return 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. 2013 state tax return Example. 2013 state tax return X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. 2013 state tax return 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. 2013 state tax return The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. 2013 state tax return The present value of this annuity is $81,156, determined from IRS valuation tables. 2013 state tax return 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. 2013 state tax return Securities loans. 2013 state tax return   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). 2013 state tax return 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. 2013 state tax return   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from