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2010 Federal Tax Forms

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2010 Federal Tax Forms

2010 federal tax forms Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. 2010 federal tax forms Proc. 2010 federal tax forms 2013-16 Table of Contents SECTION 1. 2010 federal tax forms PURPOSE SECTION 2. 2010 federal tax forms BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. 2010 federal tax forms BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. 2010 federal tax forms FEDERAL INCOME TAX TREATMENT SECTION 5. 2010 federal tax forms INFORMATION-REPORTING OBLIGATIONS SECTION 6. 2010 federal tax forms HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. 2010 federal tax forms PENALTY RELIEF FOR 2012 SECTION 8. 2010 federal tax forms SCOPE AND EFFECTIVE DATE SECTION 9. 2010 federal tax forms DRAFTING INFORMATION SECTION 1. 2010 federal tax forms PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). 2010 federal tax forms Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). 2010 federal tax forms In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. 2010 federal tax forms Current plans call for HAMP to continue accepting new borrowers through the end of 2013. 2010 federal tax forms The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. 2010 federal tax forms SECTION 2. 2010 federal tax forms BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . 2010 federal tax forms 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). 2010 federal tax forms A description of the program can be found at www. 2010 federal tax forms makinghomeaffordable. 2010 federal tax forms gov. 2010 federal tax forms . 2010 federal tax forms 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. 2010 federal tax forms These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. 2010 federal tax forms . 2010 federal tax forms 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. 2010 federal tax forms The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. 2010 federal tax forms However, as noted in section 2. 2010 federal tax forms 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. 2010 federal tax forms (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. 2010 federal tax forms ”) . 2010 federal tax forms 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. 2010 federal tax forms . 2010 federal tax forms 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. 2010 federal tax forms The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. 2010 federal tax forms (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. 2010 federal tax forms ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). 2010 federal tax forms Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. 2010 federal tax forms Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. 2010 federal tax forms . 2010 federal tax forms 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. 2010 federal tax forms (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. 2010 federal tax forms ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. 2010 federal tax forms . 2010 federal tax forms 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). 2010 federal tax forms If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. 2010 federal tax forms These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. 2010 federal tax forms The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. 2010 federal tax forms The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. 2010 federal tax forms For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. 2010 federal tax forms ” . 2010 federal tax forms 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). 2010 federal tax forms . 2010 federal tax forms 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. 2010 federal tax forms 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. 2010 federal tax forms . 2010 federal tax forms 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. 2010 federal tax forms SECTION 3. 2010 federal tax forms BACKGROUND—APPLICABLE PROVISIONS OF LAW . 2010 federal tax forms 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. 2010 federal tax forms See § 61(a)(12). 2010 federal tax forms . 2010 federal tax forms 02 Under § 1. 2010 federal tax forms 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. 2010 federal tax forms In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. 2010 federal tax forms However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. 2010 federal tax forms See § 1. 2010 federal tax forms 1001-3(c)(6). 2010 federal tax forms . 2010 federal tax forms 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. 2010 federal tax forms 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. 2010 federal tax forms If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. 2010 federal tax forms See also § 1. 2010 federal tax forms 61-12(c). 2010 federal tax forms . 2010 federal tax forms 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. 2010 federal tax forms If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. 2010 federal tax forms See, e. 2010 federal tax forms g. 2010 federal tax forms , §§ 1. 2010 federal tax forms 1272-1(c)(5) and 1. 2010 federal tax forms 1274-2(d). 2010 federal tax forms . 2010 federal tax forms 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. 2010 federal tax forms Section 108(a)(1)(E) and 108(a)(1)(B). 2010 federal tax forms (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. 2010 federal tax forms ) . 2010 federal tax forms 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. 2010 federal tax forms . 2010 federal tax forms 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. 2010 federal tax forms See §§ 108(h) and 163(h)(3)(B)(i). 2010 federal tax forms . 2010 federal tax forms 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). 2010 federal tax forms Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. 2010 federal tax forms . 2010 federal tax forms 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. 2010 federal tax forms . 2010 federal tax forms 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. 2010 federal tax forms Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. 2010 federal tax forms . 2010 federal tax forms 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. 2010 federal tax forms See § 108(h)(1). 2010 federal tax forms If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). 2010 federal tax forms See § 108(b). 2010 federal tax forms For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 2010 federal tax forms . 2010 federal tax forms 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). 2010 federal tax forms See Form 982 instructions and Publication 4681. 2010 federal tax forms This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. 2010 federal tax forms . 2010 federal tax forms 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. 2010 federal tax forms See Notice 2003-18, 2003-1 C. 2010 federal tax forms B. 2010 federal tax forms 699, and Rev. 2010 federal tax forms Rul. 2010 federal tax forms 79-356, 1979-2 C. 2010 federal tax forms B. 2010 federal tax forms 28. 2010 federal tax forms However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). 2010 federal tax forms See Rev. 2010 federal tax forms Rul. 2010 federal tax forms 2005-46, 2005-2 C. 2010 federal tax forms B. 2010 federal tax forms 120, and Rev. 2010 federal tax forms Rul. 2010 federal tax forms 75-246, 1975-1 C. 2010 federal tax forms B. 2010 federal tax forms 24. 2010 federal tax forms . 2010 federal tax forms 14 Under § 451 and § 1. 2010 federal tax forms 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. 2010 federal tax forms . 2010 federal tax forms 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. 2010 federal tax forms See § 6041(a) and (d) and § 1. 2010 federal tax forms 6041-1(a)(1) and (b). 2010 federal tax forms . 2010 federal tax forms 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. 2010 federal tax forms See § 6050P(a)-(c) and §§ 1. 2010 federal tax forms 6050P-1(a) and 1. 2010 federal tax forms 6050P-2(a) and (d). 2010 federal tax forms . 2010 federal tax forms 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. 2010 federal tax forms These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. 2010 federal tax forms Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. 2010 federal tax forms ” . 2010 federal tax forms 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. 2010 federal tax forms These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. 2010 federal tax forms Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. 2010 federal tax forms SECTION 4. 2010 federal tax forms FEDERAL INCOME TAX TREATMENT . 2010 federal tax forms 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. 2010 federal tax forms See § 1. 2010 federal tax forms 1001-3. 2010 federal tax forms At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. 2010 federal tax forms See also § 61(a)(12) and § 1. 2010 federal tax forms 61-12(c). 2010 federal tax forms . 2010 federal tax forms 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. 2010 federal tax forms Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. 2010 federal tax forms Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. 2010 federal tax forms . 2010 federal tax forms 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. 2010 federal tax forms Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. 2010 federal tax forms . 2010 federal tax forms 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. 2010 federal tax forms Therefore, for purposes of § 1. 2010 federal tax forms 1001-3, the date of the modification is the date of the permanent modification. 2010 federal tax forms . 2010 federal tax forms 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. 2010 federal tax forms 01 of this revenue procedure for the taxable year in which the permanent modification occurs. 2010 federal tax forms Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. 2010 federal tax forms The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. 2010 federal tax forms . 2010 federal tax forms 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. 2010 federal tax forms . 2010 federal tax forms 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. 2010 federal tax forms This is consistent with Rev. 2010 federal tax forms Rul. 2010 federal tax forms 2009-19, 2009-28 I. 2010 federal tax forms R. 2010 federal tax forms B. 2010 federal tax forms 111, which addressed the treatment of Pay-for-Performance Success Payments. 2010 federal tax forms . 2010 federal tax forms 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. 2010 federal tax forms If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. 2010 federal tax forms . 2010 federal tax forms 09 As described in section 2. 2010 federal tax forms 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. 2010 federal tax forms To the extent that the HAMP-PRA borrower is described in section 4. 2010 federal tax forms 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. 2010 federal tax forms To the extent that the HAMP-PRA borrower is described in section 4. 2010 federal tax forms 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. 2010 federal tax forms SECTION 5. 2010 federal tax forms INFORMATION-REPORTING OBLIGATIONS . 2010 federal tax forms 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. 2010 federal tax forms A copy of this form is required to be furnished to the borrower. 2010 federal tax forms . 2010 federal tax forms 02 As stated in sections 4. 2010 federal tax forms 01 and 4. 2010 federal tax forms 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. 2010 federal tax forms . 2010 federal tax forms 03 An investor is an applicable entity that is required under § 1. 2010 federal tax forms 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. 2010 federal tax forms Under § 1. 2010 federal tax forms 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. 2010 federal tax forms Identifiable events determine when Forms 1099-C have to be issued. 2010 federal tax forms Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. 2010 federal tax forms This rule under § 1. 2010 federal tax forms 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. 2010 federal tax forms . 2010 federal tax forms 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. 2010 federal tax forms That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). 2010 federal tax forms . 2010 federal tax forms 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. 2010 federal tax forms 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. 2010 federal tax forms Under § 6041, these payments are not subject to information reporting. 2010 federal tax forms See Notice 2011-14, 2011-11 I. 2010 federal tax forms R. 2010 federal tax forms B. 2010 federal tax forms 544, 546. 2010 federal tax forms . 2010 federal tax forms 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. 2010 federal tax forms 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. 2010 federal tax forms The payment is subject to the information reporting requirements of § 6041, as described in section 3. 2010 federal tax forms 15 of this revenue procedure. 2010 federal tax forms Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. 2010 federal tax forms SECTION 6. 2010 federal tax forms HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . 2010 federal tax forms 01 In general. 2010 federal tax forms The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). 2010 federal tax forms As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. 2010 federal tax forms Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. 2010 federal tax forms A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. 2010 federal tax forms 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. 2010 federal tax forms Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. 2010 federal tax forms 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. 2010 federal tax forms . 2010 federal tax forms 02 HAMP-PRA borrower options. 2010 federal tax forms A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. 2010 federal tax forms 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. 2010 federal tax forms If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. 2010 federal tax forms 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. 2010 federal tax forms . 2010 federal tax forms 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. 2010 federal tax forms (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. 2010 federal tax forms (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. 2010 federal tax forms 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. 2010 federal tax forms 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. 2010 federal tax forms This section 6. 2010 federal tax forms 03(2) applies only if the change to reporting the discharge using the method described in section 6. 2010 federal tax forms 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. 2010 federal tax forms To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. 2010 federal tax forms (3) Example. 2010 federal tax forms The following example illustrates the application of section 6. 2010 federal tax forms 03(2) of this revenue procedure. 2010 federal tax forms In 2010, B’s basis in B’s principal residence was $330,000. 2010 federal tax forms In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. 2010 federal tax forms B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). 2010 federal tax forms The trial period plan effective date also fell in 2010. 2010 federal tax forms B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. 2010 federal tax forms 02(2) of this revenue procedure. 2010 federal tax forms That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. 2010 federal tax forms The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. 2010 federal tax forms For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. 2010 federal tax forms 02(1) of this revenue procedure. 2010 federal tax forms Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. 2010 federal tax forms 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). 2010 federal tax forms (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. 2010 federal tax forms 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. 2010 federal tax forms 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. 2010 federal tax forms Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. 2010 federal tax forms 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. 2010 federal tax forms Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. 2010 federal tax forms (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. 2010 federal tax forms 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. 2010 federal tax forms The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. 2010 federal tax forms (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. 2010 federal tax forms The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). 2010 federal tax forms The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. 2010 federal tax forms . 2010 federal tax forms 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. 2010 federal tax forms (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. 2010 federal tax forms Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. 2010 federal tax forms Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. 2010 federal tax forms If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. 2010 federal tax forms (2) A HAMP-PRA borrower who has been using the method described in section 6. 2010 federal tax forms 02(1) of this revenue procedure may change to the method described in section 6. 2010 federal tax forms 02(2) but must comply with the consistency and open-year requirements described in section 6. 2010 federal tax forms 01 of this revenue procedure. 2010 federal tax forms SECTION 7. 2010 federal tax forms PENALTY RELIEF FOR 2012 . 2010 federal tax forms 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. 2010 federal tax forms 03 through 5. 2010 federal tax forms 04 and section 8. 2010 federal tax forms 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. 2010 federal tax forms 01 through 4. 2010 federal tax forms 04 of this revenue procedure) that is required to be reported for 2012. 2010 federal tax forms (2) Not later than March 28, 2013, a statement is sent to the Service. 2010 federal tax forms It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. 2010 federal tax forms 01(1) of this revenue procedure. 2010 federal tax forms The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . 2010 federal tax forms 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. 2010 federal tax forms 06 and 8. 2010 federal tax forms 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. 2010 federal tax forms . 2010 federal tax forms 03 Section 8. 2010 federal tax forms 03 and 8. 2010 federal tax forms 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. 2010 federal tax forms SECTION 8. 2010 federal tax forms SCOPE AND EFFECTIVE DATE . 2010 federal tax forms 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. 2010 federal tax forms . 2010 federal tax forms 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. 2010 federal tax forms . 2010 federal tax forms 03 Because of the effective date in section 8. 2010 federal tax forms 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. 2010 federal tax forms 03 through 5. 2010 federal tax forms 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. 2010 federal tax forms 03 through 5. 2010 federal tax forms 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. 2010 federal tax forms . 2010 federal tax forms 04 Because of the effective date in section 8. 2010 federal tax forms 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. 2010 federal tax forms 06 of this revenue procedure. 2010 federal tax forms SECTION 9. 2010 federal tax forms DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. 2010 federal tax forms Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. 2010 federal tax forms Pflanz and Sheldon A. 2010 federal tax forms Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. 2010 federal tax forms Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). 2010 federal tax forms For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). 2010 federal tax forms Prev  Up  Next   Home   More Internal Revenue Bulletins
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

South Carolina Department of Consumer Affairs

Website: South Carolina Department of Consumer Affairs

Address: South Carolina Department of Consumer Affairs
PO Box 5757
Columbia, SC 29250

Phone Number: 803-734-4200

Toll-free: 1-800-922-1594 (SC)

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Office of the Commissioner of Banking

Website: Office of the Commissioner of Banking

Address: Office of the Commissioner of Banking
State Board of Financial Institutions
1205 Pendleton St., Suite 305
Columbia, SC 29201

Phone Number: 803-734-2001

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Department of Insurance

Website: Department of Insurance

Address: Department of Insurance
Consumer Services
PO Box 100105
Columbia, SC 29202-3105

Phone Number: 803-737-6180

Toll-free: 1-800-768-3467 (SC)

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Office of the Attorney General

Website: Office of the Attorney General

Address: Office of the Attorney General
Securities Division
PO Box 11549
Columbia, SC 29211-1549

Phone Number: 803-734-9916

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Office of Regulatory Staff

Website: Office of Regulatory Staff

Address: Office of Regulatory Staff
Consumer Services Division
1401 Main St., Suite 900
Columbia, SC 29201

Phone Number: 803-737-5230

Toll-free: 1-800-922-1531 (SC)

TTY: 1-800-334-2217 (SC)

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The 2010 Federal Tax Forms

2010 federal tax forms 2. 2010 federal tax forms   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. 2010 federal tax forms 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. 2010 federal tax forms Deduction may depend on your type of business. 2010 federal tax forms Exception for events that benefit charitable organizations. 2010 federal tax forms Food and beverages in skybox seats. 2010 federal tax forms What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. 2010 federal tax forms You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. 2010 federal tax forms The rules and definitions are summarized in Table 2-1 . 2010 federal tax forms You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. 2010 federal tax forms Directly-related test. 2010 federal tax forms Associated test. 2010 federal tax forms Both of these tests are explained later. 2010 federal tax forms An ordinary expense is one that is common and accepted in your trade or business. 2010 federal tax forms A necessary expense is one that is helpful and appropriate for your business. 2010 federal tax forms An expense does not have to be required to be considered necessary. 2010 federal tax forms The amount you can deduct for entertainment expenses may be limited. 2010 federal tax forms Generally, you can deduct only 50% of your unreimbursed entertainment expenses. 2010 federal tax forms This limit is discussed later under 50% Limit. 2010 federal tax forms Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. 2010 federal tax forms Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. 2010 federal tax forms Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. 2010 federal tax forms See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. 2010 federal tax forms You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. 2010 federal tax forms It is not necessary to devote more time to business than to entertainment. 2010 federal tax forms However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. 2010 federal tax forms Table 2-1. 2010 federal tax forms When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. 2010 federal tax forms Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. 2010 federal tax forms An ordinary expense is one that is common and accepted in your trade or business. 2010 federal tax forms A necessary expense is one that is helpful and appropriate. 2010 federal tax forms Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. 2010 federal tax forms   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. 2010 federal tax forms Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. 2010 federal tax forms You cannot deduct expenses that are lavish or extravagant under the circumstances. 2010 federal tax forms You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). 2010 federal tax forms You do not have to show that business income or other business benefit actually resulted from each entertainment expense. 2010 federal tax forms Clear business setting. 2010 federal tax forms   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. 2010 federal tax forms The following situations are examples of entertainment in a clear business setting. 2010 federal tax forms Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. 2010 federal tax forms Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). 2010 federal tax forms Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. 2010 federal tax forms An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. 2010 federal tax forms Expenses not considered directly related. 2010 federal tax forms   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. 2010 federal tax forms The following are examples of situations where there are substantial distractions. 2010 federal tax forms A meeting or discussion at a nightclub, theater, or sporting event. 2010 federal tax forms A meeting or discussion during what is essentially a social gathering, such as a cocktail party. 2010 federal tax forms A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. 2010 federal tax forms Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. 2010 federal tax forms To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). 2010 federal tax forms Associated with trade or business. 2010 federal tax forms   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. 2010 federal tax forms The purpose may be to get new business or to encourage the continuation of an existing business relationship. 2010 federal tax forms Substantial business discussion. 2010 federal tax forms   Whether a business discussion is substantial depends on the facts of each case. 2010 federal tax forms A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. 2010 federal tax forms   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. 2010 federal tax forms It is not necessary that you devote more time to business than to entertainment. 2010 federal tax forms You do not have to discuss business during the meal or entertainment. 2010 federal tax forms Meetings at conventions. 2010 federal tax forms   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. 2010 federal tax forms However, your reason for attending the convention or meeting must be to further your trade or business. 2010 federal tax forms The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. 2010 federal tax forms Directly before or after business discussion. 2010 federal tax forms   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. 2010 federal tax forms   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. 2010 federal tax forms Among the facts to consider are the place, date, and duration of the business discussion. 2010 federal tax forms If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. 2010 federal tax forms Example. 2010 federal tax forms A group of business associates comes from out of town to your place of business to hold a substantial business discussion. 2010 federal tax forms If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. 2010 federal tax forms The expense meets the associated test. 2010 federal tax forms 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. 2010 federal tax forms (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. 2010 federal tax forms See Individuals subject to “hours of service” limits , later. 2010 federal tax forms ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. 2010 federal tax forms Figure A summarizes the general rules explained in this section. 2010 federal tax forms The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. 2010 federal tax forms Included expenses. 2010 federal tax forms   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. 2010 federal tax forms However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. 2010 federal tax forms Figure A. 2010 federal tax forms Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. 2010 federal tax forms See Exceptions to the 50% Limit . 2010 federal tax forms Please click here for the text description of the image. 2010 federal tax forms Figure A. 2010 federal tax forms Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. 2010 federal tax forms   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. 2010 federal tax forms   The 50% limit also applies to certain meal and entertainment expenses that are not business related. 2010 federal tax forms It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. 2010 federal tax forms It also applies to the cost of meals included in deductible educational expenses. 2010 federal tax forms When to apply the 50% limit. 2010 federal tax forms   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. 2010 federal tax forms You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. 2010 federal tax forms Example 1. 2010 federal tax forms You spend $200 for a business-related meal. 2010 federal tax forms If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. 2010 federal tax forms Your deduction cannot be more than $45 (50% × $90). 2010 federal tax forms Example 2. 2010 federal tax forms You purchase two tickets to a concert and give them to a client. 2010 federal tax forms You purchased the tickets through a ticket agent. 2010 federal tax forms You paid $200 for the two tickets, which had a face value of $80 each ($160 total). 2010 federal tax forms Your deduction cannot be more than $80 (50% × $160). 2010 federal tax forms Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. 2010 federal tax forms Figure A can help you determine if the 50% limit applies to you. 2010 federal tax forms Expenses not subject to 50% limit. 2010 federal tax forms   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. 2010 federal tax forms 1 - Employee's reimbursed expenses. 2010 federal tax forms   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. 2010 federal tax forms Accountable plans are discussed in chapter 6. 2010 federal tax forms 2 - Self-employed. 2010 federal tax forms   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. 2010 federal tax forms You have these expenses as an independent contractor. 2010 federal tax forms Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. 2010 federal tax forms You provide adequate records of these expenses to your customer or client. 2010 federal tax forms (See chapter 5 . 2010 federal tax forms )   In this case, your client or customer is subject to the 50% limit on the expenses. 2010 federal tax forms Example. 2010 federal tax forms You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. 2010 federal tax forms You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. 2010 federal tax forms If the client can deduct the expenses, the client is subject to the 50% limit. 2010 federal tax forms If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. 2010 federal tax forms 3 - Advertising expenses. 2010 federal tax forms   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. 2010 federal tax forms For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. 2010 federal tax forms 4 - Sale of meals or entertainment. 2010 federal tax forms   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. 2010 federal tax forms For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. 2010 federal tax forms 5 - Charitable sports event. 2010 federal tax forms   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. 2010 federal tax forms For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. 2010 federal tax forms Individuals subject to “hours of service” limits. 2010 federal tax forms   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. 2010 federal tax forms The percentage is 80%. 2010 federal tax forms   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. 2010 federal tax forms Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. 2010 federal tax forms Interstate truck operators and bus drivers who are under Department of Transportation regulations. 2010 federal tax forms Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. 2010 federal tax forms Certain merchant mariners who are under Coast Guard regulations. 2010 federal tax forms What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. 2010 federal tax forms Entertainment. 2010 federal tax forms   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. 2010 federal tax forms Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. 2010 federal tax forms   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. 2010 federal tax forms A meal as a form of entertainment. 2010 federal tax forms   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. 2010 federal tax forms A meal expense includes the cost of food, beverages, taxes, and tips for the meal. 2010 federal tax forms To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. 2010 federal tax forms    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. 2010 federal tax forms    Meals sold in the normal course of your business are not considered entertainment. 2010 federal tax forms Deduction may depend on your type of business. 2010 federal tax forms   Your kind of business may determine if a particular activity is considered entertainment. 2010 federal tax forms For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. 2010 federal tax forms This is because fashion shows are typical in your business. 2010 federal tax forms But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. 2010 federal tax forms Separating costs. 2010 federal tax forms   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. 2010 federal tax forms You must have a reasonable basis for making this allocation. 2010 federal tax forms For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. 2010 federal tax forms Taking turns paying for meals or entertainment. 2010 federal tax forms   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. 2010 federal tax forms Lavish or extravagant expenses. 2010 federal tax forms   You cannot deduct expenses for entertainment that are lavish or extravagant. 2010 federal tax forms An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. 2010 federal tax forms Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. 2010 federal tax forms Allocating between business and nonbusiness. 2010 federal tax forms   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. 2010 federal tax forms You can deduct only the business part. 2010 federal tax forms If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. 2010 federal tax forms Example. 2010 federal tax forms You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. 2010 federal tax forms Only 4/11 of the expense qualifies as a business entertainment expense. 2010 federal tax forms You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. 2010 federal tax forms Trade association meetings. 2010 federal tax forms   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. 2010 federal tax forms These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. 2010 federal tax forms Entertainment tickets. 2010 federal tax forms   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. 2010 federal tax forms For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. 2010 federal tax forms Exception for events that benefit charitable organizations. 2010 federal tax forms   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. 2010 federal tax forms You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. 2010 federal tax forms The event's main purpose is to benefit a qualified charitable organization. 2010 federal tax forms The entire net proceeds go to the charity. 2010 federal tax forms The event uses volunteers to perform substantially all the event's work. 2010 federal tax forms    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. 2010 federal tax forms Example 1. 2010 federal tax forms You purchase tickets to a golf tournament organized by the local volunteer fire company. 2010 federal tax forms All net proceeds will be used to buy new fire equipment. 2010 federal tax forms The volunteers will run the tournament. 2010 federal tax forms You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. 2010 federal tax forms Example 2. 2010 federal tax forms You purchase tickets to a college football game through a ticket broker. 2010 federal tax forms After having a business discussion, you take a client to the game. 2010 federal tax forms Net proceeds from the game go to colleges that qualify as charitable organizations. 2010 federal tax forms However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. 2010 federal tax forms Skyboxes and other private luxury boxes. 2010 federal tax forms   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. 2010 federal tax forms   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. 2010 federal tax forms For example, renting a skybox for a series of playoff games is considered renting it for more than one event. 2010 federal tax forms All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. 2010 federal tax forms   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. 2010 federal tax forms Example. 2010 federal tax forms You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. 2010 federal tax forms The cost of regular nonluxury box seats at each event is $30 a seat. 2010 federal tax forms You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). 2010 federal tax forms Food and beverages in skybox seats. 2010 federal tax forms   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. 2010 federal tax forms The amounts separately stated for food and beverages must be reasonable. 2010 federal tax forms You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. 2010 federal tax forms What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. 2010 federal tax forms Club dues and membership fees. 2010 federal tax forms   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. 2010 federal tax forms This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. 2010 federal tax forms   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. 2010 federal tax forms You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. 2010 federal tax forms Entertainment facilities. 2010 federal tax forms   Generally, you cannot deduct any expense for the use of an entertainment facility. 2010 federal tax forms This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. 2010 federal tax forms   An entertainment facility is any property you own, rent, or use for entertainment. 2010 federal tax forms Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. 2010 federal tax forms Out-of-pocket expenses. 2010 federal tax forms   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. 2010 federal tax forms These are not expenses for the use of an entertainment facility. 2010 federal tax forms However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. 2010 federal tax forms Expenses for spouses. 2010 federal tax forms   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. 2010 federal tax forms However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. 2010 federal tax forms Example. 2010 federal tax forms You entertain a customer. 2010 federal tax forms The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. 2010 federal tax forms The customer's spouse joins you because it is impractical to entertain the customer without the spouse. 2010 federal tax forms You can deduct the cost of entertaining the customer's spouse. 2010 federal tax forms If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. 2010 federal tax forms Gift or entertainment. 2010 federal tax forms   Any item that might be considered either a gift or entertainment generally will be considered entertainment. 2010 federal tax forms However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. 2010 federal tax forms   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. 2010 federal tax forms You can treat the tickets as either a gift or entertainment, whichever is to your advantage. 2010 federal tax forms   You can change your treatment of the tickets at a later date by filing an amended return. 2010 federal tax forms Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. 2010 federal tax forms   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. 2010 federal tax forms You cannot choose, in this case, to treat the tickets as a gift. 2010 federal tax forms Prev  Up  Next   Home   More Online Publications