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Taxes On Unemployment

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Taxes On Unemployment

Taxes on unemployment Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. Taxes on unemployment Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. Taxes on unemployment Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. Taxes on unemployment Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. Taxes on unemployment However, a joint undertaking merely to share expenses is not a partnership. Taxes on unemployment For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Taxes on unemployment The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Taxes on unemployment Organizations formed after 1996. Taxes on unemployment   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. Taxes on unemployment An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Taxes on unemployment An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Taxes on unemployment An insurance company. Taxes on unemployment Certain banks. Taxes on unemployment An organization wholly owned by a state, local, or foreign government. Taxes on unemployment An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Taxes on unemployment Certain foreign organizations identified in section 301. Taxes on unemployment 7701-2(b)(8) of the regulations. Taxes on unemployment A tax-exempt organization. Taxes on unemployment A real estate investment trust. Taxes on unemployment An organization classified as a trust under section 301. Taxes on unemployment 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Taxes on unemployment Any other organization that elects to be classified as a corporation by filing Form 8832. Taxes on unemployment For more information, see the instructions for Form 8832. Taxes on unemployment Limited liability company. Taxes on unemployment   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Taxes on unemployment Unlike a partnership, none of the members of an LLC are personally liable for its debts. Taxes on unemployment An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. Taxes on unemployment 7701-3. Taxes on unemployment See Form 8832 and section 301. Taxes on unemployment 7701-3 of the regulations for more details. Taxes on unemployment A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Taxes on unemployment Organizations formed before 1997. Taxes on unemployment   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. Taxes on unemployment Community property. Taxes on unemployment    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. Taxes on unemployment They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. Taxes on unemployment A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Taxes on unemployment   A qualified entity is a business entity that meets all the following requirements. Taxes on unemployment The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. Taxes on unemployment No person other than one or both spouses would be considered an owner for federal tax purposes. Taxes on unemployment The business entity is not treated as a corporation. Taxes on unemployment   For more information about community property, see Publication 555, Community Property. Taxes on unemployment Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Taxes on unemployment Family Partnership Members of a family can be partners. Taxes on unemployment However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Taxes on unemployment If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. Taxes on unemployment If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Taxes on unemployment They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. Taxes on unemployment Capital is material. Taxes on unemployment   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Taxes on unemployment Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Taxes on unemployment Capital is not material. Taxes on unemployment   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. Taxes on unemployment Capital interest. Taxes on unemployment   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. Taxes on unemployment The owner withdraws from the partnership. Taxes on unemployment The partnership liquidates. Taxes on unemployment   The mere right to share in earnings and profits is not a capital interest in the partnership. Taxes on unemployment Gift of capital interest. Taxes on unemployment   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. Taxes on unemployment It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Taxes on unemployment The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. Taxes on unemployment Purchase. Taxes on unemployment   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. Taxes on unemployment The fair market value of the purchased interest is considered donated capital. Taxes on unemployment For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Taxes on unemployment Example. Taxes on unemployment A father sold 50% of his business to his son. Taxes on unemployment The resulting partnership had a profit of $60,000. Taxes on unemployment Capital is a material income-producing factor. Taxes on unemployment The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Taxes on unemployment The $24,000 must be allocated to the father as compensation. Taxes on unemployment Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. Taxes on unemployment The son's share of partnership profit cannot be more than $18,000. Taxes on unemployment Business owned and operated by spouses. Taxes on unemployment   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. Taxes on unemployment If so, they should report income or loss from the business on Form 1065. Taxes on unemployment They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Taxes on unemployment However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Taxes on unemployment Qualified Joint Venture Election. Taxes on unemployment   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. Taxes on unemployment A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. Taxes on unemployment   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. Taxes on unemployment All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Taxes on unemployment Each spouse takes into account his or her respective share of these items as a sole proprietor. Taxes on unemployment Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Taxes on unemployment For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. Taxes on unemployment e. Taxes on unemployment , based on their respective interests in the venture). Taxes on unemployment   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Taxes on unemployment Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Taxes on unemployment   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Taxes on unemployment However, this may not be true if either spouse exceeds the social security tax limitation. Taxes on unemployment   For more information on qualified joint ventures, go to IRS. Taxes on unemployment gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Taxes on unemployment ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Taxes on unemployment The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Taxes on unemployment The agreement or modifications can be oral or written. Taxes on unemployment Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. Taxes on unemployment This filing date does not include any extension of time. Taxes on unemployment If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Taxes on unemployment Terminating a Partnership A partnership terminates when one of the following events takes place. Taxes on unemployment All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. Taxes on unemployment At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. Taxes on unemployment Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. Taxes on unemployment See section 1. Taxes on unemployment 708-1(b) of the regulations for more information on the termination of a partnership. Taxes on unemployment For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Taxes on unemployment 708-1(c) and 1. Taxes on unemployment 708-1(d) of the regulations. Taxes on unemployment Date of termination. Taxes on unemployment   The partnership's tax year ends on the date of termination. Taxes on unemployment For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Taxes on unemployment For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. Taxes on unemployment Short period return. Taxes on unemployment   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Taxes on unemployment The return is due the 15th day of the fourth month following the date of termination. Taxes on unemployment See Partnership Return (Form 1065), later, for information about filing Form 1065. Taxes on unemployment Conversion of partnership into limited liability company (LLC). Taxes on unemployment   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Taxes on unemployment The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. Taxes on unemployment   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Taxes on unemployment Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Taxes on unemployment If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Taxes on unemployment For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Taxes on unemployment   The same rules apply if an LLC classified as a partnership is converted into a partnership. Taxes on unemployment IRS e-file (Electronic Filing) Please click here for the text description of the image. Taxes on unemployment e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). Taxes on unemployment Other partnerships generally have the option to file electronically. Taxes on unemployment For details about IRS e-file, see the Form 1065 instructions. Taxes on unemployment Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. Taxes on unemployment All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. Taxes on unemployment However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Taxes on unemployment Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. Taxes on unemployment Investing partnership. Taxes on unemployment   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. Taxes on unemployment They own the property as co-owners. Taxes on unemployment They reserve the right separately to take or dispose of their shares of any property acquired or retained. Taxes on unemployment They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Taxes on unemployment Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. Taxes on unemployment Operating agreement partnership. Taxes on unemployment   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. Taxes on unemployment They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Taxes on unemployment They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Taxes on unemployment They do not jointly sell services or the property produced or extracted. Taxes on unemployment Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. Taxes on unemployment However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. Taxes on unemployment Electing the exclusion. Taxes on unemployment   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. Taxes on unemployment This filing date includes any extension of time. Taxes on unemployment See Regulations section 1. Taxes on unemployment 761-2(b) for the procedures to follow. Taxes on unemployment Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. Taxes on unemployment The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Taxes on unemployment The return must be signed by a general partner. Taxes on unemployment If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Taxes on unemployment A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. Taxes on unemployment See the Instructions for Form 1065 for more information about who must file Form 1065. Taxes on unemployment Partnership Distributions Partnership distributions include the following. Taxes on unemployment A withdrawal by a partner in anticipation of the current year's earnings. Taxes on unemployment A distribution of the current year's or prior years' earnings not needed for working capital. Taxes on unemployment A complete or partial liquidation of a partner's interest. Taxes on unemployment A distribution to all partners in a complete liquidation of the partnership. Taxes on unemployment A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Taxes on unemployment If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Taxes on unemployment Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. Taxes on unemployment Effect on partner's basis. Taxes on unemployment   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. Taxes on unemployment See Adjusted Basis under Basis of Partner's Interest, later. Taxes on unemployment Effect on partnership. Taxes on unemployment   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Taxes on unemployment The partnership may be able to elect to adjust the basis of its undistributed property. Taxes on unemployment Certain distributions treated as a sale or exchange. Taxes on unemployment   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Taxes on unemployment Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Taxes on unemployment Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Taxes on unemployment   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Taxes on unemployment   This treatment does not apply to the following distributions. Taxes on unemployment A distribution of property to the partner who contributed the property to the partnership. Taxes on unemployment Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. Taxes on unemployment Substantially appreciated inventory items. Taxes on unemployment   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. Taxes on unemployment However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. Taxes on unemployment Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Taxes on unemployment Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Taxes on unemployment If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. Taxes on unemployment For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Taxes on unemployment Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Taxes on unemployment Example. Taxes on unemployment The adjusted basis of Jo's partnership interest is $14,000. Taxes on unemployment She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. Taxes on unemployment Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Taxes on unemployment Any gain on the land will be recognized when she sells or otherwise disposes of it. Taxes on unemployment The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Taxes on unemployment Marketable securities treated as money. Taxes on unemployment   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Taxes on unemployment This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Taxes on unemployment   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). Taxes on unemployment   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Taxes on unemployment Loss on distribution. Taxes on unemployment   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Taxes on unemployment The adjusted basis of the partner's interest in the partnership exceeds the distribution. Taxes on unemployment The partner's entire interest in the partnership is liquidated. Taxes on unemployment The distribution is in money, unrealized receivables, or inventory items. Taxes on unemployment   There are exceptions to these general rules. Taxes on unemployment See the following discussions. Taxes on unemployment Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Taxes on unemployment Distribution of partner's debt. Taxes on unemployment   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). Taxes on unemployment   The partner is treated as having satisfied the debt for its fair market value. Taxes on unemployment If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. Taxes on unemployment   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. Taxes on unemployment Net precontribution gain. Taxes on unemployment   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. Taxes on unemployment   The gain recognized is the lesser of the following amounts. Taxes on unemployment The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. Taxes on unemployment The “net precontribution gain” of the partner. Taxes on unemployment This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. Taxes on unemployment For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Taxes on unemployment   The character of the gain is determined by reference to the character of the net precontribution gain. Taxes on unemployment This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. Taxes on unemployment For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Taxes on unemployment Effect on basis. Taxes on unemployment   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Taxes on unemployment Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Taxes on unemployment See Basis of Partner's Interest , later. Taxes on unemployment   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. Taxes on unemployment Exceptions. Taxes on unemployment   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. Taxes on unemployment For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. Taxes on unemployment   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. Taxes on unemployment Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. Taxes on unemployment However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Taxes on unemployment Example 1. Taxes on unemployment The adjusted basis of Emily's partnership interest is $30,000. Taxes on unemployment She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Taxes on unemployment Her basis for the property is $20,000. Taxes on unemployment Example 2. Taxes on unemployment The adjusted basis of Steve's partnership interest is $10,000. Taxes on unemployment He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Taxes on unemployment His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Taxes on unemployment Complete liquidation of partner's interest. Taxes on unemployment   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. Taxes on unemployment Partner's holding period. Taxes on unemployment   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Taxes on unemployment If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Taxes on unemployment Basis divided among properties. Taxes on unemployment   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. Taxes on unemployment For property distributed after August 5, 1997, allocate the basis using the following rules. Taxes on unemployment Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. Taxes on unemployment If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Taxes on unemployment Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. Taxes on unemployment If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Taxes on unemployment If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Taxes on unemployment Allocating a basis increase. Taxes on unemployment   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Taxes on unemployment If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Taxes on unemployment Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Taxes on unemployment Example. Taxes on unemployment Eun's basis in her partnership interest is $55,000. Taxes on unemployment In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Taxes on unemployment Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Taxes on unemployment Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Taxes on unemployment To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). Taxes on unemployment This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Taxes on unemployment She first allocates $35,000 to property A (its unrealized appreciation). Taxes on unemployment The remaining $5,000 is allocated between the properties based on their fair market values. Taxes on unemployment $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Taxes on unemployment Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). Taxes on unemployment Allocating a basis decrease. Taxes on unemployment   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Taxes on unemployment Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Taxes on unemployment If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. Taxes on unemployment Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Taxes on unemployment Example. Taxes on unemployment Armando's basis in his partnership interest is $20,000. Taxes on unemployment In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Taxes on unemployment Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Taxes on unemployment Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Taxes on unemployment To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). Taxes on unemployment This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Taxes on unemployment He allocates the entire $10,000 to property D (its unrealized depreciation). Taxes on unemployment Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Taxes on unemployment Distributions before August 6, 1997. Taxes on unemployment   For property distributed before August 6, 1997, allocate the basis using the following rules. Taxes on unemployment Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. Taxes on unemployment If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. Taxes on unemployment Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Taxes on unemployment Partner's interest more than partnership basis. Taxes on unemployment   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. Taxes on unemployment Special adjustment to basis. Taxes on unemployment   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. Taxes on unemployment To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Taxes on unemployment Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Taxes on unemployment   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. Taxes on unemployment However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. Taxes on unemployment   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. Taxes on unemployment If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. Taxes on unemployment   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. Taxes on unemployment The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. Taxes on unemployment Example. Taxes on unemployment Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Taxes on unemployment At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. Taxes on unemployment Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. Taxes on unemployment Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. Taxes on unemployment The value of the inventory received was 25% of the value of all partnership inventory. Taxes on unemployment (It is immaterial whether the inventory he received was on hand when he acquired his interest. Taxes on unemployment ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. Taxes on unemployment His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). Taxes on unemployment The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. Taxes on unemployment The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). Taxes on unemployment His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Taxes on unemployment The remaining $11,500 is allocated to his new basis for the other property he received. Taxes on unemployment Mandatory adjustment. Taxes on unemployment   A partner does not always have a choice of making this special adjustment to basis. Taxes on unemployment The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. Taxes on unemployment The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Taxes on unemployment If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. Taxes on unemployment The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Taxes on unemployment Required statement. Taxes on unemployment   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. Taxes on unemployment The statement must provide information necessary for the partner to compute the special basis adjustment. Taxes on unemployment Marketable securities. Taxes on unemployment   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. Taxes on unemployment See Marketable securities treated as money under Partner's Gain or Loss, earlier. Taxes on unemployment The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Taxes on unemployment Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. Taxes on unemployment These transactions include the following. Taxes on unemployment Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. Taxes on unemployment Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. Taxes on unemployment Payments by accrual basis partnership to cash basis partner. Taxes on unemployment   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. Taxes on unemployment However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Taxes on unemployment Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Taxes on unemployment A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. Taxes on unemployment This treatment is for purposes of determining gross income and deductible business expenses only. Taxes on unemployment For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Taxes on unemployment Guaranteed payments are not subject to income tax withholding. Taxes on unemployment The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Taxes on unemployment They are also listed on Schedules K and K-1 of the partnership return. Taxes on unemployment The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. Taxes on unemployment Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Taxes on unemployment Generally, organizational and syndication expenses are not deductible by the partnership. Taxes on unemployment However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). Taxes on unemployment Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. Taxes on unemployment Minimum payment. Taxes on unemployment   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Taxes on unemployment Example. Taxes on unemployment Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Taxes on unemployment The partnership has net income of $20,000. Taxes on unemployment Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Taxes on unemployment The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Taxes on unemployment Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. Taxes on unemployment If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. Taxes on unemployment Self-employed health insurance premiums. Taxes on unemployment   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Taxes on unemployment The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Taxes on unemployment However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Taxes on unemployment   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. Taxes on unemployment The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. Taxes on unemployment For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Taxes on unemployment Including payments in partner's income. Taxes on unemployment   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Taxes on unemployment Example 1. Taxes on unemployment Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Taxes on unemployment Her distributive share of the partnership income is 10%. Taxes on unemployment The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Taxes on unemployment She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Taxes on unemployment Example 2. Taxes on unemployment Lamont is a calendar year taxpayer who is a partner in a partnership. Taxes on unemployment The partnership uses a fiscal year that ended January 31, 2013. Taxes on unemployment Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Taxes on unemployment He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Taxes on unemployment Payments resulting in loss. Taxes on unemployment   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. Taxes on unemployment The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Taxes on unemployment Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Taxes on unemployment Losses. Taxes on unemployment   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Taxes on unemployment   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Taxes on unemployment   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. Taxes on unemployment   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Taxes on unemployment If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. Taxes on unemployment Gains. Taxes on unemployment   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. Taxes on unemployment More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Taxes on unemployment The property in the hands of the transferee immediately after the transfer is not a capital asset. Taxes on unemployment Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. Taxes on unemployment More than 50% ownership. Taxes on unemployment   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Taxes on unemployment An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. Taxes on unemployment An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Taxes on unemployment For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Taxes on unemployment If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. Taxes on unemployment However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. Taxes on unemployment Example. Taxes on unemployment Individuals A and B and Trust T are equal partners in Partnership ABT. Taxes on unemployment A's husband, AH, is the sole beneficiary of Trust T. Taxes on unemployment Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Taxes on unemployment As a result, A is a more-than-50% partner. Taxes on unemployment This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. Taxes on unemployment More information. Taxes on unemployment   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Taxes on unemployment Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. Taxes on unemployment This applies whether a partnership is being formed or is already operating. Taxes on unemployment The partnership's holding period for the property includes the partner's holding period. Taxes on unemployment The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. Taxes on unemployment The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Taxes on unemployment Disguised sales. Taxes on unemployment   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Taxes on unemployment The distribution would not have been made but for the contribution. Taxes on unemployment The partner's right to the distribution does not depend on the success of partnership operations. Taxes on unemployment   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Taxes on unemployment However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. Taxes on unemployment If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. Taxes on unemployment Form 8275 required. Taxes on unemployment   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. Taxes on unemployment For exceptions to this requirement, see section 1. Taxes on unemployment 707-3(c)(2) of the regulations. Taxes on unemployment   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. Taxes on unemployment   Form 8275 must include the following information. Taxes on unemployment A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Taxes on unemployment A description of the transferred property or money, including its value. Taxes on unemployment A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Taxes on unemployment See section 1. Taxes on unemployment 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. Taxes on unemployment Contribution to partnership treated as investment company. Taxes on unemployment   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. Taxes on unemployment   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. Taxes on unemployment These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Taxes on unemployment For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Taxes on unemployment Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Taxes on unemployment   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Taxes on unemployment Contribution to foreign partnership. Taxes on unemployment   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. Taxes on unemployment Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Taxes on unemployment The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. Taxes on unemployment   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. Taxes on unemployment See the form instructions for more information. Taxes on unemployment Basis of contributed property. Taxes on unemployment   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. Taxes on unemployment Allocations to account for built-in gain or loss. Taxes on unemployment   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Taxes on unemployment The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. Taxes on unemployment This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Taxes on unemployment   The partnership can use different allocation methods for different items of contributed property. Taxes on unemployment A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Taxes on unemployment See section 1. Taxes on unemployment 704-3 of the regulations for allocation methods generally considered reasonable. Taxes on unemployment   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Taxes on unemployment If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. Taxes on unemployment However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. Taxes on unemployment Example. Taxes on unemployment Areta and Sofia formed an equal partnership. Taxes on unemployment Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. Taxes on unemployment The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Taxes on unemployment In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Taxes on unemployment Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. Taxes on unemployment To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Taxes on unemployment However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. Taxes on unemployment The entire $400 must be allocated to Areta. Taxes on unemployment Distribution of contributed property to another partner. Taxes on unemployment   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. Taxes on unemployment   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. Taxes on unemployment This amount is the difference between the property's basis and its fair market value at the time of contribution. Taxes on unemployment The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Taxes on unemployment Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. Taxes on unemployment Disposition of certain contributed property. Taxes on unemployment   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Taxes on unemployment Unrealized receivables. Taxes on unemployment If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Taxes on unemployment Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Taxes on unemployment When reading the definition, substitute “partner” for “partnership. Taxes on unemployment ” Inventory items. Taxes on unemployment If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Taxes on unemployment Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Taxes on unemployment Capital loss property. Taxes on unemployment If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. Taxes on unemployment The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. Taxes on unemployment Substituted basis property. Taxes on unemployment If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. Taxes on unemployment Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Taxes on unemployment Capital interest. Taxes on unemployment   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Taxes on unemployment This determination generally is made at the time of receipt of the partnership interest. Taxes on unemployment The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. Taxes on unemployment The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Taxes on unemployment   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Taxes on unemployment Profits interest. Taxes on unemployment   A profits interest is a partnership interest other than a capital interest. Taxes on unemployment If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. Taxes on unemployment However, this does not apply in the following situations. Taxes on unemployment The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. Taxes on unemployment Within 2 years of receipt, the partner disposes of the profits interest. Taxes on unemployment The profits interest is a limited partnership interest in a publicly traded partnership. Taxes on unemployment   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Taxes on unemployment Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Taxes on unemployment If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Taxes on unemployment Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Taxes on unemployment Interest acquired by gift, etc. Taxes on unemployment   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. Taxes on unemployment Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). Taxes on unemployment The basis of an interest in a partnership is increased or decreased by certain items. Taxes on unemployment Increases. Taxes on unemployment   A partner's basis is increased by the following items. Taxes on unemployment The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Taxes on unemployment The partner's distributive share of taxable and nontaxable partnership income. Taxes on unemployment The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Taxes on unemployment Decreases. Taxes on unemployment   The partner's basis is decreased (but never below zero) by the following items. Taxes on unemployment The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. Taxes on unemployment The partner's distributive share of the partnership losses (including capital losses). Taxes on unemployment The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Taxes on unemployment This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. Taxes on unemployment The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. Taxes on unemployment Partner's liabilities assumed by partnership. Taxes on unemployment   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. Taxes on unemployment This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Taxes on unemployment The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Taxes on unemployment See Effect of Partnership Liabilities , later. Taxes on unemployment Example 1. Taxes on unemployment Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. Taxes on unemployment The partnership assumed payment of the mortgage. Taxes on unemployment The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. Taxes on unemployment If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Taxes on unemployment The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. Taxes on unemployment However, this gain would not increase the basis of his partnership interest. Taxes on unemployment Book value of partner's interest. Taxes on unemployment   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. Taxes on unemployment Example. Taxes on unemployment Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Taxes on unemployment His partner contributes $1,000 cash. Taxes on unemployment While each partner has increased his capital account by $1,000, which will be re
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Page Last Reviewed or Updated: 05-Feb-2014

The Taxes On Unemployment

Taxes on unemployment Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Taxes on unemployment S. Taxes on unemployment Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Taxes on unemployment Full-time student. Taxes on unemployment Adjusted gross income. Taxes on unemployment More information. Taxes on unemployment Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Taxes on unemployment Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Taxes on unemployment Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Taxes on unemployment You are a member of a religious order who has taken a vow of poverty. Taxes on unemployment You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Taxes on unemployment See Exemption From Self-Employment (SE) Tax , later. Taxes on unemployment You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Taxes on unemployment For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Taxes on unemployment Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Taxes on unemployment See Ministerial Services , later. Taxes on unemployment Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Taxes on unemployment However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Taxes on unemployment For the specific services covered, see Ministerial Services , later. Taxes on unemployment Ministers defined. Taxes on unemployment   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Taxes on unemployment Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Taxes on unemployment   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Taxes on unemployment Employment status for other tax purposes. Taxes on unemployment   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Taxes on unemployment For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Taxes on unemployment Common-law employee. Taxes on unemployment   Under common-law rules, you are considered either an employee or a self-employed person. Taxes on unemployment Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Taxes on unemployment For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Taxes on unemployment   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Taxes on unemployment However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Taxes on unemployment Example. Taxes on unemployment A church hires and pays you a salary to perform ministerial services subject to its control. Taxes on unemployment Under the common-law rules, you are an employee of the church while performing those services. Taxes on unemployment Form SS-8. Taxes on unemployment   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Taxes on unemployment Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Taxes on unemployment See Ministerial Services , later. Taxes on unemployment However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Taxes on unemployment Vow of poverty. Taxes on unemployment   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Taxes on unemployment You do not need to request a separate exemption. Taxes on unemployment For income tax purposes, the earnings are tax free to you. Taxes on unemployment Your earnings are considered the income of the religious order. Taxes on unemployment Services covered under FICA at the election of the order. Taxes on unemployment   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Taxes on unemployment Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Taxes on unemployment   The order or subdivision elects coverage by filing Form SS-16. Taxes on unemployment The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Taxes on unemployment If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Taxes on unemployment You do not pay any of the FICA tax. Taxes on unemployment Services performed outside the order. Taxes on unemployment   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Taxes on unemployment   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Taxes on unemployment You may, however, be able to take a charitable deduction for the amount you turn over to the order. Taxes on unemployment See Publication 526, Charitable Contributions. Taxes on unemployment Rulings. Taxes on unemployment   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Taxes on unemployment To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Taxes on unemployment R. Taxes on unemployment B. Taxes on unemployment 1, available at www. Taxes on unemployment irs. Taxes on unemployment gov/irb/2014-1_IRB/ar05. Taxes on unemployment html. Taxes on unemployment Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Taxes on unemployment However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Taxes on unemployment Practitioners. Taxes on unemployment   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Taxes on unemployment State law specifically exempts Christian Science practitioners from licensing requirements. Taxes on unemployment   Some Christian Science practitioners also are Christian Science teachers or lecturers. Taxes on unemployment Income from teaching or lecturing is considered the same as income from their work as practitioners. Taxes on unemployment Readers. Taxes on unemployment   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Taxes on unemployment Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Taxes on unemployment Some exceptions are discussed next. Taxes on unemployment Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Taxes on unemployment If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Taxes on unemployment Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Taxes on unemployment 28 during the tax year. Taxes on unemployment However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Taxes on unemployment Churches and church organizations make this election by filing two copies of Form 8274. Taxes on unemployment For more information about making this election, see Form 8274. Taxes on unemployment Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Taxes on unemployment This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Taxes on unemployment Make this choice by filing Form 4029. Taxes on unemployment See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Taxes on unemployment U. Taxes on unemployment S. Taxes on unemployment Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Taxes on unemployment Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Taxes on unemployment S. Taxes on unemployment social security system. Taxes on unemployment To determine your alien status, see Publication 519, U. Taxes on unemployment S. Taxes on unemployment Tax Guide for Aliens. Taxes on unemployment Residents of Puerto Rico, the U. Taxes on unemployment S. Taxes on unemployment Virgin Islands, Guam, the CNMI, and American Samoa. Taxes on unemployment   If you are a resident of one of these U. Taxes on unemployment S. Taxes on unemployment possessions but not a U. Taxes on unemployment S. Taxes on unemployment citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Taxes on unemployment For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Taxes on unemployment Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Taxes on unemployment Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Taxes on unemployment Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Taxes on unemployment The exemption does not apply to any other income. Taxes on unemployment The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Taxes on unemployment Ministers Most services you perform as a minister, priest, rabbi, etc. Taxes on unemployment , are ministerial services. Taxes on unemployment These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Taxes on unemployment You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Taxes on unemployment A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Taxes on unemployment Services for nonreligious organizations. Taxes on unemployment   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Taxes on unemployment Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Taxes on unemployment   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Taxes on unemployment Services that are not part of your ministry. Taxes on unemployment   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Taxes on unemployment The following are not ministerial services. Taxes on unemployment Services you perform for nonreligious organizations other than the services stated above. Taxes on unemployment Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Taxes on unemployment These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Taxes on unemployment (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Taxes on unemployment ) Services you perform in a government-owned and operated hospital. Taxes on unemployment (These services are considered performed by a government employee, not by a minister as part of the ministry. Taxes on unemployment ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Taxes on unemployment Books or articles. Taxes on unemployment   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Taxes on unemployment   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Taxes on unemployment Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Taxes on unemployment The services are considered ministerial because you perform them as an agent of the order. Taxes on unemployment For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Taxes on unemployment However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Taxes on unemployment Effect of employee status. Taxes on unemployment   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Taxes on unemployment In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Taxes on unemployment This result is true even if you have taken a vow of poverty. Taxes on unemployment Example. Taxes on unemployment Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Taxes on unemployment They renounce all claims to their earnings. Taxes on unemployment The earnings belong to the order. Taxes on unemployment Pat is a licensed attorney. Taxes on unemployment The superiors of the order instructed her to get a job with a law firm. Taxes on unemployment Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Taxes on unemployment Chris is a secretary. Taxes on unemployment The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Taxes on unemployment Chris took the job and gave all his earnings to the order. Taxes on unemployment Pat's services are not duties required by the order. Taxes on unemployment Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Taxes on unemployment Chris' services are duties required by the order. Taxes on unemployment He is acting as an agent of the order and not as an employee of a third party. Taxes on unemployment He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Taxes on unemployment Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Taxes on unemployment Amounts you receive for performing these services are generally subject to SE tax. Taxes on unemployment You may request an exemption from SE tax, discussed next, which applies only to those services. Taxes on unemployment Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Taxes on unemployment Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Taxes on unemployment They do not have to request the exemption. Taxes on unemployment Who cannot be exempt. Taxes on unemployment   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Taxes on unemployment These elections are irrevocable. Taxes on unemployment You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Taxes on unemployment You elected before 1968 to be covered under social security for your ministerial services. Taxes on unemployment Requesting exemption. Taxes on unemployment    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Taxes on unemployment More detailed explanations follow. Taxes on unemployment If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Taxes on unemployment It does not apply to any other self-employment income. Taxes on unemployment Table 2. Taxes on unemployment The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Taxes on unemployment You file Form 4361, described below under Requesting Exemption—Form 4361 . Taxes on unemployment You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Taxes on unemployment You file for other than economic reasons. Taxes on unemployment You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Taxes on unemployment This requirement does not apply to Christian Science practitioners or readers. Taxes on unemployment You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Taxes on unemployment You establish that the organization is a church or a convention or association of churches. Taxes on unemployment You did not make an election discussed earlier under Who cannot be exempt . Taxes on unemployment You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Taxes on unemployment Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Taxes on unemployment The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Taxes on unemployment If it is approved, keep the approved copy of Form 4361 in your permanent records. Taxes on unemployment When to file. Taxes on unemployment   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Taxes on unemployment You have net earnings from self-employment of at least $400. Taxes on unemployment Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Taxes on unemployment The 2 years do not have to be consecutive tax years. Taxes on unemployment    The approval process can take some time, so you should file Form 4361 as soon as possible. Taxes on unemployment Example 1. Taxes on unemployment Rev. Taxes on unemployment Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Taxes on unemployment He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Taxes on unemployment However, if Rev. Taxes on unemployment Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Taxes on unemployment Example 2. Taxes on unemployment Rev. Taxes on unemployment Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Taxes on unemployment She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Taxes on unemployment However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Taxes on unemployment Example 3. Taxes on unemployment In 2011, Rev. Taxes on unemployment David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Taxes on unemployment In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Taxes on unemployment Therefore, he had no net self-employment earnings as a minister in 2012. Taxes on unemployment Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Taxes on unemployment In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Taxes on unemployment Rev. Taxes on unemployment Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Taxes on unemployment Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Taxes on unemployment Death of individual. Taxes on unemployment   The right to file an application for exemption ends with an individual's death. Taxes on unemployment A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Taxes on unemployment Effective date of exemption. Taxes on unemployment   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Taxes on unemployment Once the exemption is approved, it is irrevocable. Taxes on unemployment Example. Taxes on unemployment Rev. Taxes on unemployment Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Taxes on unemployment She files an application for exemption on February 20, 2014. Taxes on unemployment If an exemption is granted, it is effective for 2010 and the following years. Taxes on unemployment Refunds of SE tax. Taxes on unemployment   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Taxes on unemployment Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Taxes on unemployment A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Taxes on unemployment   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Taxes on unemployment Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Taxes on unemployment Exception. Taxes on unemployment   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Taxes on unemployment However, if you pay your benefits back, you may be considered for exemption. Taxes on unemployment Contact your local Social Security Administration office to find out the amount you must pay back. Taxes on unemployment Eligibility requirements. Taxes on unemployment   To claim this exemption from SE tax, all the following requirements must be met. Taxes on unemployment You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Taxes on unemployment As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Taxes on unemployment You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Taxes on unemployment The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Taxes on unemployment Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Taxes on unemployment The sect or division must complete part of the form. Taxes on unemployment The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Taxes on unemployment If it is approved, keep the approved copy of Form 4029 in your permanent records. Taxes on unemployment When to file. Taxes on unemployment   You can file Form 4029 at any time. Taxes on unemployment   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Taxes on unemployment See Effective date of exemption next for information on when the newly approved exemption would become effective. Taxes on unemployment    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Taxes on unemployment Effective date of exemption. Taxes on unemployment   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Taxes on unemployment (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Taxes on unemployment )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Taxes on unemployment You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Taxes on unemployment The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Taxes on unemployment Refunds of SE tax paid. Taxes on unemployment    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Taxes on unemployment For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Taxes on unemployment Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Taxes on unemployment Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Taxes on unemployment A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Taxes on unemployment If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Taxes on unemployment Information for employers. Taxes on unemployment   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Taxes on unemployment   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Taxes on unemployment Form W-2. Taxes on unemployment   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Taxes on unemployment ” Do not make any entries in boxes 3, 4, 5, or 6. Taxes on unemployment Forms 941, 943, and 944. Taxes on unemployment   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Taxes on unemployment Instead, follow the instructions given below. Taxes on unemployment Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Taxes on unemployment Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Taxes on unemployment Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Taxes on unemployment Effective date. Taxes on unemployment   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Taxes on unemployment The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Taxes on unemployment Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Taxes on unemployment Regular method. Taxes on unemployment Nonfarm optional method. Taxes on unemployment You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Taxes on unemployment Blank worksheets are in the back of this publication, after the Comprehensive Example. Taxes on unemployment Regular Method Most people use the regular method. Taxes on unemployment Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Taxes on unemployment Then, subtract your allowable business deductions and multiply the difference by 92. Taxes on unemployment 35% (. Taxes on unemployment 9235). Taxes on unemployment Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Taxes on unemployment If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Taxes on unemployment 35% (. Taxes on unemployment 9235). Taxes on unemployment Do not reduce your wages by any business deductions when making this computation. Taxes on unemployment Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Taxes on unemployment If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Taxes on unemployment Amounts included in gross income. Taxes on unemployment   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Taxes on unemployment , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Taxes on unemployment This amount is also subject to income tax. Taxes on unemployment   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Taxes on unemployment Example. Taxes on unemployment Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Taxes on unemployment The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Taxes on unemployment His church owns a parsonage that has a fair rental value of $12,000 per year. Taxes on unemployment The church gives Pastor Adams the use of the parsonage. Taxes on unemployment He is not exempt from SE tax. Taxes on unemployment He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Taxes on unemployment The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Taxes on unemployment Overseas duty. Taxes on unemployment   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Taxes on unemployment S. Taxes on unemployment citizen or resident alien serving abroad and living in a foreign country. Taxes on unemployment   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Taxes on unemployment Example. Taxes on unemployment Diane Jones was the minister of a U. Taxes on unemployment S. Taxes on unemployment church in Mexico. Taxes on unemployment She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Taxes on unemployment The United States does not have a social security agreement with Mexico, so Mrs. Taxes on unemployment Jones is subject to U. Taxes on unemployment S. Taxes on unemployment SE tax and must include $35,000 when figuring net earnings from self-employment. Taxes on unemployment Specified U. Taxes on unemployment S. Taxes on unemployment possessions. Taxes on unemployment    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Taxes on unemployment Also see Residents of Puerto Rico, the U. Taxes on unemployment S. Taxes on unemployment Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Taxes on unemployment S. Taxes on unemployment Citizens and Resident and Nonresident Aliens. Taxes on unemployment Amounts not included in gross income. Taxes on unemployment   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Taxes on unemployment Offerings that others made to the church. Taxes on unemployment Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Taxes on unemployment Pension payments or retirement allowances you receive for your past ministerial services. Taxes on unemployment The rental value of a parsonage or a parsonage allowance provided to you after you retire. Taxes on unemployment Allowable deductions. Taxes on unemployment   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Taxes on unemployment These are ministerial expenses you incurred while working other than as a common-law employee of the church. Taxes on unemployment They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Taxes on unemployment Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Taxes on unemployment   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Taxes on unemployment Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Taxes on unemployment Do not complete Schedule C or C-EZ (Form 1040). Taxes on unemployment However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Taxes on unemployment Employee reimbursement arrangements. Taxes on unemployment   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Taxes on unemployment Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Taxes on unemployment Accountable plans. Taxes on unemployment   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Taxes on unemployment Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Taxes on unemployment You must adequately account to your employer for these expenses within a reasonable period of time. Taxes on unemployment You must return any excess reimbursement or allowance within a reasonable period of time. Taxes on unemployment   The reimbursement is not reported on your Form W-2. Taxes on unemployment Generally, if your expenses equal your reimbursement, you have no deduction. Taxes on unemployment If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Taxes on unemployment Nonaccountable plan. Taxes on unemployment   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Taxes on unemployment In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Taxes on unemployment Excess reimbursements you fail to return to your employer. Taxes on unemployment Reimbursement of nondeductible expenses related to your employer's business. Taxes on unemployment   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Taxes on unemployment Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Taxes on unemployment   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Taxes on unemployment Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Taxes on unemployment If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Taxes on unemployment Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Taxes on unemployment The tax rate for the social security part is 12. Taxes on unemployment 4%. Taxes on unemployment In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Taxes on unemployment This tax rate is 2. Taxes on unemployment 9%. Taxes on unemployment The combined self-employment tax rate is 15. Taxes on unemployment 3%. Taxes on unemployment Additional Medicare Tax. Taxes on unemployment   Beginning in 2013, a 0. Taxes on unemployment 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Taxes on unemployment Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Taxes on unemployment A self-employment loss is not considered for purposes of this tax. Taxes on unemployment RRTA compensation is separately compared to the threshold. Taxes on unemployment For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Taxes on unemployment Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Taxes on unemployment In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Taxes on unemployment You may use the nonfarm optional method if you meet all the following tests. Taxes on unemployment You are self-employed on a regular basis. Taxes on unemployment You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Taxes on unemployment The net earnings can be from either farm or nonfarm earnings or both. Taxes on unemployment You have used this method less than 5 prior years. Taxes on unemployment (There is a 5-year lifetime limit. Taxes on unemployment ) The years do not have to be consecutive. Taxes on unemployment Your net nonfarm profits were: Less than $5,024, and Less than 72. Taxes on unemployment 189% of your gross nonfarm income. Taxes on unemployment If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Taxes on unemployment Table 3. Taxes on unemployment Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Taxes on unemployment . Taxes on unemployment . Taxes on unemployment THEN your net earnings are equal to . Taxes on unemployment . Taxes on unemployment . Taxes on unemployment $6,960 or less Two-thirds of your gross nonfarm income. Taxes on unemployment More than $6,960 $4,640. Taxes on unemployment Actual net earnings. Taxes on unemployment   Multiply your total earnings subject to SE tax by 92. Taxes on unemployment 35% (. Taxes on unemployment 9235) to get actual net earnings. Taxes on unemployment Actual net earnings are equivalent to net earnings under the “Regular Method. Taxes on unemployment ” More information. Taxes on unemployment   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Taxes on unemployment Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Taxes on unemployment Note. Taxes on unemployment For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Taxes on unemployment Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Taxes on unemployment Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Taxes on unemployment , in addition to your salary. Taxes on unemployment If the offering is made to the religious institution, it is not taxable to you. Taxes on unemployment Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Taxes on unemployment However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Taxes on unemployment For more information, see Publication 526. Taxes on unemployment Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Taxes on unemployment Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Taxes on unemployment This exclusion applies only for income tax purposes. Taxes on unemployment It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Taxes on unemployment Designation requirement. Taxes on unemployment   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Taxes on unemployment It must designate a definite amount. Taxes on unemployment It cannot determine the amount of the housing allowance at a later date. Taxes on unemployment If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Taxes on unemployment   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Taxes on unemployment The local congregation must officially designate the part of your salary that is a housing allowance. Taxes on unemployment However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Taxes on unemployment Rental allowances. Taxes on unemployment   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Taxes on unemployment   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Taxes on unemployment Fair rental value of parsonage. Taxes on unemployment   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Taxes on unemployment However, the exclusion cannot be more than the reasonable pay for your services. Taxes on unemployment If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Taxes on unemployment Example. Taxes on unemployment Rev. Taxes on unemployment Joanna Baker is a full-time minister. Taxes on unemployment The church allows her to use a parsonage that has an annual fair rental value of $24,000. Taxes on unemployment The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Taxes on unemployment Her actual utility costs during the year were $7,000. Taxes on unemployment For income tax purposes, Rev. Taxes on unemployment Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Taxes on unemployment She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Taxes on unemployment Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Taxes on unemployment Home ownership. Taxes on unemployment   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Taxes on unemployment Excess rental allowance. Taxes on unemployment   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Taxes on unemployment   Include in the total on Form 1040, line 7. Taxes on unemployment On the dotted line next to line 7, enter “Excess allowance” and the amount. Taxes on unemployment You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Taxes on unemployment However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Taxes on unemployment Retired ministers. Taxes on unemployment   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Taxes on unemployment However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Taxes on unemployment Teachers or administrators. Taxes on unemployment   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Taxes on unemployment However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Taxes on unemployment    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Taxes on unemployment In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Taxes on unemployment   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Taxes on unemployment Theological students. Taxes on unemployment   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Taxes on unemployment Traveling evangelists. Taxes on unemployment   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Taxes on unemployment You are an ordained minister. Taxes on unemployment You perform ministerial services at churches located away from your community. Taxes on unemployment You actually use the rental allowance to maintain your permanent home. Taxes on unemployment Cantors. Taxes on unemployment   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Taxes on unemployment Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Taxes on unemployment See Members of Religious Orders , earlier, under Social Security Coverage. Taxes on unemployment Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Taxes on unemployment S. Taxes on unemployment possession. Taxes on unemployment Publication 54 discusses the foreign earned income exclusion. Taxes on unemployment Publication 570, Tax Guide for Individuals With Income From U. Taxes on unemployment S. Taxes on unemployment Possessions, covers the rules for taxpayers with income from U. Taxes on unemployment S. Taxes on unemployment possessions. Taxes on unemployment You can get these free publications from the Internal Revenue Service at IRS. Taxes on unemployment gov or from most U. Taxes on unemployment S. Taxes on unemployment Embassies or consulates. Taxes on unemployment Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Taxes on unemployment Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Taxes on unemployment You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Taxes on unemployment You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Taxes on unemployment See Publication 529 for more information on this limit. Taxes on unemployment However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Taxes on unemployment Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Taxes on unemployment You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Taxes on unemployment Exception. Taxes on unemployment   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Taxes on unemployment Figuring the allocation. Taxes on unemployment   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Taxes on unemployment    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Taxes on unemployment Example. Taxes on unemployment Rev. Taxes on unemployment Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Taxes on unemployment He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Taxes on unemployment $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Taxes on unemployment Rev. Taxes on unemployment Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Taxes on unemployment Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Taxes on unemployment   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Taxes on unemployment The statement must contain all of the following information. Taxes on unemployment A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Taxes on unemployment ) plus the amount. Taxes on unemployment A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Taxes on unemployment A list of each item of otherwise deductible ministerial expenses plus the amount. Taxes on unemployment How you figured the nondeductible part of your otherwise deductible expenses. Taxes on unemployment A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Taxes on unemployment   See the attachments prepared for the Comprehensive Example , later. Taxes on unemployment Following the example, you will find blank worksheets for your own use. Taxes on unemployment Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Taxes on unemployment If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Taxes on unemployment See the Instructions for Form 1040 to figure your deduction. Taxes on unemployment The following special rules apply to the self-employed health insurance deduction. Taxes on unemployment You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Taxes on unemployment You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Taxes on unemployment The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Taxes on unemployment Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Taxes on unemployment More information. Taxes on unemployment   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Taxes on unemployment Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Taxes on unemployment This is an income tax deduction only, on Form 1040, line 27. Taxes on unemployment Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Taxes on unemployment Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Taxes on unemployment You must pay the tax as you earn or receive income during the year. Taxes on unemployment An employee usually has income tax withheld from his or her wages or salary. Taxes on unemployment However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Taxes on unemployment You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Taxes on unemployment Your salary is for ministerial services (see Ministerial Services , earlier). Taxes on unemployment If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Taxes on unemployment You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Taxes on unemployment Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Taxes on unemployment Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Taxes on unemployment See Form 1040-ES for the different payment methods. Taxes on unemployment The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Taxes on unemployment For more information, see chapter 2 of Publication 505. Taxes on unemployment If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Taxes on unemployment Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Taxes on unemployment Table 4. Taxes on unemployment 2013 Filing Requirements for Most Taxpayers IF your filing status is . Taxes on unemployment . Taxes on unemployment . Taxes on unemployment AND at the end of 2013 you were* . Taxes on unemployment . Taxes on unemployment . Taxes on unemployment THEN file a return if your gross income** was at least . Taxes on unemployment . Taxes on unemployment . Taxes on unemployment single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Taxes on unemployment ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Taxes on unemployment Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Taxes on unemployment If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Taxes on unemployment Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Taxes on unemployment Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Taxes on unemployment But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Taxes on unemployment *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Taxes on unemployment Additional requirements. Taxes on unemployment   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Taxes on unemployment 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Taxes on unemployment Self-employment tax. Taxes on unemployment   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Taxes on unemployment   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Taxes on unemployment You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Taxes on unemployment You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Taxes on unemployment However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Taxes on unemployment Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Taxes on unemployment Note. Taxes on unemployment For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Taxes on unemployment You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Taxes on unemployment Exemption from SE tax. Taxes on unemployment   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Taxes on unemployment Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Taxes on unemployment However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Taxes on unemployment    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Taxes on unemployment Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Taxes on unemployment More information. Taxes on unemployment   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Taxes on unemployment Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Taxes on unemployment You generally can deduct your contributions to the plan. Taxes on unemployment Your contributions and the earnings on them are not taxed until they are distributed. Taxes on unemployment Retirement plans for the self-employed. Taxes on unemployment   To set up one of the following plans you must be self-employed. Taxes on unemployment SEP (simplified employee pension) plan. Taxes on unemployment SIMPLE (savings incentive match plan for employees) plan. Taxes on unemployment Qualified retirement plan (also called a Keogh or H. Taxes on unemployment R. Taxes on unemployment 10 plan). Taxes on unemployment   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Taxes on unemployment See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Taxes on unemployment This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Taxes on unemployment   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Taxes on unemployment You are not a self-employed person for purposes of setting up a retirement plan. Taxes on unemployment This result is true even if your salary is subject to SE tax. Taxes on unemployment   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Taxes on unemployment   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Taxes on unemployment Individual retirement arrangements (IRAs). Taxes on unemployment   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Taxes on unemployment Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Taxes on unemployment   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Taxes on unemployment You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Taxes on unemployment   If you contribute to a traditional IRA, your contribution may be deductible. Taxes on unemployment However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Taxes on unemployment   For more information on IRAs, see Publication 590. Taxes on unemployment Tax-sheltered annuity plans. Taxes on unemployment   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Taxes on unemployment For more