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Free 1040ez Tax Return

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Free 1040ez Tax Return

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

May 15, 2013

The IRS has received a variety of questions related to the exempt organization issues recently raised. Here are some basics on the issue.

1. What are the issues raised in the recent Treasury Inspector General for Tax Administration (“TIGTA”) report?

The issues relate to the application process for organizations seeking tax-exempt status. Part of the IRS’s responsibility is to review applications of organizations seeking tax-exempt status. Section 501(c)(3) organizations are required to get IRS approval. Others, including section 501(c)(4) organizations, are not required to get IRS approval, but often seek it.

2. Do the issues raised in the recent report relate to audits/ examinations?

No, the issues relate to the approval process of organizations that applied to the IRS for recognition of tax-exempt status. 

3. What does the IRS look for in the approval process? 

The IRS’s role is to determine whether organization meets the legal requirements for tax-exempt status. One requirement relates to the amount of political campaign intervention (“political activity”) that tax-exempt organizations may engage in. Section 501(c)(3) organizations are prohibited from engaging in any political activity. Other organizations, including section 501(c)(4) organizations, may only engage in a limited amount of political activity. 

4. Where does an organization send its application for tax-exemption?

All applications are sent to the IRS Determinations Office in Cincinnati. This office receives approximately 70,000 applications for tax-exempt status of all kinds each year. This includes applications from section 501(c)(3) and section 501(c)(4) organizations. This office, which includes fewer than 200 people working directly on applications, is primarily responsible for working determination applications. Determinations staff may consult with tax law specialists in Washington on how the law applies to their case. 

5. Has the IRS seen an increase in the number of applications in which the organization is potentially engaged in political activity?

Yes, the IRS has seen an increase in the number of section 501(c)(4) applications in general. The number of applications has more than doubled in recent years. In addition, the IRS has seen an increase in the number of tax-exempt organization applications in which the organization is potentially engaged in political activity. This includes both section 501(c)(3) and section 501(c)(4) organizations.

6. How did the IRS handle the increase in the number of applications from organizations that appeared to be engaged in political activity?

As done in the past in other situations, such as credit counseling and down payment assistance), the IRS selected cases using identified criteria so that cases needing further review would be worked consistently. This means that cases meeting the selection criteria were centralized and assigned to designated employees developing expertise in the area so that they could be worked in a fair and consistent manner. 

7. How are decisions made regarding what cases should be centralized in this area?

Cases are selected for centralization if there are indications in the application that the organization may engage in political campaign intervention, lobbying, or advocacy. This was done to ensure that the legal requirements related to these activities are applied in a fair and consistent manner. The set of criteria was revised at a later point in order to avoid centralizing pure lobbying organizations that did not require follow-on development. During certain periods (August 2010 to July 2011 and January 2012 to June 2012), specific names, terms and policies (such as Tea Party and Patriot) were inappropriately used as criteria in determining which cases should be centralized. However, case selection during these periods was not limited to these criteria. 

8. What cases were centralized?

The TIGTA report reflects that 300 cases were centralized. Approximately 70 of those cases included the name Tea Party. The remaining cases included organizations of all political views. The current number of centralized cases is approximately 470.

9. Why did IRS employees look at Tea Party organizations?

IRS employees had seen cases of organizations with the name Tea Party in which political activity was an issue that needed to be reviewed for compliance with legal requirements. Because of the increased inventory of applications, this inappropriate criterion was used as a shortcut to centralize similar cases.

10. Would organizations with Tea Party in the name have been centralized if only appropriate selection criteria had been used?

Yes, in most cases the organization would have been centralized based on the information included in the application. The IRS should have focused on this information instead of using a shortcut.

11. Were centralized cases worked differently depending on which selection criteria was used?

No, centralized cases were not worked differently depending on which selection criteria was used.

12. Did mistakes occur in working the centralized cases?

Yes. Applicants whose cases were centralized unfortunately experienced inappropriate delays and over-expansive information requests in some cases. This was caused by ineffective processes and not related to the selection criteria used for the centralization of a case.

13. Is there any evidence of political bias in selecting cases for centralization or in working those cases?

The TIGTA report included no findings of political bias. In addition, the IRS has found no indication of political bias. 

14. How many centralized applications have been approved?

Since centralization, more than 175 applications have been approved to date. As with all applications for tax-exempt status that are approved, the names of organizations whose applications have been approved are publicly available. 

Page Last Reviewed or Updated: 04-Sep-2013

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