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Free state tax extension 4. Free state tax extension   Other Section 501(c) Organizations Table of Contents Introduction 501(c)(4) - Civic Leagues and Social Welfare OrganizationsSpecific Organizations 501(c)(5) - Labor, Agricultural and Horticultural OrganizationsLabor Organizations Agricultural and Horticultural Organizations 501(c)(6) - Business Leagues, etc. Free state tax extension Line of business. Free state tax extension Examples. Free state tax extension Improvement of business conditions. Free state tax extension Exception for local legislation. Free state tax extension De minimis exception. Free state tax extension Grass roots lobbying. Free state tax extension 501(c)(7) - Social and Recreation ClubsLimited membership. Free state tax extension Support. Free state tax extension Facilities open to public. Free state tax extension Gross receipts from nonmembership sources. Free state tax extension Gross receipts. Free state tax extension Nontraditional activities. Free state tax extension 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal SocietiesFraternal Beneficiary Societies (501(c)(8)) Domestic Fraternal Societies (501(c)(10)) 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' AssociationsLocal Employees' Associations (501(c)(4)) Voluntary Employees' Beneficiary Associations (501(c)(9)) Supplemental Unemployment Benefit Trusts (501(c)(17)) 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like OrganizationsMembership. Free state tax extension Losses and expenses. Free state tax extension Distributions of proceeds. Free state tax extension The 85% Requirement Local Life Insurance Associations Mutual or Cooperative Associations 501(c)(13) - Cemetery CompaniesBuying cemetery property. Free state tax extension Perpetual care organization. Free state tax extension Care of individual plots. Free state tax extension 501(c)(14) - Credit Unions and Other Mutual Financial OrganizationsState-Chartered Credit Unions Other Mutual Financial Organizations 501(c)(19) - Veterans' Organizations 501(c)(20) - Group Legal Services Plan Organizations 501(c)(21) - Black Lung Benefit TrustsExcise taxes. Free state tax extension 501(c)(2) - Title-Holding Corporations for Single Parent CorporationsExpenses. Free state tax extension Waiver of payment of income. Free state tax extension 501(c)(25) - Title-Holding Corporations or Trusts for Multiple Parent CorporationsUnrelated Business Income 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations 501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations 501(c)(29) - CO-OP Health Insurance Issuers New Guidance for IRC 501(c)(29) Qualified Nonprofit Health Insurance Issuers General Requirements for Exemption under 501(c)(29) and Annual Filing Requirement Additional Guidance for Prospective 501(c)(29) Organizations Introduction This chapter contains specific information for certain organizations described in section 501(c), other than those organizations that are described in section 501(c)(3). Free state tax extension Section 501(c)(3) organizations are covered in chapter 3 of this publication. Free state tax extension The Table of Contents at the beginning of this publication, as well as the Organization Reference Chart, may help you locate at a glance the type of organization discussed in this chapter. Free state tax extension 501(c)(4) - Civic Leagues and Social Welfare Organizations If your organization is not organized for profit and will be operated primarily to promote social welfare to benefit the community, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4). Free state tax extension The discussion that follows describes the information you must provide when applying. Free state tax extension For application procedures, see chapter 1. Free state tax extension To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted primarily to charitable, educational, or recreational purposes. Free state tax extension In addition, no part of the organization's net earnings can inure to the benefit of any private shareholder or individual. Free state tax extension If the organization provides an excess benefit to certain persons, an excise tax may be imposed. Free state tax extension See Excise tax on excess benefit transactions , under Excess Benefit Transactions in chapter 5 for more information about this tax. Free state tax extension Examples. Free state tax extension   Types of organizations that are considered to be social welfare organizations are civic associations and volunteer fire companies. Free state tax extension Nonprofit operation. Free state tax extension   You must submit evidence that your organization is organized and will be operated on a nonprofit basis. Free state tax extension However, such evidence, including the fact that your organization is organized under a state law relating to nonprofit corporations, will not in itself establish a social welfare purpose. Free state tax extension Social welfare. Free state tax extension   To establish that your organization is organized primarily to promote social welfare, you should submit evidence with your application showing that your organization will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). Free state tax extension   An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community. Free state tax extension It therefore does not qualify as a section 501(c)(4) organization. Free state tax extension Similarly, an organization formed to represent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the community. Free state tax extension However, an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization. Free state tax extension Political activity. Free state tax extension   Promoting social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Free state tax extension However, if you submit proof that your organization is organized primarily to promote social welfare, it can obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for public office. Free state tax extension See the discussion in chapter 2 under Political Organization Income Tax Return . Free state tax extension Social or recreational activity. Free state tax extension   If social activities will be the primary purpose of your organization, you should not file an application for exemption as a social welfare organization but should file for exemption as a social club described in section 501(c)(7). Free state tax extension Retirement benefit program. Free state tax extension   An organization established by its members that has as its primary activity providing supplemental retirement benefits to its members or death benefits to their beneficiaries does not qualify as an exempt social welfare organization. Free state tax extension It may qualify under another paragraph of section 501(c) depending on all the facts. Free state tax extension   However, a nonprofit association that is established, maintained, and funded by a local government to provide the only retirement benefits to a class of employees may qualify as a social welfare organization under section 501(c)(4). Free state tax extension Tax treatment of donations. Free state tax extension   Donations to volunteer fire companies are deductible on the donor's federal income tax return, but only if made for exclusively public purposes. Free state tax extension Contributions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions for federal income tax purposes. Free state tax extension They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer's business. Free state tax extension However, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Free state tax extension for more information. Free state tax extension For more information on social welfare organizations, see Life Cycle of a Social Welfare Organization at IRS. Free state tax extension gov. Free state tax extension Specific Organizations The following information should be contained in the application form and accompanying statements of certain types of civic leagues or social welfare organizations. Free state tax extension Volunteer fire companies. Free state tax extension   If your organization wishes to obtain exemption as a volunteer fire company or similar organization, you should submit evidence that its members are actively engaged in fire fighting and similar disaster assistance, whether it actually owns the fire fighting equipment, and whether it provides any assistance for its members, such as death and medical benefits in case of injury to them. Free state tax extension   If your organization does not have an independent social purpose, such as providing recreational facilities for members, it may be exempt under section 501(c)(3). Free state tax extension In this event, your organization should file Form 1023. Free state tax extension Homeowners' associations. Free state tax extension   A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. Free state tax extension The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Free state tax extension Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Free state tax extension Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community. Free state tax extension   The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. Free state tax extension It also must show that it does not engage in exterior maintenance of private homes. Free state tax extension   A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally can elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income. Free state tax extension Other organizations. Free state tax extension   Other nonprofit organizations that qualify as social welfare organizations include: An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and that serves the general public in an area with no other airport, A community association that works to improve public services, housing, and residential parking; publishes a free community newspaper; sponsors a community sports league, holiday programs, and meetings; and contracts with a private security service to patrol the community, A community association devoted to preserving the community's traditions, architecture, and appearance by representing it before the local legislature and administrative agencies in zoning, traffic, and parking matters, An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses so they will relocate to the area, and An organization that holds an annual festival of regional customs and traditions. Free state tax extension 501(c)(5) - Labor, Agricultural and Horticultural Organizations If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural, or horticultural organization, you should submit an application on Form 1024. Free state tax extension You must indicate in your application for exemption and accompanying statements that no part of the organization's net earnings will inure to the benefit of any member. Free state tax extension In addition, you should follow the procedure for obtaining recognition of exempt status described in chapter 1. Free state tax extension Submit any additional information that may be required, as described in this section. Free state tax extension Tax treatment of donations. Free state tax extension   Contributions to labor, agricultural, and horticultural organizations are not deductible as charitable contributions on the donor's federal income tax return. Free state tax extension However, such payments may be deductible as business expenses if they are ordinary and necessary in the conduct of the taxpayer's trade or business. Free state tax extension For more information about certain limits affecting the deductibility of these business expenses, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Free state tax extension Labor Organizations A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collectively with their employers to secure better working conditions. Free state tax extension To show that your organization has the purpose of a labor organization, you should include in the articles of organization or accompanying statements (submitted with your exemption application) information establishing that the organization is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. Free state tax extension In addition, no net earnings of the organization can inure to the benefit of any member. Free state tax extension Composition of membership. Free state tax extension   While a labor organization generally is composed of employees or representatives of the employees (in the form of collective bargaining agents) and similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate an exempt purpose. Free state tax extension You must show in your application that your organization has the purposes described in the preceding paragraph. Free state tax extension These purposes can be accomplished by a single labor organization acting alone or by several organizations acting together through a separate organization. Free state tax extension Benefits to members. Free state tax extension   The payment by a labor organization of death, sick, accident, and similar benefits to its individual members with funds contributed by its members, if made under a plan to better the conditions of the members, does not preclude exemption as a labor organization. Free state tax extension However, an organization does not qualify for exemption as a labor organization if it has no authority to represent members in job-related matters, even if it provides weekly income to its members in the event of a lawful strike by the members' union, in return for an annual payment by the member. Free state tax extension   For more information on labor organizations, see Life Cycle of a Labor Organization at IRS. Free state tax extension gov. Free state tax extension Agricultural and Horticultural Organizations Agricultural and horticultural organizations are connected with raising livestock, forestry, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits. Free state tax extension For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. Free state tax extension The term harvesting, in this case, includes fishing and related pursuits. Free state tax extension Agricultural organizations can be quasi-public in character and are often designed to encourage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the necessary expenses of upkeep and operation. Free state tax extension When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture, the organization must qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6) organizations. Free state tax extension The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products. Free state tax extension The following list contains some examples of activities that show an agricultural or horticultural purpose. Free state tax extension Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state, farm, or home bureau. Free state tax extension Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture. Free state tax extension Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations being furnished to the community members to educate them in soil treatment. Free state tax extension Guarding the purity of a specific breed of livestock. Free state tax extension Encouraging improvements in the production of fish on privately owned fish farms. Free state tax extension Negotiating with processors for the price to be paid to members for their crops. Free state tax extension For more information on agricultural or horticultural organizations, see Life Cycle of an Agricultural or Horticultural Organization at IRS. Free state tax extension gov. Free state tax extension 501(c)(6) - Business Leagues, etc. Free state tax extension If your association wants to apply for recognition of exemption from federal income tax as a nonprofit business league, chamber of commerce, real estate board, or board of trade, it should file Form 1024. Free state tax extension For a discussion of the procedure to follow, see chapter 1. Free state tax extension Your organization must indicate in its application form and attached statements that no part of its net earnings will inure to the benefit of any private shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining). Free state tax extension In addition, your organization must be primarily engaged in activities or functions that are the basis for its exemption. Free state tax extension It must be primarily supported by membership dues and other income from activities substantially related to its exempt purpose. Free state tax extension A business league, in general, is an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Free state tax extension Trade associations and professional associations are considered business leagues. Free state tax extension Chamber of commerce. Free state tax extension   A chamber of commerce usually is composed of the merchants and traders of a city. Free state tax extension Board of trade. Free state tax extension   A board of trade often consists of persons engaged in similar lines of business. Free state tax extension For example, a nonprofit organization formed to regulate the sale of a specified agricultural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of trade. Free state tax extension   Chambers of commerce and boards of trade usually promote the common economic interests of all the commercial enterprises in a given trade community. Free state tax extension Real estate board. Free state tax extension   A real estate board consists of members interested in improving the business conditions in the real estate field. Free state tax extension It is not organized for profit and no part of the net earnings inures to the benefit of any private shareholder or individual. Free state tax extension Professional football leagues. Free state tax extension   The Internal Revenue Code specifically defines professional football leagues as exempt organizations under section 501(c)(6). Free state tax extension They are exempt whether or not they administer a pension fund for football players. Free state tax extension General purpose. Free state tax extension   You must indicate in the material submitted with your application that your organization will be devoted to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. Free state tax extension It must be shown that the conditions of a particular trade or the interests of the community will be advanced. Free state tax extension Merely indicating the name of the organization or the object of the local statute under which it is created is not enough to demonstrate the required general purpose. Free state tax extension Line of business. Free state tax extension   This term generally refers either to an entire industry or to all components of an industry within a geographic area. Free state tax extension It does not include a group composed of businesses that market a particular brand within an industry. Free state tax extension Common business interest. Free state tax extension   A common business interest of all members of the organization must be established by the application documents. Free state tax extension Examples. Free state tax extension   Activities that would tend to illustrate a common business interest are: Promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail merchants association, Education of the public in the use of credit, Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated by casualty insurance companies, Establishment and maintenance of the integrity of a local commercial market, Operation of a trade publication primarily intended to benefit an entire industry, and Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main purpose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying basis as a result). Free state tax extension Improvement of business conditions. Free state tax extension   Generally, this must be shown to be the purpose of the organization. Free state tax extension This is not established by evidence of particular services that provide a convenience or economy to individual members in their businesses, such as advertising that carries the name of members, interest-free loans, assigning exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency. Free state tax extension Stock or commodity exchange. Free state tax extension   A stock or commodity exchange is not a business league, chamber of commerce, real estate board, or board of trade and is not exempt under section 501(c)(6). Free state tax extension Legislative activity. Free state tax extension   An organization that is exempt under section 501(c)(6) can work for the enactment of laws to advance the common business interests of the organization's members. Free state tax extension Deduction not allowed for dues used for political or legislative activities. Free state tax extension   A taxpayer cannot deduct the part of dues or other payments to a business league, trade association, labor union, or similar organization that is reported to the taxpayer by the organization as having been used for any of the following activities. Free state tax extension Influencing legislation. Free state tax extension Participating or intervening in a political campaign for, or against, any candidate for public office. Free state tax extension Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or referendums (also known as grass roots lobbying). Free state tax extension Communicating directly with certain executive branch officials to try to influence their official actions or positions. Free state tax extension See Dues Used for Lobbying or Political Activities under Required Disclosures in chapter 2 for more information. Free state tax extension Exception for local legislation. Free state tax extension   Members can deduct dues (or assessments) to an organization that are for expenses of: Appearing before, submitting statements to, or sending communications to members of a local council or similar governing body with respect to legislation or proposed legislation of direct interest to the member, or Communicating information between the member and the organization with respect to local legislation or proposed legislation of direct interest to the organization or the member. Free state tax extension Legislation or proposed legislation is of direct interest to a taxpayer if it will, or can reasonably be expected to, affect the taxpayer's trade or business. Free state tax extension De minimis exception. Free state tax extension   In-house expenditures of $2,000 or less for the year for activities (1) – (4) listed earlier will not prevent a deduction for dues if the dues meet all other tests to be deductible as a business expense. Free state tax extension Grass roots lobbying. Free state tax extension   A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grass roots lobbying if it contacts prospective members or calls upon its own members to contact their employees and customers for the purpose of urging such persons to communicate with their elected state or Congressional representatives to support the promotion, defeat, or repeal of legislation that is of direct interest to the organization. Free state tax extension Any dues or assessments directly related to such activities are not deductible by the taxpayer, since the individuals being contacted, who are not members of the organization, are a segment of the general public. Free state tax extension Tax treatment of donations. Free state tax extension   Contributions to organizations described in this section are not deductible as charitable contributions on the donor's federal income tax return. Free state tax extension They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer's business. Free state tax extension   For more information on business leagues, see Life Cycle of a Business League (Trade Association) on IRS. Free state tax extension gov. Free state tax extension 501(c)(7) - Social and Recreation Clubs If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax. Free state tax extension In applying for recognition of exemption, you should submit the information described in this section. Free state tax extension Also see chapter 1 for the procedures to follow. Free state tax extension Typical organizations that should file for recognition of exemption as social clubs include: College alumni associations that are not described in chapter 3 under Alumni association , College fraternities or sororities operating chapter houses for students, Country clubs, Amateur hunting, fishing, tennis, swimming, and other sport clubs, Dinner clubs that provide a meeting place, library, and dining room for members, Hobby clubs, Garden clubs, and Variety clubs. Free state tax extension Discrimination prohibited. Free state tax extension   Your organization will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any written policy statement provides for discrimination against any person on the basis of race, color, or religion. Free state tax extension   However, a club that in good faith limits its membership to the members of a particular religion to further the teachings or principles of that religion and not to exclude individuals of a particular race or color will not be considered as discriminating on the basis of religion. Free state tax extension Also, the restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed later) if that society is described in section 501(c)(8) and exempt from tax under section 501(a) and limits its membership to the members of a particular religion. Free state tax extension Private benefit prohibited. Free state tax extension   No part of the organization's net earnings can inure to the benefit of any person having a personal and private interest in the activities of the organization. Free state tax extension For purposes of this requirement, it is not necessary that net earnings be actually distributed. Free state tax extension Even undistributed earnings can benefit members. Free state tax extension Examples of this include a decrease in membership dues or an increase in the services the club provides to its members without a corresponding increase in dues or other fees paid for club support. Free state tax extension However, fixed-fee payments to members who bring new members into the club are not an inurement of the club's net earnings, if the payments are reasonable compensation for performance of a necessary administrative service. Free state tax extension Purposes. Free state tax extension   To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you should submit evidence with your application that personal contact, commingling, and fellowship exist among members. Free state tax extension You must show that members are bound together by a common objective of pleasure, recreation, and other nonprofitable purposes. Free state tax extension   Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organization. Free state tax extension A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group. Free state tax extension   The term other nonprofitable purposes means other purposes similar to pleasure and recreation. Free state tax extension For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits is not operating exclusively for pleasure, recreation, and other nonprofitable purposes. Free state tax extension Limited membership. Free state tax extension   The membership in a social club must be limited. Free state tax extension To show that your organization has a purpose that would characterize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club. Free state tax extension   A social club that issues corporate membership is dealing with the general public in the form of the corporation's employees. Free state tax extension Corporate members of a club are not the kind of members contemplated by the law. Free state tax extension Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. Free state tax extension See Gross receipts from nonmembership sources , later. Free state tax extension Bona fide individual memberships paid for by a corporation would not have an effect on the gross receipts source. Free state tax extension   The fact that a social club may have an associate (nonvoting) class of membership will not be, in and of itself, a cause for nonrecognition of exemption. Free state tax extension However, if one membership class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited class, resulting in a denial of the club's exemption. Free state tax extension Support. Free state tax extension   In general, your club should be supported solely by membership fees, dues, and assessments. Free state tax extension However, if otherwise entitled to exemption, your club will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. Free state tax extension Business activities. Free state tax extension   If your club will engage in business, such as selling real estate, timber, or other products or services, it generally will be denied exemption. Free state tax extension However, evidence submitted with your application form that your organization will provide meals, refreshments, or services related to its exempt purposes only to its own members or their dependents or guests will not cause denial of exemption. Free state tax extension Facilities open to public. Free state tax extension   Evidence that your club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. Free state tax extension This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. Free state tax extension Gross receipts from nonmembership sources. Free state tax extension   A section 501(c)(7) organization can receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Free state tax extension Income from nontraditional business activity with members is not exempt function income, and thus is included as income from sources outside of the membership. Free state tax extension Of the 35% gross receipts listed above, up to 15% of the gross receipts can be derived from the use of the club's facilities or services by the general public. Free state tax extension If an organization has outside income that is more than these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. Free state tax extension Gross receipts. Free state tax extension   Gross receipts, for this purpose, are receipts from the normal and usual (traditionally conducted) activities of the club. Free state tax extension These receipts include charges, admissions, membership fees, dues, assessments, investment income, and normal recurring capital gains on investments. Free state tax extension Receipts do not include initiation fees and capital contributions. Free state tax extension Unusual amounts of income, such as from the sale of a clubhouse or similar facility, are not included in gross receipts or in figuring the percentage limits. Free state tax extension Nontraditional activities. Free state tax extension   Activities conducted by a social club need to further its exempt purposes. Free state tax extension Traditional business activities are those that further a social club's exempt purposes. Free state tax extension Nontraditional business activities do not further the exempt purposes of a social club even if conducted solely on a membership basis. Free state tax extension Nontraditional business activities are prohibited (subject to an insubstantial, trivial, and nonrecurrent test) for businesses conducted with both members and nonmembers. Free state tax extension Examples of nontraditional business activities include sale of package liquor, take-out food, and long-term room rental. Free state tax extension Fraternity foundations. Free state tax extension   If your organization is a foundation formed for the exclusive purpose of acquiring and leasing a chapter house to a local fraternity chapter or sorority chapter maintained at an educational institution and does not engage in any social or recreational activities, it may be a title holding corporation (discussed later under section 501(c)(2) organizations and under section 501(c)(25) organizations) rather than a social club. Free state tax extension Tax treatment of donations. Free state tax extension   Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor's federal income tax return. Free state tax extension 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies This section describes the information to be provided upon application for recognition of exemption by two types of fraternal societies: beneficiary and domestic. Free state tax extension The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other benefits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather devote their earnings to fraternal, religious, charitable, etc. Free state tax extension , purposes. Free state tax extension The procedures to follow in applying for recognition of exemption are described in chapter 1. Free state tax extension If your organization is controlled by a central organization, you should check with your controlling organization to determine whether your unit has been included in a group exemption letter or can be added. Free state tax extension If so, your organization need not apply for individual recognition of exemption. Free state tax extension For more information, see Group Exemption Letter in chapter 1 of this publication. Free state tax extension Tax treatment of donations. Free state tax extension   Donations by an individual to a domestic fraternal beneficiary society or a domestic fraternal society operating under the lodge system are deductible as charitable contributions only if used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Free state tax extension Fraternal Beneficiary Societies (501(c)(8)) A fraternal beneficiary society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Free state tax extension The application and accompanying statements should establish that the organization: Is a fraternal organization, Operates under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system, and Provides for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or their dependents. Free state tax extension Lodge system. Free state tax extension   Operating under the lodge system means carrying on activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. Free state tax extension Payment of benefits. Free state tax extension   It is not essential that every member be covered by the society's program of sick, accident, or death benefits. Free state tax extension An organization can qualify for exemption if most of its members are eligible for benefits, and the benefits are paid from contributions or dues paid by those members. Free state tax extension   The benefits must be limited to members and their dependents. Free state tax extension If members will have the ability to confer benefits to other than themselves and their dependents, exemption will not be recognized. Free state tax extension Whole-life insurance. Free state tax extension   Whole-life insurance constitutes a life benefit under section 501(c)(8) even though the policy may contain investment features such as a cash surrender value or a policy loan. Free state tax extension Reinsurance pool. Free state tax extension   Payments by a fraternal beneficiary society into a state-sponsored reinsurance pool that protects participating insurers against excessive losses on major medical health and accident insurance will not preclude exemption as a fraternal beneficiary society. Free state tax extension Domestic Fraternal Societies (501(c)(10)) A domestic fraternal society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Free state tax extension The application and accompanying statements should establish that the organization: Is a domestic fraternal organization organized in the U. Free state tax extension S. Free state tax extension , Operates under the lodge system, Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and Does not provide for the payment of life, sick, accident, or other benefits to its members. Free state tax extension The organization can arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status. Free state tax extension 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' Associations This section describes the information to be provided upon application for recognition of exemption by the following types of employees' associations: A voluntary employees' beneficiary association (including federal employees' associations) organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries, if no part of the net earnings of the association inures to the benefit of any private shareholder or individual, and A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemployment benefits. Free state tax extension Both the application form to file and the information to provide are discussed later under the section that describes your employee association. Free state tax extension Chapter 1 describes the procedures to follow in applying for exemption. Free state tax extension Tax treatment of donations. Free state tax extension   Donations to these organizations are not deductible as charitable contributions on the donor's federal income tax return. Free state tax extension Local Employees' Associations (501(c)(4)) A local association of employees whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. Free state tax extension A local employees' association must apply for recognition of exemption by filing Form 1024. Free state tax extension The organization must submit evidence that: It is of a purely local character, Its membership is limited to employees of a designated person or persons in a particular locality, and Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes. Free state tax extension A local association of employees that has established a system of paying retirement or death benefits, or both, to its members will not qualify for exemption since the payment of these benefits is not considered as being for charitable, educational, or recreational purposes. Free state tax extension Similarly, a local association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount prices on merchandise, services, and activities does not qualify for exemption. Free state tax extension Voluntary Employees' Beneficiary Associations (501(c)(9)) An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. Free state tax extension The material submitted with the application must show that your organization: Is a voluntary association of employees, Will provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and Will not allow any of its net earnings to inure to the benefit of any private individual or shareholder except in the form of scheduled benefit payments. Free state tax extension To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Free state tax extension Note. Free state tax extension Under section 4976, the reversion of funds from a section 501(c)(9) organization to the employer who created the beneficiary association may subject the employer to a 100% penalty excise tax on the amount of the reversion. Free state tax extension Notice requirement. Free state tax extension   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Free state tax extension The organization gives notice by filing Form 1024. Free state tax extension If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before notice is given. Free state tax extension An extension of time for filing the notice can be granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Free state tax extension Membership. Free state tax extension   Membership of a section 501(c)(9) organization must consist of individuals who are employees and have an employment-related common bond. Free state tax extension This common bond can be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. Free state tax extension   The membership of an association can include some individuals who are not employees, provided they have an employment-related bond with the employee-members. Free state tax extension For example, the owner of a business whose employees are members of the association can be a member. Free state tax extension An association will be considered composed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees. Free state tax extension Employees. Free state tax extension   Employees include individuals who became entitled to membership because they are or were employees. Free state tax extension For example, an individual will qualify as an employee even though the individual is on a leave of absence or has been terminated due to retirement, disability, or layoff. Free state tax extension   Generally, membership is voluntary if an affirmative act is required on the part of an employee to become a member. Free state tax extension Conversely, membership is involuntary if the designation as a member is due to employee status. Free state tax extension However, an association will be considered voluntary if employees are required to be members of the organization as a condition of their employment and they do not incur a detriment (such as a payroll deduction) as a result of their membership. Free state tax extension An employer has not imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization. Free state tax extension Payment of benefits. Free state tax extension   The information submitted with your application must show that your organization will pay life, sick, accident, supplemental unemployment, or other similar benefits. Free state tax extension The benefits can be provided directly by your association or indirectly by your association through the payments of premiums to an insurance company (or fees to a medical clinic). Free state tax extension Benefits can be in the form of medical, clinical, or hospital services, transportation furnished for medical care, or money payments. Free state tax extension Nondiscrimination requirements. Free state tax extension   An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. Free state tax extension However, if the organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between employee organizations and employers, the plan need not meet these requirements for the organization to qualify as tax exempt. Free state tax extension   A plan meets the nondiscrimination requirements only if both of the following statements are true. Free state tax extension Each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and does not discriminate in favor of employees who are highly compensated individuals. Free state tax extension The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals. Free state tax extension A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor of highly compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan. Free state tax extension   For purposes of determining whether a plan meets the nondiscrimination requirements, the employer can elect to exclude all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. Free state tax extension This will not apply to any increase in such payment by any plan amendment adopted after June 22, 1984. Free state tax extension   If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal Revenue Code as a condition of that benefit being excluded from gross income, these nondiscrimination requirements do not apply. Free state tax extension The benefit will be considered nondiscriminatory only if it meets the nondiscrimination provision of the applicable Code section. Free state tax extension For example, benefits provided under a medical reimbursement plan would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimination requirements of section 105(h)(3) and 105(h)(4). Free state tax extension Excluded employees. Free state tax extension   Certain employees who are not covered by a plan can be excluded from consideration in applying these requirements. Free state tax extension These include employees: Who have not completed 3 years of service, Who have not attained age 21, Who are seasonal or less than half-time employees, Who are not in the plan and who are included in a unit of employees covered by a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining, or Who are nonresident aliens and who receive no earned income from the employer that has United States source income. Free state tax extension Highly compensated individual. Free state tax extension   A highly compensated individual is one who: Owned 5 percent or more of the employer at any time during the current year or the preceding year, Received more than $115,000 in compensation from the employer for the preceding year (the amount is annualized for inflation. Free state tax extension Go to IRS. Free state tax extension gov, and search “Pension Plan Limitation” for the year), and Was among the top 20% of employees by compensation for the preceding year. Free state tax extension However, the employer can choose not to have (3) apply. Free state tax extension Aggregation rules. Free state tax extension   The employer can choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination requirements. Free state tax extension Employees of controlled groups of corporations, trades, or businesses under common control, or members of an affiliated service group, are treated as employees of a single employer. Free state tax extension Leased employees are treated as employees of the recipient. Free state tax extension One employee. Free state tax extension   A trust created to provide benefits to one employee will not qualify as a voluntary employees' beneficiary association under section 501(c)(9). Free state tax extension Supplemental Unemployment Benefit Trusts (501(c)(17)) A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. Free state tax extension The trust must be a valid, existing trust under local law and must be evidenced by an executed document. Free state tax extension A conformed copy of the plan of which the trust is a part should be attached to the application. Free state tax extension To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Free state tax extension Note. Free state tax extension Under section 4976, the reversion of funds from a section 501(c)(17) organization to the employer who created the supplemental unemployment benefit trust may subject the employer to a 100% penalty excise tax on the amount of the reversion. Free state tax extension Notice requirement. Free state tax extension   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Free state tax extension The organization gives notice by filing Form 1024. Free state tax extension If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before such notice is given. Free state tax extension An extension of time for filing the notice is granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Free state tax extension Types of payments. Free state tax extension   You must show that the supplemental unemployment compensation benefits will be benefits paid to an employee because of the employee's involuntary separation from employment (whether or not the separation is temporary) resulting directly from a reduction-in-force, discontinuance of a plant or operation, or other similar conditions. Free state tax extension In addition, sickness and accident benefits (but not vacation, retirement, or death benefits) may be included in the plan if these are subordinate to the unemployment compensation benefits. Free state tax extension Diversion of funds. Free state tax extension   It must be impossible under the plan (at any time before the satisfaction of all liabilities with respect to employees under the plan) to use or to divert any of the corpus or income of the trust to any purpose other than the payment of supplemental unemployment compensation benefits (or sickness or accident benefits to the extent just explained). Free state tax extension Discrimination in benefits. Free state tax extension   Neither the terms of the plan nor the actual payment of benefits can be discriminatory in favor of the company's officers, stockholders, supervisors, or highly paid employees. Free state tax extension However, a plan is not discriminatory merely because benefits bear a uniform relationship to compensation or the rate of compensation. Free state tax extension Prohibited transactions and exemption. Free state tax extension   If your organization is a supplemental unemployment benefit trust and has received a denial of exemption because it engaged in a prohibited transaction, as defined by section 503(b), it can file a claim for exemption in any tax year following the tax year in which the notice of denial was issued. Free state tax extension It must file the claim on Form 1024. Free state tax extension The organization must include a written declaration that it will not knowingly again engage in a prohibited transaction. Free state tax extension An authorized principal officer of your organization must make this declaration under the penalties of perjury. Free state tax extension   If your organization has satisfied all requirements as a supplemental unemployment benefit trust described in section 501(c)(17), it will be notified in writing that it has been recognized as exempt. Free state tax extension However, the organization will be exempt only for those tax years after the tax year in which the claim for exemption (Form 1024) is filed. Free state tax extension Tax year in this case means the established annual accounting period of the organization or, if the organization has not established an annual accounting period, the calendar year. Free state tax extension For more information about the requirements for reestablishing an exemption previously denied, contact the IRS. Free state tax extension 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations Each of the following organizations apply for recognition of exemption from federal income tax by filing Form 1024. Free state tax extension Benevolent life insurance associations of a purely local character and like organizations. Free state tax extension Mutual ditch or irrigation companies and like organizations. Free state tax extension Mutual or cooperative telephone companies and like organizations. Free state tax extension A like organization is an organization that performs a service comparable to that performed by any one of the above organizations. Free state tax extension The information to be provided upon application by each of these organizations is described in this section. Free state tax extension For information as to the procedures to follow in applying for exemption, see chapter 1. Free state tax extension General requirements. Free state tax extension   These organizations must use their income solely to cover losses and expenses, with any excess being returned to members or retained to cover future losses and expenses. Free state tax extension They must collect at least 85% of their income from members for the sole purpose of meeting losses and expenses. Free state tax extension Mutual character. Free state tax extension   These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual or cooperative basis. Free state tax extension They are associations of persons or organizations, or both, banded together to provide themselves a mutually desirable service approximately at cost and on a mutual basis. Free state tax extension To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated that their members have the right to choose the management, to receive services at cost, to receive a return of any excess of payments over losses and expenses, and to share in any assets upon dissolution. Free state tax extension   The rights and interests of members in the annual savings of the organization must be determined in proportion to their business with the organization. Free state tax extension Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members during the period the assets were owned by the organization in proportion to the amount of business done during that period. Free state tax extension The bylaws must not provide for forfeiture of a member's rights and interest upon withdrawal or termination. Free state tax extension Membership. Free state tax extension   Membership of a mutual organization consists of those who join the organization to obtain its services, and have a voice in its management. Free state tax extension In a stock company, the stockholders are members. Free state tax extension However, a mutual life insurance organization cannot have policyholders other than its members. Free state tax extension Losses and expenses. Free state tax extension   In furnishing services substantially at cost, an organization must use its income solely for paying losses and expenses. Free state tax extension Any excess income not retained in reasonable reserves for future losses and expenses belongs to members in proportion to their patronage or business done with the organization. Free state tax extension If such patronage refunds are retained in reasonable amounts for purposes of expanding and improving facilities, retiring capital indebtedness, acquiring other assets, and unexpected expenses, the organization must maintain records sufficient to reflect the equity of each member in the assets acquired with the funds. Free state tax extension Distributions of proceeds. Free state tax extension   The cooperative may distribute the unexpended balance of collections or assessments remaining on hand at the end of the year to members or patrons prorated on the basis of their patronage or business done with the cooperative. Free state tax extension Such distribution represents a refund in the costs of services rendered to the member. Free state tax extension The 85% Requirement All of the organizations listed above must submit evidence with their application that they receive 85% or more of their gross income from their members for the sole purpose of meeting losses and expenses. Free state tax extension Nevertheless, certain items of income are excluded from the computation of the 85% requirement if the organization is a mutual or cooperative telephone or electric company. Free state tax extension Mutual or cooperative telephone company. Free state tax extension   A mutual or cooperative telephone company will exclude from the computation of the 85% requirement any income received or accrued from: A nonmember telephone company for the performance of communication services involving the completion of long distance calls to, from, or between members of the mutual or cooperative telephone company, Qualified pole rentals, The sale of display listings in a directory furnished to its members, or The prepayment of a loan created in 1987, 1988, or 1989, under section 306A, 306B, or 311 of the Rural Electrification Act of 1936. Free state tax extension Mutual or cooperative electric company. Free state tax extension   A mutual or cooperative electric company will exclude from the computation of the 85% requirement any income received or accrued from: Qualified pole rentals, Any provision or sale of electric energy transmission services or ancillary service if the services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by the Federal Energy Regulatory Commission (FERC) or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member), The provision or sale of electric energy distribution services or ancillary services if the services are provided on a nondiscriminatory open-access basis to distribute electric energy not owned by the mutual or electric cooperative company: To end-users who are served by distribution facilities not owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), or Generated by a generation facility not owned or leased by the company or any of its members and which is directly connected to distribution facilities owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), Any nuclear decommissioning transaction, or Any asset exchange or conversion transaction. Free state tax extension   An electric cooperative's sale of excess fuel at cost in the year of purchase is not income for purposes of determining compliance with the 85% requirement. Free state tax extension Qualified pole rental. Free state tax extension   The term qualified pole rental means any rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that are used by the company in providing telephone or electric services to its members, and Pursuant to the rental to support one or more wires (in addition to wires described in (1)) for use in connection with the transmission by wire of electricity or of telephone or other communications. Free state tax extension   The term rental, for this purpose, includes any sale of the right to use the pole (or other structure). Free state tax extension The 85% requirement is applied on the basis of an annual accounting period. Free state tax extension Failure of an organization to meet the requirement in a particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement is met. Free state tax extension Gain from the sale or conversion of the organization's property is not considered an amount received from members in determining whether the organization's income consists of amounts collected from members. Free state tax extension Because the 85% income test is based on gross income, capital losses cannot be used to reduce capital gains for purposes of this test. Free state tax extension Example. Free state tax extension   The books of an organization reflect the following for the calendar year. Free state tax extension Collections from members $2,400 Short-term capital gains 600 Short-term capital losses 400 Other income None Gross income ($2,400 + $600 =$3000) 100% Collected from members ($2,400) 80%   Since amounts collected from members do not constitute at least 85% of gross income, the organization is not entitled to exemption from federal income tax for the year. Free state tax extension   Voluntary contributions in the nature of gifts are not taken into account for purposes of the 85% computation. Free state tax extension   Other tax-exempt income besides gifts is considered as income received from other than members in applying the 85% test. Free state tax extension   If the 85% test is not met, your organization, if classifiable under this section, will not qualify for exemption as any other type of organization described in this publication. Free state tax extension Tax treatment of donations. Free state tax extension   Donations to an organization described in this section are not deductible as charitable contributions on the donor's federal income tax return. Free state tax extension Local Life Insurance Associations A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a benevolent life insurance association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that its excess funds will be refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income requirement. Free state tax extension If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15% of its income is derived, it will not be entitled to exemption. Free state tax extension To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular community, place, or district irrespective of political subdivisions. Free state tax extension If the activities of an organization are limited only by the borders of a state, it cannot be purely local in character. Free state tax extension A benevolent life insurance association that does not terminate membership when a member moves from the local area in which the association operates will qualify for exemption if it meets the other requirements. Free state tax extension A copy of each type of policy issued by your organization should be included with the application for recognition of exemption. Free state tax extension Organizations similar to local benevolent life insurance companies. Free state tax extension   These organizations include those that in addition to paying death benefits also provide for the payment of sick, accident, or health benefits. Free state tax extension However, an organization that pays only sick, accident, or health benefits, but not life insurance benefits, is not an organization similar to a benevolent life insurance association and should not apply for recognition of exemption as described in this section. Free state tax extension Burial and funeral benefit insurance organization. Free state tax extension   This type of organization can apply for recognition of exemption as an organization similar to a benevolent life insurance company if it establishes that the benefits are paid in cash and if it is not engaged directly in the manufacture of funeral supplies or the performance of funeral services. Free state tax extension An organization that provides its benefits in the form of supplies and service is not a life insurance company. Free state tax extension Such an organization can seek recognition of exemption from federal income tax, however, as a mutual insurance company other than life. Free state tax extension Mutual or Cooperative Associations Mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations need not establish that they are of a purely local character. Free state tax extension They can serve noncontiguous areas. Free state tax extension Like organization. Free state tax extension   A like organization is a cooperative or mutual organization that performs a service similar to mutual ditch, irrigation, telephone, or electric companies. Free state tax extension Examples include the following: cooperatives that provide protection of river banks to prevent erosion, water and sewer services, cable television, satellite, television, cellular phone services, two-way radio service, or natural gas services. Free state tax extension 501(c)(13) - Cemetery Companies If your organization wishes to obtain recognition of exemption from federal income tax as a cemetery company or a corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, it must file an application on Form 1024. Free state tax extension For the procedure to follow to file an application, see Application, Approval, and Appeal Procedures in chapter 1. Free state tax extension A nonprofit mutual cemetery company that seeks recognition of exemption should submit evidence with its application that it is owned and operated exclusively for the benefit of its lot owners who hold lots for bona fide burial purposes and not for purposes of resale. Free state tax extension A mutual cemetery company that also engages in charitable activities, such as the burial of paupers, will be regarded as operating within this standard. Free state tax extension The fact that a mutual cemetery company limits its membership to a particular class of individuals, such as members of a family, will not affect its status as mutual so long as all the other requirements of section 501(c)(13) are met. Free state tax extension If your organization is a nonprofit corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, you should show that it is not permitted by its charter to engage in any business not necessarily incident to that purpose. Free state tax extension Operating a mortuary is not permitted. Free state tax extension However, selling monuments, markers, vaults, and flowers solely for use in the cemetery is permitted if the profits from these sales are used to maintain the cemetery as a whole. Free state tax extension How income can be used. Free state tax extension   You should show that your organization's earnings are or will be used only in one or more of the following ways. Free state tax extension To pay the ordinary and necessary expenses of operating, maintaining, and improving the cemetery or crematorium. Free state tax extension To buy cemetery property. Free state tax extension To create a fund that will provide a source of income for the perpetual care of the cemetery or a reasonable reserve for any ordinary or necessary purpose. Free state tax extension No part of the net earnings of your organization can inure to the benefit of any private shareholder or individual. Free state tax extension Ordinary and necessary expenses in connection with the operation, management, maintenance, and improvement of the cemetery are permitted, as are reasonable fees for the services of a manager. Free state tax extension Buying cemetery property. Free state tax extension   Payments can be made to amortize debt incurred to buy land, but cannot be in the nature of profit distributions. Free state tax extension You must show the method used to finance the purchase of the cemetery property and that the purchase price of the land at the time of its sale to the cemetery was not unreasonable. Free state tax extension   Except for holders of preferred stock (discussed later), no person can have any interest in the net earnings of a tax-exempt cemetery company or crematorium. Free state tax extension Therefore, if property is transferred to the organization in exchange for an interest in the organization's net earnings, the organization will not
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The Free State Tax Extension

Free state tax extension 13. Free state tax extension   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Free state tax extension It is divided into the following sections. Free state tax extension Cost basis. Free state tax extension Adjusted basis. Free state tax extension Basis other than cost. Free state tax extension Your basis is the amount of your investment in property for tax purposes. Free state tax extension Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Free state tax extension Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Free state tax extension If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Free state tax extension Only the basis allocated to the business or investment use of the property can be depreciated. Free state tax extension Your original basis in property is adjusted (increased or decreased) by certain events. Free state tax extension For example, if you make improvements to the property, increase your basis. Free state tax extension If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Free state tax extension Keep accurate records of all items that affect the basis of your property. Free state tax extension For more information on keeping records, see chapter 1. Free state tax extension Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Free state tax extension The cost is the amount you pay in cash, debt obligations, other property, or services. Free state tax extension Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Free state tax extension In addition, the basis of real estate and business assets may include other items. Free state tax extension Loans with low or no interest. Free state tax extension    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Free state tax extension You generally have unstated interest if your interest rate is less than the applicable federal rate. Free state tax extension   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free state tax extension Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Free state tax extension If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Free state tax extension Lump sum purchase. Free state tax extension   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Free state tax extension Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Free state tax extension Figure the basis of each asset by multiplying the lump sum by a fraction. Free state tax extension The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free state tax extension    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Free state tax extension Fair market value (FMV). Free state tax extension   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Free state tax extension Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Free state tax extension Assumption of mortgage. Free state tax extension   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Free state tax extension Settlement costs. Free state tax extension   Your basis includes the settlement fees and closing costs you paid for buying the property. Free state tax extension (A fee for buying property is a cost that must be paid even if you buy the property for cash. Free state tax extension ) Do not include fees and costs for getting a loan on the property in your basis. Free state tax extension   The following are some of the settlement fees or closing costs you can include in the basis of your property. Free state tax extension Abstract fees (abstract of title fees). Free state tax extension Charges for installing utility services. Free state tax extension Legal fees (including fees for the title search and preparation of the sales contract and deed). Free state tax extension Recording fees. Free state tax extension Survey fees. Free state tax extension Transfer taxes. Free state tax extension Owner's title insurance. Free state tax extension Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Free state tax extension   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free state tax extension   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Free state tax extension Casualty insurance premiums. Free state tax extension Rent for occupancy of the property before closing. Free state tax extension Charges for utilities or other services related to occupancy of the property before closing. Free state tax extension Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Free state tax extension Fees for refinancing a mortgage. Free state tax extension Real estate taxes. Free state tax extension   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Free state tax extension You cannot deduct them as an expense. Free state tax extension    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Free state tax extension Do not include that amount in the basis of your property. Free state tax extension If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Free state tax extension Points. Free state tax extension   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Free state tax extension Generally, you deduct the points over the term of the loan. Free state tax extension For more information on how to deduct points, see chapter 23. Free state tax extension Points on home mortgage. Free state tax extension   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Free state tax extension If certain requirements are met, you can deduct the points in full for the year in which they are paid. Free state tax extension Reduce the basis of your home by any seller-paid points. Free state tax extension Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Free state tax extension The result is the adjusted basis. Free state tax extension Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free state tax extension Examples of items that increase basis are shown in Table 13-1. Free state tax extension These include the items discussed below. Free state tax extension Improvements. Free state tax extension   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Free state tax extension For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Free state tax extension Assessments for local improvements. Free state tax extension   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Free state tax extension Do not deduct them as taxes. Free state tax extension However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Free state tax extension Example. Free state tax extension Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Free state tax extension Add the assessment to your property's basis. Free state tax extension In this example, the assessment is a depreciable asset. Free state tax extension Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Free state tax extension Examples of items that decrease basis are shown in Table 13-1. Free state tax extension These include the items discussed below. Free state tax extension Table 13-1. Free state tax extension Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Free state tax extension   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Free state tax extension    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Free state tax extension   For more information on casualty and theft losses, see chapter 25. Free state tax extension Depreciation and section 179 deduction. Free state tax extension   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Free state tax extension   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Free state tax extension Example. Free state tax extension You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Free state tax extension You added an improvement to the duplex that cost $10,000. Free state tax extension In February last year, the duplex was damaged by fire. Free state tax extension Up to that time, you had been allowed depreciation of $23,000. Free state tax extension You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Free state tax extension You deducted a casualty loss of $1,000 on your income tax return for last year. Free state tax extension You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Free state tax extension You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Free state tax extension Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Free state tax extension Your basis in the land is its original cost of $5,000. Free state tax extension Easements. Free state tax extension   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Free state tax extension It reduces the basis of the affected part of the property. Free state tax extension If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Free state tax extension   If the gain is on a capital asset, see chapter 16 for information about how to report it. Free state tax extension If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Free state tax extension Exclusion of subsidies for energy conservation measures. Free state tax extension   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Free state tax extension Reduce the basis of the property for which you received the subsidy by the excluded amount. Free state tax extension For more information about this subsidy, see chapter 12. Free state tax extension Postponed gain from sale of home. Free state tax extension    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Free state tax extension For more information on the rules for the sale of a home, see chapter 15. Free state tax extension Basis Other Than Cost There are many times when you cannot use cost as basis. Free state tax extension In these cases, the fair market value or the adjusted basis of the property can be used. Free state tax extension Fair market value (FMV) and adjusted basis were discussed earlier. Free state tax extension Property Received for Services If you receive property for your services, include the FMV of the property in income. Free state tax extension The amount you include in income becomes your basis. Free state tax extension If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Free state tax extension Restricted property. Free state tax extension   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Free state tax extension However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Free state tax extension Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Free state tax extension For more information, see Restricted Property in Publication 525. Free state tax extension Bargain purchases. Free state tax extension   A bargain purchase is a purchase of an item for less than its FMV. Free state tax extension If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Free state tax extension Your basis in the property is its FMV (your purchase price plus the amount you include in income). Free state tax extension   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Free state tax extension However, your basis in the property is still its FMV. Free state tax extension See Employee Discounts in Publication 15-B. Free state tax extension Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Free state tax extension A taxable gain or deductible loss also is known as a recognized gain or loss. Free state tax extension If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Free state tax extension Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Free state tax extension Similar or related property. Free state tax extension   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Free state tax extension Decrease the basis by the following. Free state tax extension Any loss you recognize on the involuntary conversion. Free state tax extension Any money you receive that you do not spend on similar property. Free state tax extension Increase the basis by the following. Free state tax extension Any gain you recognize on the involuntary conversion. Free state tax extension Any cost of acquiring the replacement property. Free state tax extension Money or property not similar or related. Free state tax extension    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Free state tax extension Example. Free state tax extension The state condemned your property. Free state tax extension The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Free state tax extension You realized a gain of $5,000 ($31,000 − $26,000). Free state tax extension You bought replacement property similar in use to the converted property for $29,000. Free state tax extension You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Free state tax extension Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Free state tax extension The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Free state tax extension   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free state tax extension Basis for depreciation. Free state tax extension   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Free state tax extension For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Free state tax extension Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free state tax extension If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Free state tax extension See Nontaxable Trades in chapter 14. Free state tax extension Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free state tax extension To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Free state tax extension Qualifying property. Free state tax extension Like-kind property. Free state tax extension The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Free state tax extension If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Free state tax extension Qualifying property. Free state tax extension   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Free state tax extension Like-kind property. Free state tax extension   There must be an exchange of like-kind property. Free state tax extension Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Free state tax extension The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Free state tax extension Example. Free state tax extension You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Free state tax extension The dealer allows you $2,000 on the old truck, and you pay $4,800. Free state tax extension This is a like-kind exchange. Free state tax extension The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Free state tax extension If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Free state tax extension The basis of the new truck is the price you pay the dealer. Free state tax extension Partially nontaxable exchanges. Free state tax extension   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Free state tax extension The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Free state tax extension Decrease the basis by the following amounts. Free state tax extension Any money you receive. Free state tax extension Any loss you recognize on the exchange. Free state tax extension Increase the basis by the following amounts. Free state tax extension Any additional costs you incur. Free state tax extension Any gain you recognize on the exchange. Free state tax extension If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free state tax extension Allocation of basis. Free state tax extension   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Free state tax extension The rest is the basis of the like-kind property. Free state tax extension More information. Free state tax extension   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Free state tax extension Basis for depreciation. Free state tax extension   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Free state tax extension For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Free state tax extension Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Free state tax extension The same rule applies to a transfer by your former spouse that is incident to divorce. Free state tax extension However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Free state tax extension If the property transferred to you is a series E, series EE, or series I U. Free state tax extension S. Free state tax extension savings bond, the transferor must include in income the interest accrued to the date of transfer. Free state tax extension Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Free state tax extension For more information on these bonds, see chapter 7. Free state tax extension At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Free state tax extension For more information about the transfer of property from a spouse, see chapter 14. Free state tax extension Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Free state tax extension FMV less than donor's adjusted basis. Free state tax extension   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Free state tax extension Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Free state tax extension Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Free state tax extension See Adjusted Basis , earlier. Free state tax extension Example. Free state tax extension You received an acre of land as a gift. Free state tax extension At the time of the gift, the land had an FMV of $8,000. Free state tax extension The donor's adjusted basis was $10,000. Free state tax extension After you received the property, no events occurred to increase or decrease your basis. Free state tax extension If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Free state tax extension If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Free state tax extension If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Free state tax extension Business property. Free state tax extension   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Free state tax extension FMV equal to or greater than donor's adjusted basis. Free state tax extension   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Free state tax extension Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Free state tax extension   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Free state tax extension See Adjusted Basis , earlier. Free state tax extension   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Free state tax extension Figure the increase by multiplying the gift tax paid by a fraction. Free state tax extension The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Free state tax extension   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Free state tax extension The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free state tax extension Example. Free state tax extension In 2013, you received a gift of property from your mother that had an FMV of $50,000. Free state tax extension Her adjusted basis was $20,000. Free state tax extension The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Free state tax extension She paid a gift tax of $7,320 on the property. Free state tax extension Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Free state tax extension 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Free state tax extension If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Free state tax extension However, your basis cannot exceed the FMV of the gift at the time it was given to you. Free state tax extension Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Free state tax extension The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Free state tax extension The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Free state tax extension The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Free state tax extension If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Free state tax extension For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Free state tax extension Property inherited from a decedent who died in 2010. Free state tax extension   If you inherited property from a decedent who died in 2010, special rules may apply. Free state tax extension For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free state tax extension Community property. Free state tax extension   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Free state tax extension When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Free state tax extension For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Free state tax extension Example. Free state tax extension You and your spouse owned community property that had a basis of $80,000. Free state tax extension When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Free state tax extension The FMV of the community interest was $100,000. Free state tax extension The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Free state tax extension The basis of the other half to your spouse's heirs is also $50,000. Free state tax extension For more information about community property, see Publication 555, Community Property. Free state tax extension Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Free state tax extension To do so, you must figure its basis for depreciation at the time of the change. Free state tax extension An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Free state tax extension Basis for depreciation. Free state tax extension   The basis for depreciation is the lesser of the following amounts. Free state tax extension The FMV of the property on the date of the change. Free state tax extension Your adjusted basis on the date of the change. Free state tax extension Example. Free state tax extension Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Free state tax extension You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Free state tax extension Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Free state tax extension Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Free state tax extension On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Free state tax extension The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Free state tax extension Sale of property. Free state tax extension   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Free state tax extension Gain. Free state tax extension   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Free state tax extension Example. Free state tax extension Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Free state tax extension Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Free state tax extension Loss. Free state tax extension   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Free state tax extension Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Free state tax extension Example. Free state tax extension Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Free state tax extension In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Free state tax extension Reduce that amount ($180,000) by the depreciation deductions ($37,500). Free state tax extension The basis for loss is $142,500 ($180,000 − $37,500). Free state tax extension Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Free state tax extension If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Free state tax extension You must adjust the basis of stocks for certain events that occur after purchase. Free state tax extension For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Free state tax extension This rule applies only when the additional stock received is identical to the stock held. Free state tax extension Also reduce your basis when you receive nontaxable distributions. Free state tax extension They are a return of capital. Free state tax extension Example. Free state tax extension In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Free state tax extension In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Free state tax extension In 2013 XYZ declared a 2-for-1 stock split. Free state tax extension You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Free state tax extension Other basis. Free state tax extension   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Free state tax extension For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free state tax extension Identifying stocks or bonds sold. Free state tax extension   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Free state tax extension If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Free state tax extension For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free state tax extension Mutual fund shares. Free state tax extension   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Free state tax extension For more information, see Publication 550. Free state tax extension Bond premium. Free state tax extension   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Free state tax extension See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Free state tax extension Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Free state tax extension Original issue discount (OID) on debt instruments. Free state tax extension   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Free state tax extension See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Free state tax extension Tax-exempt obligations. Free state tax extension    OID on tax-exempt obligations is generally not taxable. Free state tax extension However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Free state tax extension The accrued OID is added to the basis of the obligation to determine your gain or loss. Free state tax extension See chapter 4 of Publication 550. Free state tax extension Prev  Up  Next   Home   More Online Publications