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State taxes 11. State taxes Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. State taxes Kickbacks. State taxes Form 1099-MISC. State taxes Exception. State taxes Tax preparation fees. State taxes Covered executive branch official. State taxes Exceptions to denial of deduction. State taxes Indirect political contributions. State taxes Type of deduction. State taxes Repayment—$3,000 or less. State taxes Repayment—over $3,000. State taxes Method 1. State taxes Method 2. State taxes Repayment does not apply. State taxes Year of deduction (or credit). State taxes Telephone. State taxes What's New Standard mileage rate. State taxes Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. State taxes 5 cents per mile. State taxes For more information, see Car and truck expenses under Miscellaneous Expenses. State taxes Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. State taxes Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. State taxes Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. State taxes If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. State taxes To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. State taxes Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. State taxes For more information on travel, meals, and entertainment, including deductibility, see Publication 463. State taxes Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. State taxes If the expenses are substantiated, you can deduct the allowable amount on your tax return. State taxes Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. State taxes For example, you can deduct 100% of the cost of meals on your business books and records. State taxes However, only 50% of these costs are allowed by law as a tax deduction. State taxes How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. State taxes If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. State taxes If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. State taxes If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. State taxes See Table 11-1 , Reporting Reimbursements. State taxes Accountable Plans An accountable plan requires your employees to meet all of the following requirements. State taxes Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. State taxes An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. State taxes The advance is reasonably calculated not to exceed the amount of anticipated expenses. State taxes You make the advance within a reasonable period of time of your employee paying or incurring the expense. State taxes If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. State taxes Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. State taxes Adequate accounting. State taxes Your employees must adequately account to you for their travel, meals, and entertainment expenses. State taxes They must give you documentary evidence of their travel, mileage, and other employee business expenses. State taxes This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. State taxes Excess reimbursement or allowance. State taxes An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. State taxes The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. State taxes Reasonable period of time. State taxes A reasonable period of time depends on the facts and circumstances. State taxes Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. State taxes You give an advance within 30 days of the time the employee pays or incurs the expense. State taxes Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. State taxes Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. State taxes You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. State taxes How to deduct. State taxes You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. State taxes Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. State taxes If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). State taxes If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. State taxes S. State taxes Corporation Income Tax Return. State taxes If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. State taxes Table 11-1. State taxes Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement: Adequate accounting made and excess returned No amount. State taxes Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. State taxes Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned No amount. State taxes Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. State taxes The amount up to the federal rate is reported only in box 12—it is not reported in box 1. State taxes Per diem or mileage allowance exceeds the federal rate: Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. State taxes The amount up to the federal rate is reported only in box 12—it is not reported in box 1. State taxes A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. State taxes No reimbursement plan The entire amount as wages in box 1. State taxes Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. State taxes In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. State taxes Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. State taxes Federal rate. State taxes The federal rate can be figured using any one of the following methods. State taxes For car expenses: The standard mileage rate. State taxes A fixed and variable rate (FAVR). State taxes For per diem amounts: The regular federal per diem rate. State taxes The standard meal allowance. State taxes The high-low rate. State taxes Car allowance. State taxes Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. State taxes Beginning in 2013, the standard business mileage rate is 56. State taxes 5 cents per mile. State taxes You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. State taxes This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. State taxes ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. State taxes ). State taxes For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. State taxes irs. State taxes gov/irb/2010-51_IRB/ar14. State taxes html and Notice 2012-72, available at www. State taxes irs. State taxes gov/irb/2012-50_IRB/ar10. State taxes html. State taxes Per diem allowance. State taxes If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. State taxes Regular federal per diem rate. State taxes The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. State taxes It has two components: Lodging expense, and Meal and incidental expense (M&IE). State taxes The rates are different for different locations. State taxes Publication 1542 lists the rates in the continental United States. State taxes Standard meal allowance. State taxes The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. State taxes You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). State taxes Internet access. State taxes Per diem rates are available on the Internet. State taxes You can access per diem rates at www. State taxes gsa. State taxes gov/perdiemrates. State taxes High-low method. State taxes This is a simplified method of computing the federal per diem rate for travel within the continental United States. State taxes It eliminates the need to keep a current list of the per diem rate for each city. State taxes Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. State taxes All other areas have a per diem amount of $163 ($52 for M&IE). State taxes The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. State taxes Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). State taxes The rate for all other locations increased to $170 ($52 for M&IE). State taxes For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. State taxes However, you must use the same rate for all employees reimbursed under the high-low method. State taxes For more information about the high-low method, see Notice 2013-65, available at www. State taxes irs. State taxes gov/irb/2013-44_IRB/ar13. State taxes html. State taxes See Publication 1542 (available on the Internet at IRS. State taxes gov) for the current per diem rates for all locations. State taxes Reporting per diem and car allowances. State taxes The following discussion explains how to report per diem and car allowances. State taxes The manner in which you report them depends on how the allowance compares to the federal rate. State taxes See Table 11-1. State taxes Allowance less than or equal to the federal rate. State taxes If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. State taxes Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). State taxes See How to deduct under Accountable Plans, earlier. State taxes Allowance more than the federal rate. State taxes If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. State taxes Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. State taxes Deduct it as travel expenses (as explained above). State taxes This part of the allowance is treated as reimbursed under an accountable plan. State taxes Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. State taxes Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. State taxes This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. State taxes Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. State taxes The deduction limit applies even if you reimburse them for 100% of the expenses. State taxes Application of the 50% limit. State taxes The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. State taxes It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. State taxes The deduction limit may also apply to meals you furnish on your premises to your employees. State taxes Related expenses. State taxes Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. State taxes Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. State taxes However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. State taxes Amount subject to 50% limit. State taxes If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. State taxes The per diem allowance. State taxes The federal rate for M&IE. State taxes If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. State taxes If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. State taxes Meal expenses when subject to “hours of service” limits. State taxes You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. State taxes See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. State taxes De minimis (minimal) fringe benefit. State taxes The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. State taxes See Publication 15-B for additional information on de minimis fringe benefits. State taxes Company cafeteria or executive dining room. State taxes The cost of food and beverages you provide primarily to your employees on your business premises is deductible. State taxes This includes the cost of maintaining the facilities for providing the food and beverages. State taxes These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). State taxes Employee activities. State taxes The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. State taxes The benefit must be primarily for your employees who are not highly compensated. State taxes For this purpose, a highly compensated employee is an employee who meets either of the following requirements. State taxes Owned a 10% or more interest in the business during the year or the preceding year. State taxes An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. State taxes Received more than $115,000 in pay for the preceding year. State taxes You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. State taxes For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. State taxes Meals or entertainment treated as compensation. State taxes The 50% limit does not apply to either of the following. State taxes Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. State taxes Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. State taxes Sales of meals or entertainment. State taxes You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. State taxes For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. State taxes The 50% limit does not apply to this expense. State taxes Providing meals or entertainment to general public to promote goodwill. State taxes You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. State taxes The 50% limit does not apply to this expense. State taxes Director, stockholder, or employee meetings. State taxes You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. State taxes You can provide some minor social activities, but the main purpose of the meeting must be your company's business. State taxes These expenses are subject to the 50% limit. State taxes Trade association meetings. State taxes You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. State taxes These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. State taxes Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. State taxes All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. State taxes The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. State taxes You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. State taxes Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. State taxes Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. State taxes Advertising expenses. State taxes You generally can deduct reasonable advertising expenses that are directly related to your business activities. State taxes Generally, you cannot deduct amounts paid to influence legislation (i. State taxes e. State taxes , lobbying). State taxes See Lobbying expenses , later. State taxes You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. State taxes For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. State taxes S. State taxes Savings Bonds, or to participate in similar causes is usually deductible. State taxes Anticipated liabilities. State taxes Anticipated liabilities or reserves for anticipated liabilities are not deductible. State taxes For example, assume you sold 1-year TV service contracts this year totaling $50,000. State taxes From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. State taxes You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. State taxes You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. State taxes Bribes and kickbacks. State taxes Engaging in the payment of bribes or kickbacks is a serious criminal matter. State taxes Such activity could result in criminal prosecution. State taxes Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. State taxes Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. State taxes Meaning of “generally enforced. State taxes ” A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. State taxes For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. State taxes Kickbacks. State taxes A kickback is a payment for referring a client, patient, or customer. State taxes The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. State taxes In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. State taxes For example, the Yard Corporation is in the business of repairing ships. State taxes It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. State taxes Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. State taxes These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. State taxes Form 1099-MISC. State taxes It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. State taxes See Form 1099-MISC for more information. State taxes Car and truck expenses. State taxes The costs of operating a car, truck, or other vehicle in your business are deductible. State taxes For more information on how to figure your deduction, see Publication 463. State taxes Charitable contributions. State taxes Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. State taxes If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. State taxes However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. State taxes See the Instructions for Form 1120 for more information. State taxes Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). State taxes Example. State taxes You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. State taxes The purpose of the ad was to encourage readers to buy your products. State taxes Your payment is not a charitable contribution. State taxes You can deduct it as an advertising expense. State taxes Example. State taxes You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. State taxes Your payment is not a charitable contribution. State taxes You can deduct it as a business expense. State taxes See Publication 526 for a discussion of donated inventory, including capital gain property. State taxes Club dues and membership fees. State taxes Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. State taxes This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. State taxes Exception. State taxes The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. State taxes Boards of trade. State taxes Business leagues. State taxes Chambers of commerce. State taxes Civic or public service organizations. State taxes Professional organizations such as bar associations and medical associations. State taxes Real estate boards. State taxes Trade associations. State taxes Credit card convenience fees. State taxes Credit card companies charge a fee to businesses who accept their cards. State taxes This fee when paid or incurred by the business can be deducted as a business expense. State taxes Damages recovered. State taxes Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. State taxes You must include this compensation in your income. State taxes However, you may be able to take a special deduction. State taxes The deduction applies only to amounts recovered for actual economic injury, not any additional amount. State taxes The deduction is the smaller of the following. State taxes The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. State taxes Your losses from the injury you have not deducted. State taxes Demolition expenses or losses. State taxes Amounts paid or incurred to demolish a structure are not deductible. State taxes These amounts are added to the basis of the land where the demolished structure was located. State taxes Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. State taxes Education expenses. State taxes Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. State taxes See Education Expenses in chapter 2. State taxes You can also deduct the cost of your own education (including certain related travel) related to your trade or business. State taxes You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. State taxes For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. State taxes Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. State taxes This is true even if the education maintains or improves skills presently required in your business. State taxes For more information on education expenses, see Publication 970. State taxes Franchise, trademark, trade name. State taxes If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). State taxes When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. State taxes A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. State taxes Impairment-related expenses. State taxes If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. State taxes You are disabled if you have either of the following. State taxes A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. State taxes A physical or mental impairment that substantially limits one or more of your major life activities. State taxes The expense qualifies as a business expense if all the following apply. State taxes Your work clearly requires the expense for you to satisfactorily perform that work. State taxes The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. State taxes Their treatment is not specifically provided for under other tax law provisions. State taxes Example. State taxes You are blind. State taxes You must use a reader to do your work, both at and away from your place of work. State taxes The reader's services are only for your work. State taxes You can deduct your expenses for the reader as a business expense. State taxes Internet-related expenses. State taxes Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. State taxes If you are starting a business you may have to amortize these expenses as start-up costs. State taxes For more information about amortizing start-up and organizational costs, see chapter 8. State taxes Interview expense allowances. State taxes Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. State taxes You can deduct the reimbursements as a business expense. State taxes However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. State taxes Legal and professional fees. State taxes Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. State taxes However, usually legal fees you pay to acquire business assets are not deductible. State taxes These costs are added to the basis of the property. State taxes Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. State taxes If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. State taxes The result is the portion of the invoice attributable to business expenses. State taxes The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). State taxes Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. State taxes However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. State taxes See Publication 529, Miscellaneous Deductions. State taxes Tax preparation fees. State taxes The cost of hiring a tax professional, such as a C. State taxes P. State taxes A. State taxes , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. State taxes Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. State taxes You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. State taxes Licenses and regulatory fees. State taxes Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. State taxes Some licenses and fees may have to be amortized. State taxes See chapter 8 for more information. State taxes Lobbying expenses. State taxes Generally, lobbying expenses are not deductible. State taxes Lobbying expenses include amounts paid or incurred for any of the following activities. State taxes Influencing legislation. State taxes Participating in or intervening in any political campaign for, or against, any candidate for public office. State taxes Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. State taxes Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. State taxes Researching, preparing, planning, or coordinating any of the preceding activities. State taxes Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. State taxes For information on making this allocation, see section 1. State taxes 162-28 of the regulations. State taxes You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. State taxes The organization conducts lobbying activities on matters of direct financial interest to your business. State taxes A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. State taxes If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. State taxes Covered executive branch official. State taxes For purposes of this discussion, a covered executive branch official is any of the following. State taxes The President. State taxes The Vice President. State taxes Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. State taxes Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). State taxes Exceptions to denial of deduction. State taxes The general denial of the deduction does not apply to the following. State taxes Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. State taxes An Indian tribal government is treated as a local council or similar governing body. State taxes Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). State taxes Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). State taxes Moving machinery. State taxes Generally, the cost of moving machinery from one city to another is a deductible expense. State taxes So is the cost of moving machinery from one plant to another, or from one part of your plant to another. State taxes You can deduct the cost of installing the machinery in the new location. State taxes However, you must capitalize the costs of installing or moving newly purchased machinery. State taxes Outplacement services. State taxes The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. State taxes are deductible. State taxes The costs of outplacement services may cover more than one deduction category. State taxes For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. State taxes For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. State taxes Penalties and fines. State taxes Penalties paid for late performance or nonperformance of a contract are generally deductible. State taxes For instance, you own and operate a construction company. State taxes Under a contract, you are to finish construction of a building by a certain date. State taxes Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. State taxes You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. State taxes These additional costs are deductible business expenses. State taxes On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. State taxes These fines or penalties include the following amounts. State taxes Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. State taxes Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. State taxes Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. State taxes Forfeited as collateral posted for a proceeding that could result in a fine or penalty. State taxes Examples of nondeductible penalties and fines include the following. State taxes Fines for violating city housing codes. State taxes Fines paid by truckers for violating state maximum highway weight laws. State taxes Fines for violating air quality laws. State taxes Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. State taxes A fine or penalty does not include any of the following. State taxes Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. State taxes Court costs or stenographic and printing charges. State taxes Compensatory damages paid to a government. State taxes Political contributions. State taxes Contributions or gifts paid to political parties or candidates are not deductible. State taxes In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. State taxes Indirect political contributions. State taxes You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. State taxes Examples of nondeductible expenses include the following. State taxes Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. State taxes Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. State taxes Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. State taxes Repairs. State taxes The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. State taxes Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. State taxes Otherwise, the cost must be capitalized and depreciated. State taxes See Form 4562 and its instructions for how to compute and claim the depreciation deduction. State taxes The cost of repairs includes the costs of labor, supplies, and certain other items. State taxes The value of your own labor is not deductible. State taxes Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). State taxes Repayments. State taxes If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. State taxes Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. State taxes Type of deduction. State taxes The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. State taxes For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. State taxes If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). State taxes If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. State taxes However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. State taxes Repayment—$3,000 or less. State taxes If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. State taxes Repayment—over $3,000. State taxes If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. State taxes However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. State taxes ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. State taxes If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. State taxes Method 1. State taxes Figure your tax for 2013 claiming a deduction for the repaid amount. State taxes Method 2. State taxes Figure your tax for 2013 claiming a credit for the repaid amount. State taxes Follow these steps. State taxes Figure your tax for 2013 without deducting the repaid amount. State taxes Refigure your tax from the earlier year without including in income the amount you repaid in 2013. State taxes Subtract the tax in (2) from the tax shown on your return for the earlier year. State taxes This is the amount of your credit. State taxes Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). State taxes If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. State taxes If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. State taxes R. State taxes C. State taxes 1341” next to line 71. State taxes Example. State taxes For 2012, you filed a return and reported your income on the cash method. State taxes In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. State taxes Your filing status in 2013 and 2012 is single. State taxes Your income and tax for both years are as follows: 2012 With Income 2012 Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069 2013 Without Deduction 2013 With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. State taxes Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. State taxes Repayment does not apply. State taxes This discussion does not apply to the following. State taxes Deductions for bad debts. State taxes Deductions from sales to customers, such as returns and allowances, and similar items. State taxes Deductions for legal and other expenses of contesting the repayment. State taxes Year of deduction (or credit). State taxes If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. State taxes If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. State taxes For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. State taxes Subscriptions. State taxes Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. State taxes Supplies and materials. State taxes Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. State taxes If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. State taxes You do not keep a record of when they are used. State taxes You do not take an inventory of the amount on hand at the beginning and end of the tax year. State taxes This method does not distort your income. State taxes You can also deduct the cost of books, professional instruments, equipment, etc. State taxes , if you normally use them within a year. State taxes However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. State taxes For more information regarding depreciation see Publication 946, How To Depreciate Property. State taxes Utilities. State taxes Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. State taxes However, any part due to personal use is not deductible. State taxes Telephone. State taxes You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. State taxes However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. State taxes Prev Up Next Home More Online Publications
Online and Home Shopping
Late delivery, shipment of wrong or damaged items, and hidden costs are common home shopping complaints. To avoid problems and resolve them more easily, follow the advice in the "Before You Buy" checklist In addition:
Be wary of post office boxes and sellers in other countries. It may be difficult to find the seller to resolve a problem later.
Know the total price. Make sure it includes all charges, shipping, handling, insurance and taxes. Coupons and other discounts should be properly deducted.
Make sure you are clear on what you are buying. Watch for words like "refurbished," "reconditioned," "close-out," or "discontinued."
The security code on the back of your card offers you extra protections on online purchases.
Keep track of your order. If it's late, you have the right to cancel and demand a refund.
Online and Group Coupons
In addition to the traditional coupons found in newspapers, coupons can also be found online. Online coupons come in a variety of forms; they can be found on manufacturers’ websites and on dedicated coupon websites. Coupons are also available on social media websites for becoming a fan of a product, or for sharing your email address with the company.
Group coupons are another online saving tool. Here’s how they work: local companies offer reduced prices for things like spa services, gourmet meals, and outdoor adventures through a third party company. If interested, you pay the third party company to take advantage of the deal. Group coupons allow you to try new experiences, by reducing the trial cost. Before you purchase a group coupon, ask yourself “Am I really going to use this?” If the answer is “no”, don’t buy it. Read the terms and conditions of all coupons for expiration dates or use limitations.
The State Taxes
State taxes 3. State taxes Section 501(c)(3) Organizations Table of Contents IntroductionChild care organizations. State taxes Topics - This chapter discusses: Useful Items - You may want to see: Contributions to 501(c)(3) OrganizationsCertain annuity contracts. State taxes Certain contracts held by a charitable remainder trust. State taxes Excise Taxes. State taxes Indoor tanning services. State taxes Application for Recognition of ExemptionPolitical activity. State taxes Private delivery service. State taxes Amendments to organizing documents required. State taxes How to show reasonable action and good faith. State taxes Not acting reasonably and in good faith. State taxes Prejudicing the interest of the Government. State taxes Procedure for requesting extension. State taxes More information. State taxes Organizations Not Required To File Form 1023 Articles of OrganizationOrganizational Test Dedication and Distribution of Assets Educational Organizations and Private SchoolsEducational Organizations Private Schools Organizations Providing InsuranceCharitable Risk Pools Other Section 501(c)(3) OrganizationsCharitable Organizations Religious Organizations Scientific Organizations Literary Organizations Amateur Athletic Organizations Prevention of Cruelty to Children or Animals Private Foundations and Public CharitiesPrivate Foundations Public Charities Private Operating Foundations Lobbying ExpendituresLobbying expenditures. State taxes Grass roots expenditures. State taxes Lobbying nontaxable amount. State taxes Grass roots nontaxable amount. State taxes Organization that no longer qualifies. State taxes Tax on organization. State taxes Tax on managers. State taxes Taxes on organizations. State taxes Taxes on managers. State taxes Political expenditures. State taxes Correction of expenditure. State taxes Introduction An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes. State taxes Religious. State taxes Charitable. State taxes Scientific. State taxes Testing for public safety. State taxes Literary. State taxes Educational. State taxes Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations , later in this chapter). State taxes The prevention of cruelty to children or animals. State taxes To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. State taxes A trust is a fund or foundation and will qualify. State taxes However, an individual or a partnership will not qualify. State taxes Examples. State taxes Qualifying organizations include: Nonprofit old-age homes, Parent-teacher associations, Charitable hospitals or other charitable organizations, Alumni associations, Schools, Chapters of the Red Cross, Boys' or Girls' Clubs, and Churches. State taxes Child care organizations. State taxes The term educational purposes includes providing for care of children away from their homes if substantially all the care provided is to enable individuals (the parents) to be gainfully employed and the services are available to the general public. State taxes Instrumentalities. State taxes A state or municipal instrumentality may qualify under section 501(c)(3) if it is organized as a separate entity from the governmental unit that created it and if it otherwise meets the organizational and operational tests of section 501(c)(3). State taxes Examples of a qualifying instrumentality might include state schools, universities, or hospitals. State taxes However, if an organization is an integral part of the local government or possesses governmental powers, it does not qualify for exemption. State taxes A state or municipality itself does not qualify for exemption. State taxes Topics - This chapter discusses: Contributions to 501(c)(3) organizations, Applications for recognition of exemption, Articles of Organization, Educational organizations and private schools, Organizations providing insurance, Other section 501(c)(3) organizations, Private foundations and public charities, and Lobbying expenditures. State taxes Useful Items - You may want to see: Forms (and Instructions) 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code See chapter 6 for information about getting publications and forms. State taxes Contributions to 501(c)(3) Organizations Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return. State taxes Fundraising events. State taxes If the donor receives something of value in return for the contribution, a common occurrence with fundraising efforts, part or all of the contribution may not be deductible. State taxes This may apply to fundraising activities such as charity balls, bazaars, banquets, auctions, concerts, athletic events, and solicitations for membership or contributions when merchandise or benefits are given in return for payment of a specified minimum contribution. State taxes If the donor receives or expects to receive goods or services in return for a contribution to your organization, the donor cannot deduct any part of the contribution unless the donor intends to, and does, make a payment greater than the fair market value of the goods or services. State taxes If a deduction is allowed, the donor can deduct only the part of the contribution, if any, that is more than the fair market value of the goods or services received. State taxes You should determine in advance the fair market value of any goods or services to be given to contributors and tell them, when you publicize the fundraising event or solicit their contributions, how much is deductible and how much is for the goods or services. State taxes See Disclosure of Quid Pro Quo Contributions in chapter 2. State taxes Exemption application not filed. State taxes Donors cannot deduct any charitable contribution to an organization that is required to apply for recognition of exemption but has not done so. State taxes Separate fund—contributions that are deductible. State taxes An organization that is exempt from federal income tax other than as an organization described in section 501(c)(3) can, if it desires, establish a fund, separate and apart from its other funds, exclusively for religious, charitable, scientific, literary, or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. State taxes If the fund is organized and operated exclusively for these purposes, it may qualify for exemption as an organization described in section 501(c)(3), and contributions made to it will be deductible as provided by section 170. State taxes A fund with these characteristics must be organized in such a manner as to prohibit the use of its funds upon dissolution, or otherwise, for the general purposes of the organization creating it. State taxes Personal benefit contracts. State taxes Generally, charitable deductions will not be allowed for a transfer to, or for the use of, a section 501(c)(3) or (c)(4) organization if in connection with the transfer: The organization directly or indirectly pays, or previously paid, a premium on a personal benefit contract for the transferor, or There is an understanding or expectation that anyone will directly or indirectly pay a premium on a personal benefit contract for the transferor. State taxes A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other person designated by the transferor. State taxes Certain annuity contracts. State taxes If an organization incurs an obligation to pay a charitable gift annuity, and the organization purchases an annuity contract to fund the obligation, individuals receiving payments under the charitable gift annuity will not be treated as indirect beneficiaries if the organization owns all of the incidents of ownership under the contract, is entitled to all payments under the contract, and the timing and amount of the payments are substantially the same as the timing and amount of payments to each person under the obligation (as such obligation is in effect at the time of the transfer). State taxes Certain contracts held by a charitable remainder trust. State taxes An individual will not be considered an indirect beneficiary under a life insurance, annuity, or endowment contract held by a charitable remainder annuity trust or a charitable remainder unitrust solely by reason of being entitled to the payment if the trust owns all of the incidents of ownership under the contract, and the trust is entitled to all payments under the contract. State taxes Excise tax. State taxes If the premiums are paid in connection with a transfer for which a deduction is not allowable under the deduction denial rule, without regard to when the transfer to the charitable organization was made, an excise tax will be applied that is equal to the amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract. State taxes The excise tax does not apply if all of the direct and indirect beneficiaries under the contract are organizations. State taxes Excise Taxes. State taxes A charitable organization liable for excise taxes must file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. State taxes Generally, the due date for filing Form 4720 occurs on the fifteenth day of the fifth month following the close of the organization's tax year. State taxes Indoor tanning services. State taxes If your organization provides an indoor tanning bed service, the ACA imposed a 10% excise tax on services provided after June 30, 2010. State taxes For more information, go to IRS. State taxes gov and select Affordable Care Act Tax Provisions. State taxes Application for Recognition of Exemption This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. State taxes For example, the application must include a conformed copy of the organization's articles of incorporation, as discussed under Articles of Organization , later in this chapter. State taxes See the organization headings that follow for specific information your organization may need to provide. State taxes Form 1023. State taxes Your organization must file its application for recognition of exemption on Form 1023. State taxes See chapter 1 and the instructions accompanying Form 1023 for the procedures to follow in applying. State taxes Some organizations are not required to file Form 1023. State taxes See Organizations Not Required To File Form 1023, later. State taxes Additional information to help you complete your application can be found online. State taxes Go to Exemption Requirement – Section 501(c)(3) Organizations and select the link at the bottom of the Web page for step by step help with the application process. State taxes See Exemption Requirements - Section 501(c)(3) Organizations. State taxes Form 1023 and accompanying statements must show that all of the following are true. State taxes The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (religious, charitable, etc. State taxes ) specified in the introduction to this chapter. State taxes No part of the organization's net earnings will inure to the benefit of private shareholders or individuals. State taxes You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. State taxes The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. State taxes See Political activity, next, and Lobbying Expenditures , near the end of this chapter. State taxes Political activity. State taxes If any of the activities (whether or not substantial) of your organization consist of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, your organization will not qualify for tax-exempt status under section 501(c)(3). State taxes Such participation or intervention includes the publishing or distributing of statements. State taxes Whether your organization is participating or intervening, directly or indirectly, in any political campaign on behalf of (or in opposition to) any candidate for public office depends upon all of the facts and circumstances of each case. State taxes Certain voter education activities or public forums conducted in a nonpartisan manner may not be prohibited political activity under section 501(c)(3), while other so-called voter education activities may be prohibited. State taxes Effective date of exemption. State taxes Most organizations described in this chapter that were organized after October 9, 1969, will not be treated as tax exempt unless they apply for recognition of exemption by filing Form 1023. State taxes These organizations will not be treated as tax exempt for any period before they file Form 1023, unless they file the form within 27 months from the end of the month in which they were organized. State taxes If the organization files the application within this 27-month period, the organization's exemption will be recognized retroactively to the date it was organized. State taxes Otherwise, exemption will be recognized only from the date of receipt. State taxes The date of receipt is the date of the U. State taxes S. State taxes postmark on the cover in which an exemption application is mailed or, if no postmark appears on the cover, the date the application is stamped as received by the IRS. State taxes Private delivery service. State taxes If a private delivery service designated by the IRS, rather than the U. State taxes S. State taxes Postal Service, is used to deliver the application, the date of receipt is the date recorded or marked by the private delivery service. State taxes The following private delivery services have been designated by the IRS. State taxes DHL Express (DHL): DHL “Same Day” Service. State taxes Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First. State taxes United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A. State taxes M. State taxes , UPS Worldwide Express Plus, and UPS Worldwide Express. State taxes Amendments to organizing documents required. State taxes If an organization is required to alter its activities or to make substantive amendments to its organizing document, the ruling or determination letter recognizing its exempt status will be effective as of the date the changes are made. State taxes If only a nonsubstantive amendment is made, exempt status will be effective as of the date it was organized, if the application was filed within the 15-month period, or the date the application was filed. State taxes Extensions of time for filing. State taxes There are two ways organizations seeking exemption can receive an extension of time for filing Form 1023. State taxes Automatic 12-month extension. State taxes Organizations will receive an automatic 12-month extension if they file an application for recognition of exemption with the IRS within 12 months of the original deadline. State taxes To get this extension, an organization must add the following statement at the top of its application: “Filed Pursuant to Section 301. State taxes 9100-2. State taxes ” Discretionary extensions. State taxes An organization that fails to file a Form 1023 within the extended 12-month period will be granted an extension to file if it submits evidence (including affidavits) to establish that: It acted reasonably and in good faith, and Granting a discretionary extension will not prejudice the interests of the government. State taxes How to show reasonable action and good faith. State taxes An organization acted reasonably and showed good faith if at least one of the following is true. State taxes The organization requests relief before its failure to file is discovered by the IRS. State taxes The organization failed to file because of intervening events beyond its control. State taxes The organization exercised reasonable diligence (taking into account the complexity of the return or issue and the organization's experience in these matters) but was not aware of the filing requirement. State taxes The organization reasonably relied upon the written advice of the IRS. State taxes The organization reasonably relied upon the advice of a qualified tax professional who failed to file or advise the organization to file Form 1023. State taxes An organization cannot rely on the advice of a tax professional if it knows or should know that he or she is not competent to render advice on filing exemption applications or is not aware of all the relevant facts. State taxes Not acting reasonably and in good faith. State taxes An organization has not acted reasonably and in good faith under the following circumstances. State taxes It seeks to change a return position for which an accuracy-related penalty has been or could be imposed at the time the relief is requested. State taxes It was informed of the requirement to file and related tax consequences, but chose not to file. State taxes It uses hindsight in requesting relief. State taxes The IRS will not ordinarily grant an extension if specific facts have changed since the due date that makes filing an application advantageous to an organization. State taxes Prejudicing the interest of the Government. State taxes Prejudice to the interest of the Government results if granting an extension of time to file to an organization results in a lower total tax liability for the years to which the filing applies than would have been the case if the organization had filed on time. State taxes Before granting an extension, the IRS can require the organization requesting it to submit a statement from an independent auditor certifying that no prejudice will result if the extension is granted. State taxes The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. State taxes The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced. State taxes Procedure for requesting extension. State taxes To request a discretionary extension, an organization must submit (to the IRS address shown on Form 1023 and Notice 1382) the following. State taxes A statement showing the date Form 1023 was required to have been filed and the date it was actually filed. State taxes Any documents relevant to the application. State taxes An affidavit describing in detail the events that led to the failure to apply and to the discovery of that failure. State taxes If the organization relied on a tax professional's advice, the affidavit must describe the engagement and responsibilities of the professional and the extent to which the organization relied on him or her. State taxes This affidavit must be accompanied by a dated declaration, signed by an individual who has personal knowledge of the facts and circumstances, who is authorized to act for the organization, which states, “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. State taxes ” Detailed affidavits from individuals having knowledge or information about the events that led to the failure to make the application and to the discovery of that failure. State taxes This includes the organization's return preparer, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer on the application. State taxes The affidavits must describe the engagement and responsibilities of the individual and the advice that he or she provided. State taxes These affidavits must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. State taxes ” The organization must state whether the returns for the tax year in which the application should have been filed or any tax years that would have been affected by the application had it been timely made are being examined by the IRS, an appeals office, or a federal court. State taxes The organization must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the organization's request for relief is pending. State taxes The organization, if requested, has to submit copies of its tax returns, and copies of the returns of other affected taxpayers. State taxes A request for this relief in connection with an application for exemption does not require payment of an additional user fee. State taxes Also, a request for relief under the automatic 12-month extension does not require payment of a user fee. State taxes More information. State taxes For more information about these procedures, see Regulations sections 301. State taxes 9100-1, 301. State taxes 9100-2, 301. State taxes 9100-3, Revenue Procedure 2013-4, section 6. State taxes 04, 2013-1 I. State taxes R. State taxes B. State taxes 126, and Revenue Procedure 2013-8, 2013-1 I. State taxes R. State taxes B. State taxes 237. State taxes See Revenue Procedure 2013-4 and Revenue Procedure 2013-8. State taxes Notification from the IRS. State taxes Organizations filing Form 1023 and satisfying all requirements of section 501(c)(3) will be notified of their exempt status in writing. State taxes Organizations Not Required To File Form 1023 Some organizations are not required to file Form 1023. State taxes These include: Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group. State taxes Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later). State taxes These organizations are exempt automatically if they meet the requirements of section 501(c)(3). State taxes Filing Form 1023 to establish exemption. State taxes If the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its exempt status, it should file Form 1023. State taxes By establishing its exemption, potential contributors are assured by the IRS that contributions will be deductible. State taxes A subordinate organization (other than a private foundation) covered by a group exemption letter does not have to submit a Form 1023 for itself. State taxes Private foundations. State taxes See Private Foundations and Public Charities, later in this chapter, for more information about the additional notice required from an organization in order for it not to be presumed to be a private foundation and for the additional information required from a private foundation claiming to be an operating foundation. State taxes Gross receipts test. State taxes For purposes of the gross receipts test, an organization normally does not have more than $5,000 annually in gross receipts if: During its first tax year the organization received gross receipts of $7,500 or less, During its first 2 years the organization had a total of $12,000 or less in gross receipts, and In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less. State taxes An organization with gross receipts more than the amounts in the gross receipts test, unless otherwise exempt from filing Form 1023, must file a Form 1023 within 90 days after the end of the period in which the amounts are exceeded. State taxes For example, an organization's gross receipts for its first tax year were less than $7,500, but at the end of its second tax year its gross receipts for the 2-year period were more than $12,000. State taxes The organization must file Form 1023 within 90 days after the end of its second tax year. State taxes If the organization had existed for at least 3 tax years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years will not be lost even if Form 1023 is not filed within 90 days after the close of the current tax year. State taxes However, the organization will not be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of Form 1023. State taxes Example. State taxes An organization is organized and operated exclusively for charitable purposes and is not a private foundation. State taxes It was incorporated on January 1, 2009, and files returns on a calendar-year basis. State taxes It did not file a Form 1023. State taxes The organization's gross receipts during the years 2009 through 2012 were as follows: 2009 $3,600 2010 2,900 2011 400 2012 12,600 The organization's total gross receipts for 2009, 2010, and 2011 were $6,900. State taxes Therefore, it did not have to file Form 1023 and is exempt for those years. State taxes However, for 2010, 2011, and 2012 the total gross receipts were $15,900. State taxes Therefore, the organization must file Form 1023 within 90 days after the end of its 2012 tax year. State taxes If it does not file within this time period, it will not be exempt under section 501(c)(3) for the period beginning with tax year 2012 ending when the Form 1023 is received by the IRS. State taxes The organization, however, will not lose its exempt status for the tax years ending before January 1, 2012. State taxes The IRS will consider applying the Commissioner's discretionary authority to extend the time for filing Form 1023. State taxes See the procedures for this extension discussed earlier. State taxes Articles of Organization Your organization must include a conformed copy of its articles of organization with the application for recognition of exemption. State taxes This may be its trust instrument, corporate charter, articles of association, or any other written instrument by which it is created. State taxes Organizational Test The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. State taxes These conditions for exemption are referred to as the organizational test. State taxes Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. State taxes Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3). State taxes The requirement that your organization's purposes and powers must be limited by the articles of organization is not satisfied if the limit is contained only in the bylaws or other rules or regulations. State taxes Moreover, the organizational test is not satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. State taxes Also, the test is not satisfied by the fact that your actual operations are for exempt purposes. State taxes In interpreting an organization's articles, the law of the state where the organization was created is controlling. State taxes If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities. State taxes The following are examples illustrating the organizational test. State taxes Example 1. State taxes Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). State taxes These articles appropriately limit the organization's purposes. State taxes The organization meets the organizational test. State taxes Example 2. State taxes An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. State taxes The organization will not be properly limited as to its purposes since all research is not scientific. State taxes The organization does not meet the organizational test. State taxes Example 3. State taxes An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). State taxes The organization meets the organizational test. State taxes Example 4. State taxes If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited. State taxes Example 5. State taxes If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. State taxes On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement will not be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law. State taxes Example 6. State taxes If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes will not be sufficiently limited. State taxes Such purposes are vague and may be accomplished other than in an exempt manner. State taxes Example 7. State taxes A stated purpose to operate a hospital does not meet the organizational test since it is not necessarily charitable. State taxes A hospital may or may not be exempt depending on the manner in which it is operated. State taxes Example 8. State taxes An organization that is expressly empowered by its articles to carry on social activities will not be sufficiently limited as to its power, even if its articles state that it is organized and will be operated exclusively for charitable purposes. State taxes Dedication and Distribution of Assets Assets of an organization must be permanently dedicated to an exempt purpose. State taxes This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. State taxes If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met. State taxes Dedication. State taxes To establish that your organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. State taxes Although reliance can be placed upon state law to establish permanent dedication of assets for exempt purposes, your organization's application probably can be processed much more rapidly if its articles of organization include a provision ensuring permanent dedication of assets for exempt purposes. State taxes Distribution. State taxes Revenue Procedure 82-2, 1982-1 C. State taxes B. State taxes 367, identifies the states and circumstances in which the IRS will not require an express provision for the distribution of assets upon dissolution in the articles of organization. State taxes The procedure also provides a sample of an acceptable dissolution provision for organizations required to have one. State taxes If a named beneficiary is to be the distributee, it must be one that would qualify and would be exempt within the meaning of section 501(c)(3) at the time the dissolution takes place. State taxes Since the named beneficiary at the time of dissolution may not be qualified, may not be in existence, or may be unwilling or unable to accept the assets of the dissolving organization, a provision should be made for distribution of the assets for one or more of the purposes specified in this chapter in the event of any such contingency. State taxes Sample articles of organization. State taxes See sample articles of organization in the Appendix in the back of this publication. State taxes Educational Organizations and Private Schools If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. State taxes In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. State taxes You must submit a copy of the pertinent contracts, agreements, publications, programs, etc. State taxes If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. State taxes See also Private Schools , discussed later. State taxes Educational Organizations The term educational relates to: The instruction or training of individuals for the purpose of improving or developing their capabilities, or The instruction of the public on subjects useful to individuals and beneficial to the community. State taxes Advocacy of a position. State taxes Advocacy of a particular position or viewpoint may be educational if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion. State taxes The mere presentation of unsupported opinion is not educational. State taxes Method not educational. State taxes The method used by an organization to develop and present its views is a factor in determining if an organization qualifies as educational within the meaning of section 501(c)(3). State taxes The following factors may indicate that the method is not educational. State taxes The presentation of viewpoints unsupported by facts is a significant part of the organization's communications. State taxes The facts that purport to support the viewpoint are distorted. State taxes The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of emotion than of objective evaluations. State taxes The approach used is not aimed at developing an understanding on the part of the audience because it does not consider their background or training. State taxes Exceptional circumstances, however, may exist where an organization's advocacy may be educational even if one or more of the factors listed above are present. State taxes Qualifying organizations. State taxes The following types of organizations may qualify as educational: An organization, such as a primary or secondary school, a college, or a professional or trade school, that has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled student body in attendance at a place where the educational activities are regularly carried on, An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs, An organization that presents a course of instruction by correspondence or through the use of television or radio, A museum, zoo, planetarium, symphony orchestra, or other similar organization, A nonprofit children's day-care center, and A credit counseling organization. State taxes College book stores, cafeterias, restaurants, etc. State taxes These and other on-campus organizations should submit information to show that they are controlled by and operated for the convenience of the faculty and student body or by whom they are controlled and whom they serve. State taxes Alumni association. State taxes An alumni association should establish that it is organized to promote the welfare of the university with which it is affiliated, is subject to the control of the university as to its policies and destination of funds, and is operated as an integral part of the university or is otherwise organized to promote the welfare of the college or university. State taxes If your association does not have these characteristics, it may still be exempt as a social club if it meets the requirements described in chapter 4, under 501(c)(7) - Social and Recreation Clubs . State taxes Athletic organization. State taxes This type of organization must submit evidence that it is engaged in activities such as directing and controlling interscholastic athletic competitions, conducting tournaments, and prescribing eligibility rules for contestants. State taxes If it is not so engaged, your organization may be exempt as a social club described in chapter 4. State taxes Raising funds to be used for travel and other activities to interview and persuade prospective students with outstanding athletic ability to attend a particular university does not show an exempt purpose. State taxes If your organization is not exempt as an educational organization, see Amateur Athletic Organizations , later in this chapter. State taxes Private Schools Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information. State taxes The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. State taxes (This information also must be projected, so far as may be feasible, for the next academic year. State taxes ) The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards. State taxes A list of the school's incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations. State taxes A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed. State taxes The public school district and county in which the school is located. State taxes How to determine racial composition. State taxes The racial composition of the student body, faculty, and administrative staff can be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty, or administrative staff to submit to the school information that the school otherwise does not require. State taxes Nevertheless, a statement of the method by which the racial composition was determined must be supplied. State taxes The identity of individual students or members of the faculty and administrative staff should not be included with this information. State taxes A school that is a state or municipal instrumentality (see Instrumentalities , near the beginning of this chapter), whether or not it qualifies for exemption under section 501(c)(3), is not considered to be a private school for purposes of the following discussion. State taxes Racially Nondiscriminatory Policy To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin. State taxes Also, the school must circulate information that clearly states the school's admission policies. State taxes A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs. State taxes The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin. State taxes The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. State taxes Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students. State taxes A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance is not discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy. State taxes A school that selects students on the basis of membership in a religious denomination or unit is not discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis. State taxes Policy statement. State taxes The school must include a statement of its racially nondiscriminatory policy in all its brochures and catalogs dealing with student admissions, programs, and scholarships. State taxes Also, the school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses to inform prospective students of its programs. State taxes Publicity requirement. State taxes The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. State taxes Selective communication of a racially nondiscriminatory policy that a school provides solely to leaders of racial groups will not be considered an effective means of communication to make the policy known to all segments of the community. State taxes To satisfy this requirement, the school must use one of the following two methods. State taxes Method one. State taxes The school can publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community. State taxes Such publication must be repeated at least once annually during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. State taxes When more than one community is served by a school, the school can publish the notice in those newspapers that are reasonably likely to be read by all racial segments in the communities that the school serves. State taxes If this method is used, the notice must meet the following printing requirements. State taxes It must appear in a section of the newspaper likely to be read by prospective students and their families. State taxes It must occupy at least 3 column inches. State taxes It must have its title printed in at least 12 point bold face type. State taxes It must have the remaining text printed in at least 8 point type. State taxes The following is an acceptable example of the notice: NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS The M School admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. State taxes It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. State taxes Method two. State taxes The school can use the broadcast media to publicize its racially nondiscriminatory policy if this use makes the policy known to all segments of the general community the school serves. State taxes If the school uses this method, it must provide documentation showing that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective. State taxes In this case, appropriate documentation would include copies of the tapes or scripts used and records showing that there was an adequate number of announcements. State taxes The documentation also would include proof that these announcements were made during hours when they were likely to be communicated to all segments of the general community, that they were long enough to convey the message clearly, and that they were broadcast on radio or television stations likely to be listened to by substantial numbers of members of all racial segments of the general community. State taxes Announcements must be made during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. State taxes Exceptions. State taxes The publicity requirements will not apply in the following situations. State taxes First, if for the preceding 3 years the enrollment of a parochial or other church-related school consists of students at least 75% of whom are members of the sponsoring religious denomination or unit, the school can make known its racially nondiscriminatory policy in whatever newspapers or circulars the religious denomination or unit uses in the communities from which the students are drawn. State taxes These newspapers and circulars can be distributed by a particular religious denomination or unit or by an association that represents a number of religious organizations of the same denomination. State taxes If, however, the school advertises in newspapers of general circulation in the community or communities from which its students are drawn and the second exception (discussed next) does not apply to the school, then it must comply with either of the publicity requirements explained earlier. State taxes Second, if a school customarily draws a substantial percentage of its students nationwide, worldwide, from a large geographic section or sections of the United States, or from local communities, and if the school follows a racially nondiscriminatory policy as to its students, the school may satisfy the publicity requirement by complying with the instructions explained earlier under Policy statement . State taxes The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students are not enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. State taxes The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case. State taxes The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. State taxes Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party. State taxes The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. State taxes The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. State taxes In this regard, it is each school's responsibility to determine whether either of the exceptions applies. State taxes Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. State taxes Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements. State taxes Facilities and programs. State taxes A school must be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner. State taxes Scholarship and loan programs. State taxes As a general rule, all scholarship or other comparable benefits obtainable at the school must be offered on a racially nondiscriminatory basis. State taxes This must be known throughout the general community being served by the school and should be referred to in its publicity. State taxes Financial assistance programs, as well as scholarships and loans made under financial assistance programs, that favor members of one or more racial minority groups and that do not significantly detract from or are designed to promote a school's racially nondiscriminatory policy will not adversely affect the school's exempt status. State taxes Certification. State taxes An individual authorized to take official action on behalf of a school that claims to be racially nondiscriminatory as to students must certify annually, under penalties of perjury, on Schedule E (Form 990 or 990-EZ) or Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax, whichever applies, that to the best of his or her knowledge and belief the school has satisfied all requirements that apply, as previously explained. State taxes Failure to comply with the guidelines ordinarily will result in the proposed revocation of the exempt status of a school. State taxes Recordkeeping requirements. State taxes With certain exceptions, given later, each exempt private school must maintain the following records for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition. State taxes Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year. State taxes Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis. State taxes Copies of all materials used by or on behalf of the school to solicit contributions. State taxes Copies of all brochures, catalogs, and advertising dealing with student admissions, programs, and scholarships. State taxes (Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in what publications their advertisements were placed. State taxes ) The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. State taxes However, a school cannot discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS. State taxes The IRS does not require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. State taxes Similarly, the IRS does not require a school to keep records prohibited under state or federal law. State taxes Exceptions. State taxes The school does not have to independently maintain these records for IRS use if both of the following are true. State taxes Substantially the same information has been included in a report or reports filed with an agency or agencies of federal, state, or local governments, and this information is current within 1 year. State taxes The school maintains copies of these reports from which this information is readily obtainable. State taxes If these reports do not include all of the information required, as discussed earlier, records providing such remaining information must be maintained by the school for IRS use. State taxes Failure to maintain records. State taxes Failure to maintain or to produce the required records and information, upon proper request, will create a presumption that the organization has failed to comply with these guidelines. State taxes Organizations Providing Insurance An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. State taxes However, this rule does not apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next. State taxes Charitable Risk Pools A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it: Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management, Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a), Is organized under state law authorizing this type of risk pooling, Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization), Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations, Is controlled by a board of directors elected by its members, and Is organized under documents requiring that: Each member be a section 501(c)(3) organization exempt from tax under section 501(a), Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b). State taxes Other Section 501(c)(3) Organizations In addition to the information required for all organizations, as described earlier, you should include any other information described in this section. State taxes Charitable Organizations If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. State taxes Some examples of this type of organization are those organized for: Relief of the poor, the distressed, or the underprivileged, Advancement of religion, Advancement of education or science, Erection or maintenance of public buildings, monuments, or works, Lessening the burdens of government, Lessening of neighborhood tensions, Elimination of prejudice and discrimination, Defense of human and civil rights secured by law, and Combating community deterioration and juvenile delinquency. State taxes The rest of this section contains a description of the information to be provided by certain specific organizations. State taxes This information is in addition to the required inclusions described in chapter 1, and other statements requested on Form 1023. State taxes Each of the following organizations must submit the information described. State taxes Charitable organization supporting education. State taxes Submit information showing how your organization supports education — for example, contributes to an existing educational institution, endows a professorial chair, contributes toward paying teachers' salaries, or contributes to an educational institution to enable it to carry on research. State taxes Scholarships. State taxes If the organization awards or plans to award scholarships, complete Schedule H of Form 1023. State taxes Also, submit the following: Criteria used for selecting recipients, including the rules of eligibility. State taxes How and by whom the recipients are or will be selected. State taxes If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school. State taxes If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer— Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary, Whether as a condition of the award the recipient must upon graduation accept employment with the company, and Whether the award will be continued even if the parent's employment ends. State taxes A copy of the scholarship application form and any brochures or literature describing the scholarship program. State taxes Hospital. State taxes If you are organized to operate a charitable hospital, complete and attach Section I of Schedule C, Form 1023. State taxes If your hospital was transferred to you from proprietary ownership, complete and attach Schedule G of Form 1023. State taxes You must attach a list showing: The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. State taxes Submit also an appraisal showing the fair rental value of the rented space. State taxes Clinic. State taxes If you are organized to operate a clinic, attach a statement including: A description of the facilities and services, To whom the services are offered, such as the public at large or a specific group, How charges are determined, such as on a profit basis, to recover costs, or at less than cost, By whom administered and controlled, Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and How compensation paid the professional staff is or will be determined. State taxes Home for the aged. State taxes If you are organized to operate a home for the aged, complete and attach Schedule F of Form 1023 and required attachments. State taxes Community nursing bureau. State taxes If you provide a nursing register or community nursing bureau, provide information showing that your organization will be operated as a community project and will receive its primary support from public contributions to maintain a nonprofit register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses for the benefit of hospitals, health agencies, doctors, and individuals. State taxes Organization providing loans. State taxes If you make, or will make, loans for charitable and educational purposes, submit the following information. State taxes An explanation of the circumstances under which such loans are, or will be, made. State taxes Criteria for selection, including the rules of eligibility. State taxes How and by whom the recipients are or will be selected. State taxes Manner of repayment of the loan. State taxes Security required, if any. State taxes Interest charged, if any, and when payable. State taxes Copies in duplicate of the loan application and any brochures or literature describing the loan program. State taxes Public-interest law firms. State taxes If your organization was formed to litigate in the public interest (as opposed to providing legal services to the poor), such as in the area of protection of the environment, you should submit the following information. State taxes How the litigation can reasonably be said to be representative of a broad public interest rather than a private one. State taxes Whether the organization will accept fees for its services. State taxes A description of the cases litigated or to be litigated and how they benefit the public generally. State taxes Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is neither controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter. State taxes Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm. State taxes Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor. State taxes Acceptance of attorneys' fees. State taxes A nonprofit public-interest law firm can accept attorneys' fees in public-interest cases if the fees are paid directly by its clients and the fees are not more than the actual costs incurred in the case. State taxes Upon undertaking a representation, the organization cannot withdraw from the case because the litigant is unable to pay the fee. State taxes Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms do not use the likelihood or probability of fee awards as a consideration in the selection of cases. State taxes All fee awards must be paid to the organization and not to its individual staff attorneys. State taxes Instead, a public-interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. State taxes Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis. State taxes The total amount of all attorneys' fees (court awarded and those received from clients) must not be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period. State taxes If, in order to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption. State taxes Religious Organizations To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines. State taxes That the particular religious beliefs of the organization are truly and sincerely held. State taxes That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy. State taxes Therefore, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. State taxes If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs. State taxes Churches. State taxes Although a church, its integrated auxiliaries, or a convention or association of churches is not required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. State taxes In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church. State taxes In determining whether an admittedly religious organization is also a church, the IRS does not accept every assertion that the organization is a church. State taxes Because beliefs and practices vary so widely, there is no single definition of the word church for tax purposes. State taxes The IRS considers the facts and circumstances of each organization applying for church status. State taxes Convention or association of churches. State taxes Any organization that is otherwise a convention or association of churches will not fail to qualify as a church merely because the membership of the organization includes individuals as well as churches or because the individuals have voting rights in the organization. State taxes Integrated auxiliaries. State taxes An organization is an integrated auxiliary of a church if all the following are true. State taxes The organization is described both in sections 501(c)(3) and 509(a)(1), 509(a)(2), or 509(a)(3). State taxes It is affiliated with a church or a convention or association of churches. State taxes It is internally supported. State taxes An organization is internally supported unless both of the following are true. State taxes It offers admissions, goods, services, or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost). State taxes It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. State taxes Special rule. State taxes Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy (1) and (2) shown earlier are integrated auxiliaries of a church even if they are not internally supported. State taxes In order for an organization (including a church and religious organization) to qualify for tax exemption, no part of its net earnings can inure to any individual. State taxes Although an individual is entitled to a charitable deduction for contributions to a church, the assignment or similar transfer of compensation for personal services to a church generally does not relieve a taxpayer of federal income tax liability on the compensation, regardless of the motivation behind the transfer. State taxes Scientific Organizations You must show that your organization's research will be carried on in the public interest. State taxes Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes. State taxes Aiding in the scientific education of college or university students. State taxes Obtaining scientific information that is published in a treatise, thesis, trade publication, or in any other form th