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Irs 1040x 2012

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Irs 1040x 2012

Irs 1040x 2012 4. Irs 1040x 2012   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Irs 1040x 2012 Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Irs 1040x 2012 Net unrelated income. Irs 1040x 2012 Net unrelated loss. Irs 1040x 2012 Control. Irs 1040x 2012 Income from property financed with qualified 501(c)(3) bonds. Irs 1040x 2012 Disposition of property received from taxable subsidiary and used in unrelated business. Irs 1040x 2012 Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Irs 1040x 2012 If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Irs 1040x 2012 In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Irs 1040x 2012 Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Irs 1040x 2012 For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Irs 1040x 2012 Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Irs 1040x 2012 Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Irs 1040x 2012 Dividends, interest, annuities and other investment income. Irs 1040x 2012   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Irs 1040x 2012 Exception for insurance activity income of a controlled foreign corporation. Irs 1040x 2012   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Irs 1040x 2012 The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Irs 1040x 2012 Certain exceptions to this rule apply. Irs 1040x 2012 For more information, see section 512(b)(17). Irs 1040x 2012 Other exceptions. Irs 1040x 2012   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Irs 1040x 2012 Income from lending securities. Irs 1040x 2012   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Irs 1040x 2012   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Irs 1040x 2012 The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Irs 1040x 2012 Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Irs 1040x 2012 Royalties. Irs 1040x 2012   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Irs 1040x 2012   To be considered a royalty, a payment must relate to the use of a valuable right. Irs 1040x 2012 Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Irs 1040x 2012 Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Irs 1040x 2012 However, royalties do not include payments for personal services. Irs 1040x 2012 Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Irs 1040x 2012   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Irs 1040x 2012   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Irs 1040x 2012 However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Irs 1040x 2012 To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Irs 1040x 2012 To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Irs 1040x 2012 Exceptions. Irs 1040x 2012   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Irs 1040x 2012 Rents. Irs 1040x 2012   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Irs 1040x 2012 Rents from personal property are not excluded. Irs 1040x 2012 However, special rules apply to “mixed leases” of both real and personal property. Irs 1040x 2012 Mixed leases. Irs 1040x 2012   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Irs 1040x 2012 If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Irs 1040x 2012 If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Irs 1040x 2012   Property is placed in service when the lessee first may use it under the terms of a lease. Irs 1040x 2012 For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Irs 1040x 2012   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Irs 1040x 2012   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Irs 1040x 2012 Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Irs 1040x 2012 Exception for rents based on net profit. Irs 1040x 2012   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Irs 1040x 2012 Exception for income from personal services. Irs 1040x 2012   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Irs 1040x 2012 Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Irs 1040x 2012 Other exceptions. Irs 1040x 2012   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Irs 1040x 2012 ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Irs 1040x 2012 See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Irs 1040x 2012 Income from research. Irs 1040x 2012   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Irs 1040x 2012 However, the extent of the exclusion depends on the nature of the organization and the type of research. Irs 1040x 2012   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Irs 1040x 2012   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Irs 1040x 2012   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Irs 1040x 2012   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Irs 1040x 2012 In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Irs 1040x 2012 Gains and losses from disposition of property. Irs 1040x 2012   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Irs 1040x 2012   It should be noted that the last exception relates only to cut timber. Irs 1040x 2012 The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Irs 1040x 2012 Lapse or termination of options. Irs 1040x 2012   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Irs 1040x 2012 The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Irs 1040x 2012 Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Irs 1040x 2012 Exception. Irs 1040x 2012   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Irs 1040x 2012 Gain or loss on disposition of certain brownfield property. Irs 1040x 2012   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Irs 1040x 2012 See sections 512(b)(19) and 514(b)(1)(E). Irs 1040x 2012 Income from services provided under federal license. Irs 1040x 2012   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Irs 1040x 2012   This exclusion applies only if the following requirements are met. Irs 1040x 2012 The trade or business must have been operated by the order or by the institution before May 27, 1959. Irs 1040x 2012 The trade or business must provide services under a license issued by a federal regulatory agency. Irs 1040x 2012 More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Irs 1040x 2012 The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Irs 1040x 2012 Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Irs 1040x 2012 Exception. Irs 1040x 2012    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Irs 1040x 2012 Member income of mutual or cooperative electric companies. Irs 1040x 2012   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Irs 1040x 2012 Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Irs 1040x 2012 For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Irs 1040x 2012 Exception. Irs 1040x 2012   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Irs 1040x 2012 The limit on dues paid by an associate member is $148 for 2011. Irs 1040x 2012   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Irs 1040x 2012 Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Irs 1040x 2012 They cannot be directly connected with excluded income. Irs 1040x 2012 For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Irs 1040x 2012 Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Irs 1040x 2012 For an exception, see Expenses attributable to exploitation of exempt activities, later. Irs 1040x 2012 Expenses attributable solely to unrelated business. Irs 1040x 2012   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Irs 1040x 2012   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Irs 1040x 2012 Expenses attributable to dual use of facilities or personnel. Irs 1040x 2012   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Irs 1040x 2012 The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Irs 1040x 2012 Example 1. Irs 1040x 2012 A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Irs 1040x 2012 The school provides the tennis courts, housing, and dining facilities. Irs 1040x 2012 The contracted individual hires the instructors, recruits campers, and provides supervision. Irs 1040x 2012 The income the school receives from this activity is from a dual use of the facilities and personnel. Irs 1040x 2012 The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Irs 1040x 2012 Example 2. Irs 1040x 2012 An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Irs 1040x 2012 The president devotes approximately 10% of his time to the unrelated business. Irs 1040x 2012 To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Irs 1040x 2012 Expenses attributable to exploitation of exempt activities. Irs 1040x 2012   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Irs 1040x 2012 (See Exploitation of exempt functions under Not substantially related in chapter 3. Irs 1040x 2012 ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Irs 1040x 2012 Exception. Irs 1040x 2012   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Irs 1040x 2012 The unrelated business exploits the exempt activity. Irs 1040x 2012 The unrelated business is a type normally conducted for profit by taxable organizations. Irs 1040x 2012 The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Irs 1040x 2012 The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Irs 1040x 2012   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Irs 1040x 2012 Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Irs 1040x 2012 Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Irs 1040x 2012 (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Irs 1040x 2012 ) Figuring unrelated business taxable income (UBTI). Irs 1040x 2012   The UBTI of an advertising activity is the amount shown in the following chart. Irs 1040x 2012 IF gross advertising income is . Irs 1040x 2012 . Irs 1040x 2012 . Irs 1040x 2012 THEN UBTI is . Irs 1040x 2012 . Irs 1040x 2012 . Irs 1040x 2012 More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Irs 1040x 2012 Equal to or less than direct advertising costs Zero. Irs 1040x 2012   • Circulation income and readership costs are not taken into account. Irs 1040x 2012   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Irs 1040x 2012   The terms used in the chart are explained in the following discussions. Irs 1040x 2012 Periodical Income Gross advertising income. Irs 1040x 2012   This is all the income from the unrelated advertising activities of an exempt organization periodical. Irs 1040x 2012 Circulation income. Irs 1040x 2012   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Irs 1040x 2012 It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Irs 1040x 2012 It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Irs 1040x 2012 Allocable membership receipts. Irs 1040x 2012   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Irs 1040x 2012   The amount used to allocate membership receipts is the amount shown in the following chart. Irs 1040x 2012   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Irs 1040x 2012 The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Irs 1040x 2012 IF . Irs 1040x 2012 . Irs 1040x 2012 . Irs 1040x 2012 THEN the amount used to allocate membership receipts is . Irs 1040x 2012 . Irs 1040x 2012 . Irs 1040x 2012 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Irs 1040x 2012 The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Irs 1040x 2012 Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Irs 1040x 2012 U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Irs 1040x 2012 One of U's activities is publishing a monthly periodical distributed to all of its members. Irs 1040x 2012 U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Irs 1040x 2012 Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Irs 1040x 2012 Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Irs 1040x 2012 Example 2. Irs 1040x 2012 Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Irs 1040x 2012 Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Irs 1040x 2012 U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Irs 1040x 2012 Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Irs 1040x 2012 Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Irs 1040x 2012 Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Irs 1040x 2012 U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Irs 1040x 2012 Periodical Costs Direct advertising costs. Irs 1040x 2012   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Irs 1040x 2012   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Irs 1040x 2012 Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Irs 1040x 2012   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Irs 1040x 2012 For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Irs 1040x 2012 Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Irs 1040x 2012   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Irs 1040x 2012 Readership costs. Irs 1040x 2012   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Irs 1040x 2012 Costs partly attributable to other activities. Irs 1040x 2012   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Irs 1040x 2012 When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Irs 1040x 2012 The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Irs 1040x 2012 Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Irs 1040x 2012 Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Irs 1040x 2012 It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Irs 1040x 2012 Consolidated treatment, once adopted, must be followed consistently and is binding. Irs 1040x 2012 This treatment can be changed only with the consent of the Internal Revenue Service. Irs 1040x 2012 An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Irs 1040x 2012 Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Irs 1040x 2012 The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Irs 1040x 2012 For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Irs 1040x 2012 The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Irs 1040x 2012 Example. Irs 1040x 2012 Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Irs 1040x 2012 Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Irs 1040x 2012 Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Irs 1040x 2012 The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Irs 1040x 2012 The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Irs 1040x 2012 It is not engaged in for profit. Irs 1040x 2012 Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Irs 1040x 2012 It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Irs 1040x 2012 Modifications Net operating loss deduction. Irs 1040x 2012   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Irs 1040x 2012 However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Irs 1040x 2012 For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Irs 1040x 2012   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Irs 1040x 2012 This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Irs 1040x 2012 Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Irs 1040x 2012   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Irs 1040x 2012   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Irs 1040x 2012   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Irs 1040x 2012 For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Irs 1040x 2012   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Irs 1040x 2012 Charitable contributions deduction. Irs 1040x 2012   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Irs 1040x 2012   To be deductible, the contribution must be paid to another qualified organization. Irs 1040x 2012 For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Irs 1040x 2012   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Irs 1040x 2012 Deduction limits. Irs 1040x 2012   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Irs 1040x 2012 See the Instructions for Form 990-T for more information. Irs 1040x 2012    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Irs 1040x 2012 However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Irs 1040x 2012   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Irs 1040x 2012 A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Irs 1040x 2012 Suspension of deduction limits for farmers and ranchers. Irs 1040x 2012   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Irs 1040x 2012 See the Instructions for Form 990-T for details. Irs 1040x 2012 Specific deduction. Irs 1040x 2012   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Irs 1040x 2012 However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Irs 1040x 2012   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Irs 1040x 2012 Exception. Irs 1040x 2012   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Irs 1040x 2012 In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Irs 1040x 2012   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Irs 1040x 2012 The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Irs 1040x 2012 The local units cannot file separate returns. Irs 1040x 2012 However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Irs 1040x 2012 See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Irs 1040x 2012 Example. Irs 1040x 2012 X is an association of churches and is divided into local units A, B, C, and D. Irs 1040x 2012 Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Irs 1040x 2012 X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Irs 1040x 2012 Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Irs 1040x 2012 If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Irs 1040x 2012 No distinction is made between limited and general partners. Irs 1040x 2012 The organization is required to notify the partnership of its tax-exempt status. Irs 1040x 2012 Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Irs 1040x 2012 The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Irs 1040x 2012 The partnership is required to provide the organization this information on Schedule K-1. Irs 1040x 2012 Example. Irs 1040x 2012 An exempt educational organization is a partner in a partnership that operates a factory. Irs 1040x 2012 The partnership also holds stock in a corporation. Irs 1040x 2012 The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Irs 1040x 2012 Different tax years. Irs 1040x 2012   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Irs 1040x 2012 S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Irs 1040x 2012 For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Irs 1040x 2012 The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Irs 1040x 2012 Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Irs 1040x 2012 To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Irs 1040x 2012 Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Irs 1040x 2012 These organizations must figure unrelated business taxable income under special rules. Irs 1040x 2012 Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Irs 1040x 2012 ). Irs 1040x 2012 (See Exclusions under Income, earlier. Irs 1040x 2012 ) Therefore, they are generally subject to unrelated business income tax on this income. Irs 1040x 2012 The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Irs 1040x 2012 The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Irs 1040x 2012 Losses from nonexempt activities. Irs 1040x 2012   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Irs 1040x 2012 Example. Irs 1040x 2012 A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Irs 1040x 2012 The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Irs 1040x 2012 Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Irs 1040x 2012 Modifications. Irs 1040x 2012   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Irs 1040x 2012 Exempt function income. Irs 1040x 2012   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Irs 1040x 2012 Exempt function income also includes income set aside for qualified purposes. Irs 1040x 2012 Income that is set aside. Irs 1040x 2012   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Irs 1040x 2012 In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Irs 1040x 2012   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Irs 1040x 2012 Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Irs 1040x 2012 These rules are explained in section 512(a)(3)(E)(ii). Irs 1040x 2012   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Irs 1040x 2012 In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Irs 1040x 2012   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Irs 1040x 2012 However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Irs 1040x 2012 The income set aside must have been includible in gross income for that earlier year. Irs 1040x 2012 Nonrecognition of gain. Irs 1040x 2012   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Irs 1040x 2012 The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Irs 1040x 2012   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Irs 1040x 2012 Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Irs 1040x 2012 The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Irs 1040x 2012 For details, see section 512(a)(4) and the regulations under that section. Irs 1040x 2012 Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Irs 1040x 2012 The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Irs 1040x 2012 All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Irs 1040x 2012 Excess qualifying specified payments. Irs 1040x 2012   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Irs 1040x 2012 Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Irs 1040x 2012   If a controlled participant is not required to file a U. Irs 1040x 2012 S. Irs 1040x 2012 income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Irs 1040x 2012 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Irs 1040x 2012 S. Irs 1040x 2012 Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Irs 1040x 2012 S. Irs 1040x 2012 Corporation or a Foreign Corporation Engaged in a U. Irs 1040x 2012 S. Irs 1040x 2012 Trade or Business, or any Form 8865, Return of U. Irs 1040x 2012 S. Irs 1040x 2012 Persons With Respect to Certain Foreign Partnerships, filed for that participant. Irs 1040x 2012 Addition to tax for valuation misstatements. Irs 1040x 2012   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Irs 1040x 2012 See section 512(b)(13)(E)(ii) for more information. Irs 1040x 2012 Net unrelated income. Irs 1040x 2012   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Irs 1040x 2012 Net unrelated loss. Irs 1040x 2012   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Irs 1040x 2012 Control. Irs 1040x 2012   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Irs 1040x 2012 For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Irs 1040x 2012   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Irs 1040x 2012 Income from property financed with qualified 501(c)(3) bonds. Irs 1040x 2012 If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Irs 1040x 2012 No deduction is allowed for interest on the private activity bond. Irs 1040x 2012 See sections 150(b)(3) and (c) for more information. Irs 1040x 2012 Disposition of property received from taxable subsidiary and used in unrelated business. Irs 1040x 2012 A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Irs 1040x 2012 The assets are treated as if sold at fair market value. Irs 1040x 2012 Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Irs 1040x 2012 S. Irs 1040x 2012 and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Irs 1040x 2012 A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Irs 1040x 2012 However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Irs 1040x 2012 In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Irs 1040x 2012 A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Irs 1040x 2012 This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Irs 1040x 2012 In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Irs 1040x 2012 If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Irs 1040x 2012 If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Irs 1040x 2012 Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Irs 1040x 2012 Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Irs 1040x 2012 Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Irs 1040x 2012 The amount of income included is proportionate to the debt on the property. Irs 1040x 2012 Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Irs 1040x 2012 It includes rental real estate, tangible personal property, and corporate stock. Irs 1040x 2012 Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Irs 1040x 2012 The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Irs 1040x 2012 That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Irs 1040x 2012 Example 1. Irs 1040x 2012 Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Irs 1040x 2012 The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Irs 1040x 2012 Example 2. Irs 1040x 2012 X, an exempt organization, forms a partnership with A and B. Irs 1040x 2012 The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Irs 1040x 2012 X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Irs 1040x 2012 The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Irs 1040x 2012 The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Irs 1040x 2012 The loan is secured by a mortgage on the entire office building. Irs 1040x 2012 By agreement with Y bank, X is not personally liable for payment of the mortgage. Irs 1040x 2012 X has acquisition indebtedness of $7 million. Irs 1040x 2012 This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Irs 1040x 2012 Example 3. Irs 1040x 2012 A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Irs 1040x 2012 The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Irs 1040x 2012 Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Irs 1040x 2012 The union has no outstanding debt on the property. Irs 1040x 2012 The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Irs 1040x 2012 The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Irs 1040x 2012 Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Irs 1040x 2012 In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Irs 1040x 2012 Accordingly, the debt is not acquisition indebtedness. Irs 1040x 2012 Change in use of property. Irs 1040x 2012   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Irs 1040x 2012 Example. Irs 1040x 2012 Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Irs 1040x 2012 Last year, the university rented the apartment building to the public for nonexempt purposes. Irs 1040x 2012 The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Irs 1040x 2012 Continued debt. Irs 1040x 2012   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Irs 1040x 2012 This is true even if the original property was not debt-financed property. Irs 1040x 2012 Example. Irs 1040x 2012 To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Irs 1040x 2012 The office building was not debt-financed property. Irs 1040x 2012 The organization later sold the building for $1 million without repaying the $400,000 loan. Irs 1040x 2012 It used the sale proceeds to buy an apartment building it rents to the general public. Irs 1040x 2012 The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Irs 1040x 2012 Property acquired subject to mortgage or lien. Irs 1040x 2012   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Irs 1040x 2012 Example. Irs 1040x 2012 An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Irs 1040x 2012 The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Irs 1040x 2012 Liens similar to a mortgage. Irs 1040x 2012   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Irs 1040x 2012 A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Irs 1040x 2012 However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Irs 1040x 2012 Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Irs 1040x 2012 Exception for property acquired by gift, bequest, or devise. Irs 1040x 2012   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Irs 1040x 2012 However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Irs 1040x 2012   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Irs 1040x 2012   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Irs 1040x 2012 Modifying existing debt. Irs 1040x 2012   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Irs 1040x 2012 When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Irs 1040x 2012 Extension or renewal. Irs 1040x 2012   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Irs 1040x 2012   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Irs 1040x 2012 Debt increase. Irs 1040x 2012   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Irs 1040x 2012 Example. Irs 1040x 2012 An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Irs 1040x 2012 The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Irs 1040x 2012 A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Irs 1040x 2012 Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Irs 1040x 2012 These include the following. Irs 1040x 2012 Debts incurred in performing an exempt purpose. Irs 1040x 2012 Annuity obligations. Irs 1040x 2012 Securities loans. Irs 1040x 2012 Real property debts of qualified organizations. Irs 1040x 2012 Certain Federal financing. Irs 1040x 2012 Debt incurred in performing exempt purpose. Irs 1040x 2012   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Irs 1040x 2012 For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Irs 1040x 2012 Annuity obligation. Irs 1040x 2012   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Irs 1040x 2012 It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Irs 1040x 2012 Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Irs 1040x 2012 It must be payable over the lives of either one or two individuals living when issued. Irs 1040x 2012 It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Irs 1040x 2012 Example. Irs 1040x 2012 X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Irs 1040x 2012 In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Irs 1040x 2012 The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Irs 1040x 2012 The present value of this annuity is $81,156, determined from IRS valuation tables. Irs 1040x 2012 Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Irs 1040x 2012 Securities loans. Irs 1040x 2012   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Irs 1040x 2012 This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Irs 1040x 2012   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from

The Irs 1040x 2012

Irs 1040x 2012 4. Irs 1040x 2012   Transportation Table of Contents Parking fees. Irs 1040x 2012 Advertising display on car. Irs 1040x 2012 Car pools. Irs 1040x 2012 Hauling tools or instruments. Irs 1040x 2012 Union members' trips from a union hall. Irs 1040x 2012 Car ExpensesStandard Mileage Rate Actual Car Expenses Leasing a Car Disposition of a Car This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. Irs 1040x 2012 These expenses include the cost of transportation by air, rail, bus, taxi, etc. Irs 1040x 2012 , and the cost of driving and maintaining your car. Irs 1040x 2012 Transportation expenses include the ordinary and necessary costs of all of the following. Irs 1040x 2012 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Irs 1040x 2012 Tax home is defined in chapter 1. Irs 1040x 2012 Visiting clients or customers. Irs 1040x 2012 Going to a business meeting away from your regular workplace. Irs 1040x 2012 Getting from your home to a temporary workplace when you have one or more regular places of work. Irs 1040x 2012 These temporary workplaces can be either within the area of your tax home or outside that area. Irs 1040x 2012 Transportation expenses do not include expenses you have while traveling away from home overnight. Irs 1040x 2012 Those expenses are travel expenses discussed in chapter 1 . Irs 1040x 2012 However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. Irs 1040x 2012 See Car Expenses , later. Irs 1040x 2012 Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Irs 1040x 2012 However, there may be exceptions to this general rule. Irs 1040x 2012 You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Irs 1040x 2012 Also, daily transportation expenses can be deducted if: (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance. Irs 1040x 2012 Illustration of transportation expenses. Irs 1040x 2012    Figure B , earlier, illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. Irs 1040x 2012 You may want to refer to it when deciding whether you can deduct your transportation expenses. Irs 1040x 2012 Temporary work location. Irs 1040x 2012   If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance. Irs 1040x 2012   If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. Irs 1040x 2012   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. Irs 1040x 2012   If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. Irs 1040x 2012 It will not be treated as temporary after the date you determine it will last more than 1 year. Irs 1040x 2012   If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. Irs 1040x 2012 You may have deductible travel expenses as discussed in chapter 1 . Irs 1040x 2012 No regular place of work. Irs 1040x 2012   If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area. Irs 1040x 2012   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. Irs 1040x 2012   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Irs 1040x 2012 These are nondeductible commuting expenses. Irs 1040x 2012 Two places of work. Irs 1040x 2012   If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. Irs 1040x 2012 However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second. Irs 1040x 2012   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. Irs 1040x 2012 You cannot deduct them. Irs 1040x 2012 Armed Forces reservists. Irs 1040x 2012   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. Irs 1040x 2012 You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work . Irs 1040x 2012   You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. Irs 1040x 2012 In this case, your transportation generally is a nondeductible commuting expense. Irs 1040x 2012 However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. Irs 1040x 2012   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. Irs 1040x 2012   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Irs 1040x 2012 These expenses are discussed in chapter 1 . Irs 1040x 2012   If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. Irs 1040x 2012 For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6. Irs 1040x 2012 Commuting expenses. Irs 1040x 2012   You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. Irs 1040x 2012 These costs are personal commuting expenses. Irs 1040x 2012 You cannot deduct commuting expenses no matter how far your home is from your regular place of work. Irs 1040x 2012 You cannot deduct commuting expenses even if you work during the commuting trip. Irs 1040x 2012 Example. Irs 1040x 2012 You sometimes use your cell phone to make business calls while commuting to and from work. Irs 1040x 2012 Sometimes business associates ride with you to and from work, and you have a business discussion in the car. Irs 1040x 2012 These activities do not change the trip from personal to business. Irs 1040x 2012 You cannot deduct your commuting expenses. Irs 1040x 2012 Parking fees. Irs 1040x 2012    Fees you pay to park your car at your place of business are nondeductible commuting expenses. Irs 1040x 2012 You can, however, deduct business-related parking fees when visiting a customer or client. Irs 1040x 2012 Advertising display on car. Irs 1040x 2012   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. Irs 1040x 2012 If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. Irs 1040x 2012 Car pools. Irs 1040x 2012   You cannot deduct the cost of using your car in a nonprofit car pool. Irs 1040x 2012 Do not include payments you receive from the passengers in your income. Irs 1040x 2012 These payments are considered reimbursements of your expenses. Irs 1040x 2012 However, if you operate a car pool for a profit, you must include payments from passengers in your income. Irs 1040x 2012 You can then deduct your car expenses (using the rules in this publication). Irs 1040x 2012 Hauling tools or instruments. Irs 1040x 2012   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. Irs 1040x 2012 However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car). Irs 1040x 2012 Union members' trips from a union hall. Irs 1040x 2012   If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Irs 1040x 2012 Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. Irs 1040x 2012 Office in the home. Irs 1040x 2012   If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Irs 1040x 2012 (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Irs 1040x 2012 ) Examples of deductible transportation. Irs 1040x 2012   The following examples show when you can deduct transportation expenses based on the location of your work and your home. Irs 1040x 2012 Example 1. Irs 1040x 2012 You regularly work in an office in the city where you live. Irs 1040x 2012 Your employer sends you to a 1-week training session at a different office in the same city. Irs 1040x 2012 You travel directly from your home to the training location and return each day. Irs 1040x 2012 You can deduct the cost of your daily round-trip transportation between your home and the training location. Irs 1040x 2012 Example 2. Irs 1040x 2012 Your principal place of business is in your home. Irs 1040x 2012 You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. Irs 1040x 2012 Example 3. Irs 1040x 2012 You have no regular office, and you do not have an office in your home. Irs 1040x 2012 In this case, the location of your first business contact inside the metropolitan area is considered your office. Irs 1040x 2012 Transportation expenses between your home and this first contact are nondeductible commuting expenses. Irs 1040x 2012 Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Irs 1040x 2012 While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another. Irs 1040x 2012 Car Expenses If you use your car for business purposes, you ordinarily can deduct car expenses. Irs 1040x 2012 You generally can use one of the two following methods to figure your deductible expenses. Irs 1040x 2012 Standard mileage rate. Irs 1040x 2012 Actual car expenses. Irs 1040x 2012 If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Irs 1040x 2012 See Leasing a Car , later. Irs 1040x 2012 In this publication, “car” includes a van, pickup, or panel truck. Irs 1040x 2012 For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later. Irs 1040x 2012 Rural mail carriers. Irs 1040x 2012   If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. Irs 1040x 2012 Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income. Irs 1040x 2012   If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). Irs 1040x 2012 You must complete Form 2106 and attach it to your Form 1040, U. Irs 1040x 2012 S. Irs 1040x 2012 Individual Income Tax Return. Irs 1040x 2012   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. Irs 1040x 2012 It is given as an equipment maintenance allowance (EMA) to employees of the U. Irs 1040x 2012 S. Irs 1040x 2012 Postal Service. Irs 1040x 2012 It is at the rate contained in the 1991 collective bargaining agreement. Irs 1040x 2012 Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. Irs 1040x 2012 See your employer for information on your reimbursement. Irs 1040x 2012    If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. Irs 1040x 2012 Standard Mileage Rate You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. Irs 1040x 2012 For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. Irs 1040x 2012 If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. Irs 1040x 2012 You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. Irs 1040x 2012 See Choosing the standard mileage rate and Standard mileage rate not allowed, later. Irs 1040x 2012 You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Irs 1040x 2012 See chapter 6 for more information on reimbursements . Irs 1040x 2012 Choosing the standard mileage rate. Irs 1040x 2012   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Irs 1040x 2012 Then, in later years, you can choose to use either the standard mileage rate or actual expenses. Irs 1040x 2012   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. Irs 1040x 2012 For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. Irs 1040x 2012   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. Irs 1040x 2012 You cannot revoke the choice. Irs 1040x 2012 However, in later years, you can switch from the standard mileage rate to the actual expenses method. Irs 1040x 2012 If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation. Irs 1040x 2012 Example. Irs 1040x 2012 Larry is an employee who occasionally uses his own car for business purposes. Irs 1040x 2012 He purchased the car in 2011, but he did not claim any unreimbursed employee expenses on his 2011 tax return. Irs 1040x 2012 Because Larry did not use the standard mileage rate the first year the car was available for business use, he cannot use the standard mileage rate in 2013 to claim unreimbursed employee business expenses. Irs 1040x 2012   For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation, later. Irs 1040x 2012 Standard mileage rate not allowed. Irs 1040x 2012   You cannot use the standard mileage rate if you: Use five or more cars at the same time (such as in fleet operations), Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Depreciation Deduction), Claimed a section 179 deduction (discussed later) on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses after 1997 for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Irs 1040x 2012 (See Rural mail carriers , earlier. Irs 1040x 2012 ) Note. Irs 1040x 2012 You can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above. Irs 1040x 2012 Five or more cars. Irs 1040x 2012   If you own or lease five or more cars that are used for business at the same time, you cannot use the standard mileage rate for the business use of any car. Irs 1040x 2012 However, you may be able to deduct your actual expenses for operating each of the cars in your business. Irs 1040x 2012 See Actual Car Expenses , later, for information on how to figure your deduction. Irs 1040x 2012   You are not using five or more cars for business at the same time if you alternate using (use at different times) the cars for business. Irs 1040x 2012   The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars. Irs 1040x 2012 Example 1. Irs 1040x 2012 Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. Irs 1040x 2012 She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time. Irs 1040x 2012 Example 2. Irs 1040x 2012 Tony and his employees use his four pickup trucks in his landscaping business. Irs 1040x 2012 During the year, he traded in two of his old trucks for two newer ones. Irs 1040x 2012 Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year. Irs 1040x 2012 Example 3. Irs 1040x 2012 Chris owns a repair shop and an insurance business. Irs 1040x 2012 He and his employees use his two pickup trucks and van for the repair shop. Irs 1040x 2012 Chris alternates using his two cars for the insurance business. Irs 1040x 2012 No one else uses the cars for business purposes. Irs 1040x 2012 Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time. Irs 1040x 2012 Example 4. Irs 1040x 2012 Maureen owns a car and four vans that are used in her housecleaning business. Irs 1040x 2012 Her employees use the vans, and she uses the car to travel to various customers. Irs 1040x 2012 Maureen cannot use the standard mileage rate for the car or the vans. Irs 1040x 2012 This is because all five vehicles are used in Maureen's business at the same time. Irs 1040x 2012 She must use actual expenses for all vehicles. Irs 1040x 2012 Interest. Irs 1040x 2012   If you are an employee, you cannot deduct any interest paid on a car loan. Irs 1040x 2012 This applies even if you use the car 100% for business as an employee. Irs 1040x 2012   However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. Irs 1040x 2012 For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). Irs 1040x 2012 You cannot deduct the part of the interest expense that represents your personal use of the car. Irs 1040x 2012    If you use a home equity loan to purchase your car, you may be able to deduct the interest. Irs 1040x 2012 See Publication 936, Home Mortgage Interest Deduction, for more information. Irs 1040x 2012 Personal property taxes. Irs 1040x 2012   If you itemize your deductions on Schedule A (Form 1040), you can deduct on line 7 state and local personal property taxes on motor vehicles. Irs 1040x 2012 You can take this deduction even if you use the standard mileage rate or if you do not use the car for business. Irs 1040x 2012   If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). Irs 1040x 2012 If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040). Irs 1040x 2012 Parking fees and tolls. Irs 1040x 2012   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Irs 1040x 2012 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Irs 1040x 2012 ) Sale, trade-in, or other disposition. Irs 1040x 2012   If you sell, trade in, or otherwise dispose of your car, you may have a gain or loss on the transaction or an adjustment to the basis of your new car. Irs 1040x 2012 See Disposition of a Car , later. Irs 1040x 2012 Actual Car Expenses If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. Irs 1040x 2012 If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Irs 1040x 2012 Actual car expenses include: Depreciation Licenses Lease  payments Registration  fees Gas Insurance Repairs Oil Garage rent Tires Tolls Parking fees   If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. Irs 1040x 2012 Continue to keep records, as explained later in chapter 5 . Irs 1040x 2012 Business and personal use. Irs 1040x 2012   If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. Irs 1040x 2012 You can divide your expense based on the miles driven for each purpose. Irs 1040x 2012 Example. Irs 1040x 2012 You are a sales representative for a clothing firm and drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. Irs 1040x 2012 You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense. Irs 1040x 2012 Employer-provided vehicle. Irs 1040x 2012   If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. Irs 1040x 2012 You cannot use the standard mileage rate. Irs 1040x 2012 See Vehicle Provided by Your Employer in chapter 6. Irs 1040x 2012 Interest on car loans. Irs 1040x 2012   If you are an employee, you cannot deduct any interest paid on a car loan. Irs 1040x 2012 This interest is treated as personal interest and is not deductible. Irs 1040x 2012 If you are self-employed and use your car in that business, see Interest , earlier, under Standard Mileage Rate. Irs 1040x 2012 Taxes paid on your car. Irs 1040x 2012   If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. Irs 1040x 2012 Enter the amount paid on line 7 of Schedule A (Form 1040). Irs 1040x 2012 Sales taxes. Irs 1040x 2012   Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later. Irs 1040x 2012 Fines and collateral. Irs 1040x 2012   You cannot deduct fines you pay or collateral you forfeit for traffic violations. Irs 1040x 2012 Casualty and theft losses. Irs 1040x 2012   If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. Irs 1040x 2012 See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car. Irs 1040x 2012 Depreciation and section 179 deductions. Irs 1040x 2012   Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Irs 1040x 2012 Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. Irs 1040x 2012 However, you can recover this cost through the section 179 deduction (the deduction allowed by section 179 of the Internal Revenue Code), special depreciation allowance, and depreciation deductions. Irs 1040x 2012 Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. Irs 1040x 2012 The section 179 deduction , special depreciation allowance , and depreciation deductions are discussed later. Irs 1040x 2012   Generally, there are limits on these deductions. Irs 1040x 2012 Special rules apply if you use your car 50% or less in your work or business. Irs 1040x 2012   You can claim a section 179 deduction and use a depreciation method other than straight line only if you do not use the standard mileage rate to figure your business-related car expenses in the year you first place a car in service. Irs 1040x 2012   If, in the year you first place a car in service, you claim either a section 179 deduction or use a depreciation method other than straight line for its estimated useful life, you cannot use the standard mileage rate on that car in any future year. Irs 1040x 2012 Car defined. Irs 1040x 2012   For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. Irs 1040x 2012 Its unloaded gross vehicle weight must not be more than 6,000 pounds. Irs 1040x 2012 A car includes any part, component, or other item physically attached to it or usually included in the purchase price. Irs 1040x 2012   A car does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a business, A vehicle used directly in the business of transporting persons or property for pay or hire, or A truck or van that is a qualified nonpersonal use vehicle. Irs 1040x 2012 Qualified nonpersonal use vehicles. Irs 1040x 2012   These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Irs 1040x 2012 They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Irs 1040x 2012 Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles. Irs 1040x 2012 More information. Irs 1040x 2012   See Depreciation Deduction , later, for more information on how to depreciate your vehicle. Irs 1040x 2012 Section 179 Deduction The section 179 deduction allows you to treat a portion or all of the cost of a car as a current expense. Irs 1040x 2012 If you choose to deduct all or part of the cost as a current expense, you must reduce your depreciable basis in the car by the amount of the section 179 deduction. Irs 1040x 2012 There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. Irs 1040x 2012 See Depreciation Limits, later. Irs 1040x 2012 You can claim the section 179 deduction only in the year you place the car in service. Irs 1040x 2012 For this purpose, a car is placed in service when it is ready and available for a specifically assigned use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Irs 1040x 2012 Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use. Irs 1040x 2012 A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business. Irs 1040x 2012 Example. Irs 1040x 2012 In 2012, you bought a new car and used it for personal purposes. Irs 1040x 2012 In 2013, you began to use it for business. Irs 1040x 2012 Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2013. Irs 1040x 2012 However, you can claim a depreciation deduction for the business use of the car starting in 2013. Irs 1040x 2012 See Depreciation Deduction , later. Irs 1040x 2012 More than 50% business use requirement. Irs 1040x 2012   You must use the property more than 50% for business to claim any section 179 deduction. Irs 1040x 2012 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Irs 1040x 2012 The result is the cost of the property that can qualify for the section 179 deduction. Irs 1040x 2012 Example. Irs 1040x 2012 Peter purchased a car in April 2013 for $24,500 and used it 60% for business. Irs 1040x 2012 Based on his business usage, the total cost of Peter's car that qualifies for the section 179 deduction is $14,700 ($24,500 cost × 60% business use). Irs 1040x 2012 But see Limit on total section 179, special depreciation allowance, and depreciation deduction , discussed later. Irs 1040x 2012 Limits. Irs 1040x 2012   There are limits on: The amount of the section 179 deduction, The section 179 deduction for sport utility and certain other vehicles, and The total amount of the section 179 deduction, special depreciation allowance, and depreciation deduction (discussed later ) you can claim for a qualified property. Irs 1040x 2012 Limit on the amount of the section 179 deduction. Irs 1040x 2012   For 2013, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000. Irs 1040x 2012   If the cost of your section 179 property placed in service in 2013 is over $2,000,000, you must reduce the $500,000 dollar limit (but not below zero) by the amount of cost over $2,000,000. Irs 1040x 2012 If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Irs 1040x 2012   The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year. Irs 1040x 2012   If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Irs 1040x 2012   If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. Irs 1040x 2012 You must allocate the dollar limit (after any reduction) between you. Irs 1040x 2012   For more information on the above section 179 deduction limits, see Publication 946. Irs 1040x 2012 Limit for sport utility and certain other vehicles. Irs 1040x 2012   For sport utility and certain other vehicles placed in service in 2013, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. Irs 1040x 2012 This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits explained under Depreciation Limits , later, and that is rated at no more than 14,000 pounds gross vehicle weight. Irs 1040x 2012 However, the $25,000 limit does not apply to any vehicle: Designed to have a seating capacity of more than nine persons behind the driver's seat, Equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or That has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Irs 1040x 2012    Limit on total section 179, special depreciation allowance, and depreciation deduction. Irs 1040x 2012   Generally, the total amount of section 179, special depreciation allowance, and depreciation deduction you can claim for a car that is qualified property and that you placed in service in 2013 is $11,160. Irs 1040x 2012 The limit is reduced if your business use of the car is less than 100%. Irs 1040x 2012 See Depreciation Limits , later, for more information. Irs 1040x 2012 Example. Irs 1040x 2012 In the earlier example under More than 50% business use requirement, Peter had a car with a cost (for purposes of the section 179 deduction) of $14,700. Irs 1040x 2012 However, based on Peter's business usage of his car, the total of his section 179, special depreciation allowance, and depreciation deductions is limited to $6,696 ($11,160 limit x 60% business use). Irs 1040x 2012 Cost of car. Irs 1040x 2012   For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. Irs 1040x 2012 For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Irs 1040x 2012 Your cost includes only the cash you paid. Irs 1040x 2012 Basis of car for depreciation. Irs 1040x 2012   The amount of the section 179 deduction reduces your basis in your car. Irs 1040x 2012 If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. Irs 1040x 2012 The resulting amount is the basis in your car you use to figure your depreciation deduction. Irs 1040x 2012 When to choose. Irs 1040x 2012   If you want to take the section 179 deduction, you must make the choice in the tax year you place the car in service for business or work. Irs 1040x 2012 How to choose. Irs 1040x 2012    Employees use Form 2106 to make this choice and report the section 179 deduction. Irs 1040x 2012 All others use Form 4562. Irs 1040x 2012   File the appropriate form with either of the following. Irs 1040x 2012 Your original tax return filed for the year the property was placed in service (whether or not you file it timely). Irs 1040x 2012 An amended return filed within the time prescribed by law. Irs 1040x 2012 An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Irs 1040x 2012 The amended return must also include any resulting adjustments to taxable income. Irs 1040x 2012    You must keep records that show the specific identification of each piece of qualifying section 179 property. Irs 1040x 2012 These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Irs 1040x 2012 Revoking an election. Irs 1040x 2012   An election (or any specification made in the election) to take a section 179 deduction for 2013 can only be revoked with the Commissioner's approval. Irs 1040x 2012 Recapture of section 179 deduction. Irs 1040x 2012   To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. Irs 1040x 2012 If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. Irs 1040x 2012 Any section 179 deduction claimed on the car is included in calculating the excess depreciation. Irs 1040x 2012 For information on this calculation, see Excess depreciation , later in this chapter under Car Used 50% or Less for Business. Irs 1040x 2012 Dispositions. Irs 1040x 2012   If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. Irs 1040x 2012 You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). Irs 1040x 2012 For information on the disposition of a car, see Disposition of a Car , later. Irs 1040x 2012 Special Depreciation Allowance You may be able to claim the special depreciation allowance for your car, truck, or van, if it is qualified property and was placed in service in 2013. Irs 1040x 2012 The allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). Irs 1040x 2012 The special depreciation allowance applies only for the first year the car is placed in service. Irs 1040x 2012 To qualify for the allowance more than 50% of the use of the car must be in a qualified business use (as defined under Depreciation Deduction, later). Irs 1040x 2012 Combined depreciation. Irs 1040x 2012   Your combined section 179 deduction, special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,160 ($3,160 if you elect not to claim the special depreciation allowance). Irs 1040x 2012 For trucks and vans, the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). Irs 1040x 2012 See Depreciation Limits , later in this chapter. Irs 1040x 2012 Qualified car. Irs 1040x 2012   To be a qualified car (including trucks and vans), the car must meet all of the following tests. Irs 1040x 2012 You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008, You placed the car in service in your trade or business before January 1, 2014, You used the car more than 50% in a qualified business use. Irs 1040x 2012 Election not to claim the special depreciation allowance. Irs 1040x 2012   You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. Irs 1040x 2012 If you make this election, it applies to all 5-year property placed in service during the year. Irs 1040x 2012   To make the election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired on or after January 1, 2008. Irs 1040x 2012    Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. Irs 1040x 2012 Depreciation Deduction If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. Irs 1040x 2012 This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car. Irs 1040x 2012 You generally need to know the following things about the car you intend to depreciate. Irs 1040x 2012 Your basis in the car. Irs 1040x 2012 The date you place the car in service. Irs 1040x 2012 The method of depreciation and recovery period you will use. Irs 1040x 2012 Basis. Irs 1040x 2012   Your basis in a car for figuring depreciation is generally its cost. Irs 1040x 2012 This includes any amount you borrow or pay in cash, other property, or services. Irs 1040x 2012   Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis , later). Irs 1040x 2012 However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). Irs 1040x 2012 For one of these situations see Exception under Methods of depreciation, later. Irs 1040x 2012   If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. Irs 1040x 2012 Additional rules concerning basis are discussed later in this chapter under Unadjusted basis . Irs 1040x 2012 Placed in service. Irs 1040x 2012   You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. Irs 1040x 2012 Depreciation begins when the car is placed in service for use in your work or business or for the production of income. Irs 1040x 2012   For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion. Irs 1040x 2012 Car placed in service and disposed of in the same year. Irs 1040x 2012   If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car. Irs 1040x 2012 Methods of depreciation. Irs 1040x 2012   Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). Irs 1040x 2012 MACRS is discussed later in this chapter. Irs 1040x 2012 Exception. Irs 1040x 2012   If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. Irs 1040x 2012 You must use straight line depreciation over the estimated remaining useful life of the car. Irs 1040x 2012   To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. Irs 1040x 2012 The rate per mile varies depending on the year(s) you used the standard mileage rate. Irs 1040x 2012 For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later. Irs 1040x 2012   This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis . Irs 1040x 2012 You must use your adjusted basis in your car to figure your depreciation deduction. Irs 1040x 2012 For additional information on the straight line method of depreciation, see Publication 946. Irs 1040x 2012 More-than-50%-use test. Irs 1040x 2012   Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. Irs 1040x 2012 You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car. Irs 1040x 2012   If your business use is 50% or less, you must use the straight line method to depreciate your car. Irs 1040x 2012 This is explained later under Car Used 50% or Less for Business . Irs 1040x 2012 Qualified business use. Irs 1040x 2012   A qualified business use is any use in your trade or business. Irs 1040x 2012 It does not include use for the production of income (investment use). Irs 1040x 2012 However, you do combine your business and investment use to compute your depreciation deduction for the tax year. Irs 1040x 2012 Use of your car by another person. Irs 1040x 2012   Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following conditions. Irs 1040x 2012 It is directly connected with your business. Irs 1040x 2012 It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income). Irs 1040x 2012 It results in a payment of fair market rent. Irs 1040x 2012 This includes any payment to you for the use of your car. Irs 1040x 2012 Business use changes. Irs 1040x 2012   If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. Irs 1040x 2012 See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later. Irs 1040x 2012    Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. Irs 1040x 2012 Use for more than one purpose. Irs 1040x 2012   If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. Irs 1040x 2012 You do this on the basis of mileage. Irs 1040x 2012 Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose. Irs 1040x 2012 Change from personal to business use. Irs 1040x 2012   If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. Irs 1040x 2012 In this case, you figure the percentage of business use for the year as follows. Irs 1040x 2012 Determine the percentage of business use for the period following the change. Irs 1040x 2012 Do this by dividing business miles by total miles driven during that period. Irs 1040x 2012 Multiply the percentage in (1) by a fraction. Irs 1040x 2012 The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12. Irs 1040x 2012 Example. Irs 1040x 2012 You use a car only for personal purposes during the first 6 months of the year. Irs 1040x 2012 During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. Irs 1040x 2012 This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Irs 1040x 2012 Your business use for the year is 40% (80% × 6/12). Irs 1040x 2012 Limits. Irs 1040x 2012   The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. Irs 1040x 2012 The maximum amount you can claim depends on the year in which you placed your car in service. Irs 1040x 2012 You have to reduce the maximum amount if you did not use the car exclusively for business. Irs 1040x 2012 See Depreciation Limits , later. Irs 1040x 2012 Unadjusted basis. Irs 1040x 2012   You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained later under Modified Accelerated Cost Recovery System (MACRS) . Irs 1040x 2012 Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts. Irs 1040x 2012   To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Irs 1040x 2012 Cost includes sales taxes (see Sales taxes , earlier), destination charges, and dealer preparation. Irs 1040x 2012 Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Irs 1040x 2012 Decrease your basis by any section 179 deduction, special depreciation allowance, gas guzzler tax, clean-fuel vehicle deduction (for vehicles placed in service before Jan. Irs 1040x 2012 1, 2006), and alternative motor vehicle credit. Irs 1040x 2012   See Form 8910 for information on the alternative motor vehicle credit. Irs 1040x 2012 If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. Irs 1040x 2012 See Car Used 50% or Less for Business, later, for more information. Irs 1040x 2012 If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car. Irs 1040x 2012 Improvements. Irs 1040x 2012   A major improvement to a car is treated as a new item of 5-year recovery property. Irs 1040x 2012 It is treated as placed in service in the year the improvement is made. Irs 1040x 2012 It does not matter how old the car is when the improvement is added. Irs 1040x 2012 Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. Irs 1040x 2012 However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Irs 1040x 2012 Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. Irs 1040x 2012 See Depreciation Limits , later. Irs 1040x 2012 Car trade-in. Irs 1040x 2012   If you traded one car (the “old car”) for another car (the “new car”) in 2013, there are two ways you can treat the transaction. Irs 1040x 2012 You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Irs 1040x 2012 If you make this election, you treat the old car as disposed of at the time of the trade-in. Irs 1040x 2012 The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. Irs 1040x 2012 You then figure your depreciation deduction for the new car beginning with the date you placed it in service. Irs 1040x 2012 You make this election by completing Form 2106, Part II, Section D. Irs 1040x 2012 This method is explained later, beginning at Effect of trade-in on basis . Irs 1040x 2012 If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. Irs 1040x 2012 You must apply two depreciation limits (see Depreciation Limits , later). Irs 1040x 2012 The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. Irs 1040x 2012 The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. Irs 1040x 2012 You must use Form 4562 to compute your depreciation deduction. Irs 1040x 2012 You cannot use Form 2106, Part II, Section D. Irs 1040x 2012 This method is explained in Publication 946. Irs 1040x 2012   If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). Irs 1040x 2012 Otherwise, you must use the method described in (2). Irs 1040x 2012 Effect of trade-in on basis. Irs 1040x 2012   The discussion that follows applies to trade-ins of cars in 2013, where the election was made to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Irs 1040x 2012 For information on how to figure depreciation for cars involved in a like-kind exchange (trade-in) in 2013, for which the election was not made, see Publication 946 and Regulations section 1. Irs 1040x 2012 168(i)-6(d)(3). Irs 1040x 2012 Traded car used only for business. Irs 1040x 2012   If you trade in a car you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car. Irs 1040x 2012 Example. Irs 1040x 2012 Paul trades in a car that has an adjusted basis of $5,000 for a new car. Irs 1040x 2012 In addition, he pays cash of $20,000 for the new car. Irs 1040x 2012 His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). Irs 1040x 2012 Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis, discussed under Unadjusted basis , earlier. Irs 1040x 2012 Traded car used partly in business. Irs 1040x 2012   If you trade in a car you used partly in your business for a new car you will use in your business, you must make a “trade-in” adjustment for the personal use of the old car. Irs 1040x 2012 This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. Irs 1040x 2012 (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. Irs 1040x 2012 See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car. Irs 1040x 2012 )   To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. Irs 1040x 2012 Then subtract from that total the excess, if any, of: The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over The total of the amounts actually allowed as depreciation during those years. Irs 1040x 2012 For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS) , which follows Example 2, later. Irs 1040x 2012 Modified Accelerated Cost Recovery System (MACRS). Irs 1040x 2012   The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Irs 1040x 2012   The maximum amount you can deduct is limited, depending on the year you placed your car in service. Irs 1040x 2012 See Depreciation Limits , later. Irs 1040x 2012 Recovery period. Irs 1040x 2012   Under MACRS, cars are classified as 5-year property. Irs 1040x 2012 You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. Irs 1040x 2012 This is because your car is generally treated as placed in service in the middle of the year, and you claim depreciation for one-half of both the first year and the sixth year. Irs 1040x 2012 Depreciation deduction for certain Indian reservation property. Irs 1040x 2012   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2014. Irs 1040x 2012 The recovery that applies for a business-use car is 3 years instead of 5 years. Irs 1040x 2012 However, the depreciation limits, discussed later, will still apply. Irs 1040x 2012   For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946. Irs 1040x 2012 Depreciation methods. Irs 1040x 2012   You can use one of the following methods to depreciate your car. Irs 1040x 2012 The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Irs 1040x 2012 The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Irs 1040x 2012 The straight line method (SL) over a 5-year recovery period. Irs 1040x 2012    If you use Table 4-1 (discussed later under MACRS depreciation chart) to determine your depreciation rate for 2013, you do not need to determine in what year using the straight line method provides an equal or greater deduction. Irs 1040x 2012 This is because the chart has the switch to the straight line method built into its rates. Irs 1040x 2012   Before choosing a method, you may wish to consider the following facts. Irs 1040x 2012 Using the straight line method provides equal yearly deductions throughout the recovery period. Irs 1040x 2012 Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year. Irs 1040x 2012 MACRS depreciation chart. Irs 1040x 2012   A 2013 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1 . Irs 1040x 2012 Using this table will make it easy for you to figure the 2013 depreciation deduction for your car. Irs 1040x 2012 A similar chart appears in the Instructions for Form 2106. Irs 1040x 2012    You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. Irs 1040x 2012   You must use the Depreciation Tables in Publication 946 rather than the 2013 MACRS Depreciation Chart in this publication if any one of the following four conditions applies to you. Irs 1040x 2012 You file your return on a fiscal year basis. Irs 1040x 2012 You file your return for a short tax year (less than 12 months). Irs 1040x 2012 During the year, all of the following conditions apply. Irs 1040x 2012 You placed some property in service from January through September. Irs 1040x 2012 You placed some property in service from October through December. Irs 1040x 2012 Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year. Irs 1040x 2012   You placed qualified property in service on an Indian reservation. Irs 1040x 2012 Depreciation in future years. Irs 1040x 2012   If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. Irs 1040x 2012 However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. Irs 1040x 2012 In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. Irs 1040x 2012 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Irs 1040x 2012    In future years, do not use the chart in this edition of the publication. Irs 1040x 2012 Instead, use the chart in the publication or the form instructions for those future years. Irs 1040x 2012 Disposition of car during recovery period. Irs 1040x 2012   If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. Irs 1040x 2012 See Depreciation deduction for the year of disposition under Disposition of a Car, later, for information on how to figure the depreciation allowed in the year of disposition. Irs 1040x 2012 How to use the 2013 chart. Irs 1040x 2012   To figure your depreciation deduction for 2013, find the percentage in the column of Table 4-1 based on the date that you first placed the car in service and the depreciation method that you are using. Irs 1040x 2012 Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. Irs 1040x 2012 If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946. Irs 1040x 2012    Your deduction cannot be more than the maximum depreciation limit for cars. Irs 1040x 2012 See Depreciation Limits, later. Irs 1040x 2012 Example. Irs 1040x 2012 Phil bought a used truck in February 2012 to use exclusively in his landscape business. Irs 1040x 2012 He paid $9,200 for the truck with no trade-in. Irs 1040x 2012 Phil did not claim any section 179 deduction, the truck did not qualify for the special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years. Irs 1040x 2012 Phil used the MACRS depreciation chart in 2012 to find his percentage. Irs 1040x 2012 The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. Irs 1040x 2012 He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2012 depreciation deduction of $1,840. Irs 1040x 2012 In 2013, Phil used the truck for personal purposes when he repaired his father's cabin. Irs 1040x 2012 His records show that the business use of his truck was 90% in 2013. Irs 1040x 2012 Phil used Table 4-1 to find his percentage. Irs 1040x 2012 Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. Irs 1040x 2012 He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2013 depreciation deduction of $2,650. Irs 1040x 2012 Depreciation Limits There are limits on the amount you can deduct for depreciation of your car, truck, or van. Irs 1040x 2012 The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. Irs 1040x 2012 The maximum amount you can deduct each year depends on the year you place the car in service. Irs 1040x 2012 These limits are shown in the following tables. Irs 1040x 2012   Maximum Depreciation Deduction for Cars Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2012–2013 $11,1601 $5,100 $3,050 $1,875 2010–2011 11,0602 4,900 2,950 1,775 2008–2009 10,9603 4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6103 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7104 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6605 4,900 2,950 1,775 2001–2002 7,6605 4,900 2,950 1,775 2000 3,060 4,900 2,950 1,775 1$3,160 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Irs 1040x 2012 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Irs 1040x 2012 3$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Irs 1040x 2012 4$7,660 if you acquired the car before 5/6/2003. Irs 1040x 2012 $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. Irs 1040x 2012 5$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance. Irs 1040x 2012 Trucks and vans. Irs 1040x 2012   For 2013, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. Irs 1040x 2012 A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less. Irs 1040x 2012 For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table. Irs 1040x 2012 Maximum Depreciation Deduction for Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 $11,3601 $5,300 $3,150 $1,875 2011 11,2601 5,200 3,150 1,875 2010 11,1601 5,100 3,050 1,875 2009 11,0601 4,900 2,950 1,775 2008 11,1601 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2005–2006 3,260 5,200 3,150 1,875 2004 10,9101 5,300 3,150 1,875 2003 11,0101,2 5,400 3,250 1,975 1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first-year limit is $3,360 for 2012 and 2013, $3,260 for 2011, $3,160 for 2010, $3,060 for 2009, $3,160 for 2008, $3,260 for 2004, and $3,360 for 2003. Irs 1040x 2012 2If the truck or van was acquired before 5/06/2003, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960. Irs 1040x 2012 Car used less than full year. Irs 1040x 2012   The depreciation limits are not reduced if you use a car for less than a full year. Irs 1040x 2012 This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. Irs 1040x 2012 However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. Irs 1040x 2012 See Reduction for personal use , next. Irs 1040x 2012 Reduction for personal use. Irs 1040x 2012   The depreciation limits are reduced based on your percentage of personal use. Irs 1040x 2012 If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year. Irs 1040x 2012 Section 179 deduction. Irs 1040x 2012   The section 179 deduction is treated as a depreciation deduction. Irs 1040x 2012 If you place a car that is not a truck or van in service in 2013, use it only for business, and choose the section 179 deduction, the special depreciation allowance, and the depreciation deduction for that car for 2013 is limited to $11,160. Irs 1040x 2012 Example. Irs 1040x 2012 On September 4, 2013, Jack bought a used car for $10,000 and placed it in service. Irs 1040x 2012 He used it 80% for his business, and he chooses to take a section 179 deduction for the car. Irs 1040x 2012 The car is not qualified property for purposes of the special depreciation allowance. Irs 1040x 2012 Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. Irs 1040x 2012 This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%). Irs 1040x 2012 Jack then figures that his section 179 deduction for 2013 is limited to $2,528 (80% of $3,160). Irs 1040x 2012 He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Irs 1040x 2012 Jack has reached his maximum depreciation deduction for 2013. Irs 1040x 2012 For 2014, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction. Irs 1040x 2012 Deductions in years after the recovery period. Irs 1040x 2012   If the depreciation deductions for your car are reduced under the passenger automobile limits (discussed earlier), you will have unrecovered basis in your car at the end of the recovery period. Irs 1040x 2012 If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends. Irs 1040x 2012 Unrecovered basis. Irs 1040x 2012   This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction (for vehicles placed in service before January 1, 2006), alternative motor vehicle credit, electric vehicle credit, gas guzzler tax, and depreciation (including any special depreciation allowance , discussed earlier, unless you elect not to claim it) and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use. Irs 1040x 2012 The recovery period. Irs 1040x 2012   For 5-year property, your recovery period is 6 calendar years. Irs 1040x 2012 A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year. Irs 1040x 2012   Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. Irs 1040x 2012 You determine your unrecovered basis in the 7th year after you placed the car in service. Irs 1040x 2012 How to treat unrecovered basis. Irs 1040x 2012   If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your basis in the car. Irs 1040x 2012 The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. Irs 1040x 2012 For example, no deduction is allowed for a year you use your car 100% for personal purposes. Irs 1040x 2012 Example. Irs 1040x 2012 In April 2007, Bob bought and placed in service a car he used exclusively in his business. Irs 1040x 2012 The car cost $31,500. Irs 1040x 2012 Bob did not claim a section 179 deduction or the special depreciation allowance for the car. Irs 1040x 2012 He continued to use the car 100% in his business throughout the recovery period (2007 through 2012). Irs 1040x 2012 For those years, Bob used the MACRS Depreciation Chart (200% declining balance method) and the Maximum Depreciation Deduction for Cars table, earlier, for the applicable tax year to compute his depreciation deductions during the recovery period. Irs 1040x 2012 Bob's depreciation deductions were subject to the depreciation limits so he will have unrecovered basis at the end of the recovery period as shown in the following table. Irs 1040x 2012      MACRS     Deprec. Irs 1040x 2012 Year % Amount Limit Allowed 2007 20. Irs 1040x 2012 00 $6,300 $3,060 $ 3,060 2008 32. Irs 1040x 2012 00 10,080 4,900 4,900 2009 19. Irs 1040x 2012 20 6,048 2,850 2,850 2010 11. Irs 1040x 2012 52 3,629 1,775 1,775 2011 11. Irs 1040x 2012 52 3,629 1,775 1,775 2012 5. Irs 1040x 2012 76 1,814 1,775 1,775 Total $31,500   16,135 For the correct limit, see Maximum Depreciation Deduction for Cars under “Depreciation Limits,” earlier, for the maximum amount of depreciation allowed each year. Irs 1040x 2012   At the end of 2012, Bob had an unrecovered basis in the car of $15,365 ($31,500 – $16,135). Irs 1040x 2012 If Bob continued to use the car 100% for business in 2013 and later years, he can claim a depreciation deduction equal to the lesser of $1,775 or his remaining unrecovered basis. Irs 1040x 2012   If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. Irs 1040x 2012 However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable as if the business use had been 100%. Irs 1040x 2012 For example, if Bob had used his car 60% for business instead of 100%, his allowable depreciation deductions would have been $9,681 ($16,135 × 60%), but he still would have to reduce his basis by $16,135 to determine his unrecovered basis. Irs 1040x 2012 Table 4-1. Irs 1040x 2012 2013 MACRS Depreciation Chart (Use to Figure Depreciation for 2013. Irs 1040x 2012 ) If you claim actual expenses for your car, use the chart below to find the depreciation method and percentage to use for your 2013 return for cars placed in service in 2013. Irs 1040x 2012   First, using the left column, find the date you first placed the car in service in 2013. Irs 1040x 2012 Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter. Irs 1040x 2012 For cars placed in service before 2013, you must use the same method you used on last year's return unless a decline in your business use requires you to change to the straight line method. Irs 1040x 2012 Refer back to the MACRS Depreciation Chart for the year you placed the car in service. Irs 1040x 2012 (See Car Used 50% or Less for Business . Irs 1040x 2012 )  Multiply the unadjusted basis of your car by your business use percentage. Irs 1040x 2012 Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2013. Irs 1040x 2012 (Also see Depreciation Limits . Irs 1040x 2012 )   If you placed your car in service after September of any year and you placed other business property in service during the same year, you may have to use the Jan. Irs 1040x 2012 1—Sept. Irs 1040x 2012 30 percentage instead of the Oct. Irs 1040x 2012 1—Dec. Irs 1040x 2012 31 percentage for your car. Irs 1040x 2012               To find out if this applies to you, determine: 1) the basis of all business property you placed in service after September of that year and 2) the basis of all business property you placed in service during that entire year. Irs 1040x 2012 If the basis of the property placed in service after September is not more than 40% of the basis of all property (certain property is excluded) placed in service for the entire year, use the percentage for Jan. Irs 1040x 2012 1—Sept. Irs 1040x 2012 30 for figuring depreciation for your car. Irs 1040x 2012 See Which Convention Applies? in chapter 4 of Publication 946 for more details. Irs 1040x 2012               Example. Irs 1040x 2012 You buy machinery (basis of $32,000) in May 2013 and a new van (basis of $20,000) in October 2013, both used 100% in your business. Irs 1040x 2012 You