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2011 Tax Forms Instructions

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2011 Tax Forms Instructions

2011 tax forms instructions 22. 2011 tax forms instructions   Taxes Table of Contents IntroductionIndian tribal government. 2011 tax forms instructions Useful Items - You may want to see: Tests To Deduct Any Tax Income TaxesState and Local Income Taxes Foreign Income Taxes General Sales TaxesMotor vehicles. 2011 tax forms instructions Real Estate TaxesReal estate taxes for prior years. 2011 tax forms instructions Examples. 2011 tax forms instructions Form 1099-S. 2011 tax forms instructions Real Estate-Related Items You Cannot Deduct Personal Property Taxes Taxes and Fees You Cannot Deduct Where To Deduct Introduction This chapter discusses which taxes you can deduct if you itemize deductions on Schedule A (Form 1040). 2011 tax forms instructions It also explains which taxes you can deduct on other schedules or forms and which taxes you cannot deduct. 2011 tax forms instructions This chapter covers the following topics. 2011 tax forms instructions Income taxes (federal, state, local, and foreign). 2011 tax forms instructions General sales taxes (state and local). 2011 tax forms instructions Real estate taxes (state, local, and foreign). 2011 tax forms instructions Personal property taxes (state and local). 2011 tax forms instructions Taxes and fees you cannot deduct. 2011 tax forms instructions Use Table 22-1 as a guide to determine which taxes you can deduct. 2011 tax forms instructions The end of the chapter contains a section that explains which forms you use to deduct different types of taxes. 2011 tax forms instructions Business taxes. 2011 tax forms instructions   You can deduct certain taxes only if they are ordinary and necessary expenses of your trade or business or of producing income. 2011 tax forms instructions For information on these taxes, see Publication 535, Business Expenses. 2011 tax forms instructions State or local taxes. 2011 tax forms instructions   These are taxes imposed by the 50 states, U. 2011 tax forms instructions S. 2011 tax forms instructions possessions, or any of their political subdivisions (such as a county or city), or by the District of Columbia. 2011 tax forms instructions Indian tribal government. 2011 tax forms instructions   An Indian tribal government recognized by the Secretary of the Treasury as performing substantial government functions will be treated as a state for purposes of claiming a deduction for taxes. 2011 tax forms instructions Income taxes, real estate taxes, and personal property taxes imposed by that Indian tribal government (or by any of its subdivisions that are treated as political subdivisions of a state) are deductible. 2011 tax forms instructions General sales taxes. 2011 tax forms instructions   These are taxes imposed at one rate on retail sales of a broad range of classes of items. 2011 tax forms instructions Foreign taxes. 2011 tax forms instructions   These are taxes imposed by a foreign country or any of its political subdivisions. 2011 tax forms instructions Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 530 Tax Information for Homeowners Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule E (Form 1040) Supplemental Income and Loss 1116 Foreign Tax Credit Tests To Deduct Any Tax The following two tests must be met for you to deduct any tax. 2011 tax forms instructions The tax must be imposed on you. 2011 tax forms instructions You must pay the tax during your tax year. 2011 tax forms instructions The tax must be imposed on you. 2011 tax forms instructions   In general, you can deduct only taxes imposed on you. 2011 tax forms instructions   Generally, you can deduct property taxes only if you are an owner of the property. 2011 tax forms instructions If your spouse owns the property and pays the real estate taxes, the taxes are deductible on your spouse's separate return or on your joint return. 2011 tax forms instructions You must pay the tax during your tax year. 2011 tax forms instructions   If you are a cash basis taxpayer, you can deduct only those taxes you actually paid during your tax year. 2011 tax forms instructions If you pay your taxes by check, the day you mail or deliver the check is the date of payment, provided the check is honored by the financial institution. 2011 tax forms instructions If you use a pay-by-phone account (such as a credit card or electronic funds withdrawal), the date reported on the statement of the financial institution showing when payment was made is the date of payment. 2011 tax forms instructions If you contest a tax liability and are a cash basis taxpayer, you can deduct the tax only in the year you actually pay it (or transfer money or other property to provide for satisfaction of the contested liability). 2011 tax forms instructions See Publication 538, Accounting Periods and Methods, for details. 2011 tax forms instructions    If you use an accrual method of accounting, see Publication 538 for more information. 2011 tax forms instructions Income Taxes This section discusses the deductibility of state and local income taxes (including employee contributions to state benefit funds) and foreign income taxes. 2011 tax forms instructions State and Local Income Taxes You can deduct state and local income taxes. 2011 tax forms instructions However, you can elect to deduct state and local general sales taxes instead of state and local income taxes. 2011 tax forms instructions See General Sales Taxes , later. 2011 tax forms instructions Exception. 2011 tax forms instructions    You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income. 2011 tax forms instructions For example, you cannot deduct the part of a state's income tax that is on a cost-of-living allowance exempt from federal income tax. 2011 tax forms instructions What To Deduct Your deduction may be for withheld taxes, estimated tax payments, or other tax payments as follows. 2011 tax forms instructions Withheld taxes. 2011 tax forms instructions   You can deduct state and local income taxes withheld from your salary in the year they are withheld. 2011 tax forms instructions Your Form(s) W-2 will show these amounts. 2011 tax forms instructions Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld. 2011 tax forms instructions Estimated tax payments. 2011 tax forms instructions   You can deduct estimated tax payments you made during the year to a state or local government. 2011 tax forms instructions However, you must have a reasonable basis for making the estimated tax payments. 2011 tax forms instructions Any estimated state or local tax payments that are not made in good faith at the time of payment are not deductible. 2011 tax forms instructions For example, you made an estimated state income tax payment. 2011 tax forms instructions However, the estimate of your state tax liability shows that you will get a refund of the full amount of your estimated payment. 2011 tax forms instructions You had no reasonable basis to believe you had any additional liability for state income taxes and you cannot deduct the estimated tax payment. 2011 tax forms instructions Refund applied to taxes. 2011 tax forms instructions   You can deduct any part of a refund of prior-year state or local income taxes that you chose to have credited to your 2013 estimated state or local income taxes. 2011 tax forms instructions    Do not reduce your deduction by either of the following items. 2011 tax forms instructions Any state or local income tax refund (or credit) you expect to receive for 2013. 2011 tax forms instructions Any refund of (or credit for) prior-year state and local income taxes you actually received in 2013. 2011 tax forms instructions   However, part or all of this refund (or credit) may be taxable. 2011 tax forms instructions See Refund (or credit) of state or local income taxes , later. 2011 tax forms instructions Separate federal returns. 2011 tax forms instructions   If you and your spouse file separate state, local, and federal income tax returns, you each can deduct on your federal return only the amount of your own state and local income tax that you paid during the tax year. 2011 tax forms instructions Joint state and local returns. 2011 tax forms instructions   If you and your spouse file joint state and local returns and separate federal returns, each of you can deduct on your separate federal return a part of the total state and local income taxes paid during the tax year. 2011 tax forms instructions You can deduct only the amount of the total taxes that is proportionate to your gross income compared to the combined gross income of you and your spouse. 2011 tax forms instructions However, you cannot deduct more than the amount you actually paid during the year. 2011 tax forms instructions You can avoid this calculation if you and your spouse are jointly and individually liable for the full amount of the state and local income taxes. 2011 tax forms instructions If so, you and your spouse can deduct on your separate federal returns the amount you each actually paid. 2011 tax forms instructions Joint federal return. 2011 tax forms instructions   If you file a joint federal return, you can deduct the total of the state and local income taxes both of you paid. 2011 tax forms instructions Contributions to state benefit funds. 2011 tax forms instructions    As an employee, you can deduct mandatory contributions to state benefit funds withheld from your wages that provide protection against loss of wages. 2011 tax forms instructions For example, certain states require employees to make contributions to state funds providing disability or unemployment insurance benefits. 2011 tax forms instructions Mandatory payments made to the following state benefit funds are deductible as state income taxes on Schedule A (Form 1040), line 5. 2011 tax forms instructions Alaska Unemployment Compensation Fund. 2011 tax forms instructions California Nonoccupational Disability Benefit Fund. 2011 tax forms instructions New Jersey Nonoccupational Disability Benefit Fund. 2011 tax forms instructions New Jersey Unemployment Compensation Fund. 2011 tax forms instructions New York Nonoccupational Disability Benefit Fund. 2011 tax forms instructions Pennsylvania Unemployment Compensation Fund. 2011 tax forms instructions Rhode Island Temporary Disability Benefit Fund. 2011 tax forms instructions Washington State Supplemental Workmen's Compensation Fund. 2011 tax forms instructions    Employee contributions to private or voluntary disability plans are not deductible. 2011 tax forms instructions Refund (or credit) of state or local income taxes. 2011 tax forms instructions   If you receive a refund of (or credit for) state or local income taxes in a year after the year in which you paid them, you may have to include the refund in income on Form 1040, line 10, in the year you receive it. 2011 tax forms instructions This includes refunds resulting from taxes that were overwithheld, applied from a prior year return, not figured correctly, or figured again because of an amended return. 2011 tax forms instructions If you did not itemize your deductions in the previous year, do not include the refund in income. 2011 tax forms instructions If you deducted the taxes in the previous year, include all or part of the refund on Form 1040, line 10, in the year you receive the refund. 2011 tax forms instructions For a discussion of how much to include, see Recoveries in chapter 12. 2011 tax forms instructions Foreign Income Taxes Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. 2011 tax forms instructions S. 2011 tax forms instructions possession. 2011 tax forms instructions However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. 2011 tax forms instructions S. 2011 tax forms instructions tax under the foreign earned income exclusion or the foreign housing exclusion. 2011 tax forms instructions For information on these exclusions, see Publication 54, Tax Guide for U. 2011 tax forms instructions S. 2011 tax forms instructions Citizens and Resident Aliens Abroad. 2011 tax forms instructions For information on the foreign tax credit, see Publication 514. 2011 tax forms instructions General Sales Taxes You can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), line 5b. 2011 tax forms instructions You can use either your actual expenses or the state and local sales tax tables to figure your sales tax deduction. 2011 tax forms instructions Actual expenses. 2011 tax forms instructions   Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) if the tax rate was the same as the general sales tax rate. 2011 tax forms instructions However, sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. 2011 tax forms instructions If you paid sales tax on a motor vehicle at a rate higher than the general sales tax rate, you can deduct only the amount of tax that you would have paid at the general sales tax rate on that vehicle. 2011 tax forms instructions If you use the actual expenses method, you must have receipts to show the general sales taxes paid. 2011 tax forms instructions Do not include sales taxes paid on items used in your trade or business. 2011 tax forms instructions Motor vehicles. 2011 tax forms instructions   For purposes of this section, motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. 2011 tax forms instructions This also includes sales taxes on a leased motor vehicle, but not on vehicles used in your trade or business. 2011 tax forms instructions Optional sales tax tables. 2011 tax forms instructions   Instead of using your actual expenses, you can figure your state and local general sales tax deduction using the state and local sales tax tables in the Instructions for Schedule A (Form 1040). 2011 tax forms instructions You may also be able to add the state and local general sales taxes paid on certain specified items. 2011 tax forms instructions   Your applicable table amount is based on the state where you live, your income, and the number of exemptions claimed on your tax return. 2011 tax forms instructions Your income is your adjusted gross income plus any nontaxable items such as the following. 2011 tax forms instructions Tax-exempt interest. 2011 tax forms instructions Veterans' benefits. 2011 tax forms instructions Nontaxable combat pay. 2011 tax forms instructions Workers' compensation. 2011 tax forms instructions Nontaxable part of social security and railroad retirement benefits. 2011 tax forms instructions Nontaxable part of IRA, pension, or annuity distributions, excluding rollovers. 2011 tax forms instructions Public assistance payments. 2011 tax forms instructions If you lived in different states during the same tax year, you must prorate your applicable table amount for each state based on the days you lived in each state. 2011 tax forms instructions See the Instructions for Schedule A (Form 1040), line 5, for details. 2011 tax forms instructions Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. 2011 tax forms instructions You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority. 2011 tax forms instructions Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. 2011 tax forms instructions They also do not include itemized charges for services (such as trash collection) assessed against specific property or certain people, even if the charge is paid to the taxing authority. 2011 tax forms instructions For more information about taxes and charges that are not deductible, see Real Estate-Related Items You Cannot Deduct , later. 2011 tax forms instructions Tenant-shareholders in a cooperative housing corporation. 2011 tax forms instructions   Generally, if you are a tenant-stockholder in a cooperative housing corporation, you can deduct the amount paid to the corporation that represents your share of the real estate taxes the corporation paid or incurred for your dwelling unit. 2011 tax forms instructions The corporation should provide you with a statement showing your share of the taxes. 2011 tax forms instructions For more information, see Special Rules for Cooperatives in Publication 530. 2011 tax forms instructions Division of real estate taxes between buyers and sellers. 2011 tax forms instructions   If you bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller. 2011 tax forms instructions   The buyer and the seller must divide the real estate taxes according to the number of days in the real property tax year (the period to which the tax is imposed relates) that each owned the property. 2011 tax forms instructions The seller is treated as paying the taxes up to, but not including, the date of sale. 2011 tax forms instructions The buyer is treated as paying the taxes beginning with the date of sale. 2011 tax forms instructions This applies regardless of the lien dates under local law. 2011 tax forms instructions Generally, this information is included on the settlement statement provided at the closing. 2011 tax forms instructions    If you (the seller) cannot deduct taxes until they are paid because you use the cash method of accounting, and the buyer of your property is personally liable for the tax, you are considered to have paid your part of the tax at the time of the sale. 2011 tax forms instructions This lets you deduct the part of the tax to the date of sale even though you did not actually pay it. 2011 tax forms instructions However, you must also include the amount of that tax in the selling price of the property. 2011 tax forms instructions The buyer must include the same amount in his or her cost of the property. 2011 tax forms instructions   You figure your deduction for taxes on each property bought or sold during the real property tax year as follows. 2011 tax forms instructions Worksheet 22-1. 2011 tax forms instructions Figuring Your Real Estate Tax Deduction 1. 2011 tax forms instructions Enter the total real estate taxes for the real property tax year   2. 2011 tax forms instructions Enter the number of days in the real property tax year that you owned the property   3. 2011 tax forms instructions Divide line 2 by 365 (for leap years, divide line 2 by 366) . 2011 tax forms instructions 4. 2011 tax forms instructions Multiply line 1 by line 3. 2011 tax forms instructions This is your deduction. 2011 tax forms instructions Enter it on Schedule A (Form 1040), line 6   Note. 2011 tax forms instructions Repeat steps 1 through 4 for each property you bought or sold during the real property tax year. 2011 tax forms instructions Your total deduction is the sum of the line 4 amounts for all of the properties. 2011 tax forms instructions Real estate taxes for prior years. 2011 tax forms instructions   Do not divide delinquent taxes between the buyer and seller if the taxes are for any real property tax year before the one in which the property is sold. 2011 tax forms instructions Even if the buyer agrees to pay the delinquent taxes, the buyer cannot deduct them. 2011 tax forms instructions The buyer must add them to the cost of the property. 2011 tax forms instructions The seller can deduct these taxes paid by the buyer. 2011 tax forms instructions However, the seller must include them in the selling price. 2011 tax forms instructions Examples. 2011 tax forms instructions   The following examples illustrate how real estate taxes are divided between buyer and seller. 2011 tax forms instructions Example 1. 2011 tax forms instructions Dennis and Beth White's real property tax year for both their old home and their new home is the calendar year, with payment due August 1. 2011 tax forms instructions The tax on their old home, sold on May 7, was $620. 2011 tax forms instructions The tax on their new home, bought on May 3, was $732. 2011 tax forms instructions Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the old home even though they did not actually pay them to the taxing authority. 2011 tax forms instructions On the other hand, they can claim only a proportionate share of the taxes they paid on their new property even though they paid the entire amount. 2011 tax forms instructions Dennis and Beth owned their old home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). 2011 tax forms instructions They figure their deduction for taxes on their old home as follows. 2011 tax forms instructions Worksheet 22-1. 2011 tax forms instructions Figuring Your Real Estate Tax Deduction — Taxes on Old Home 1. 2011 tax forms instructions Enter the total real estate taxes for the real property tax year $620 2. 2011 tax forms instructions Enter the number of days in the real property tax year that you owned the property 126 3. 2011 tax forms instructions Divide line 2 by 365 (for leap years, divide line 2 by 366) . 2011 tax forms instructions 3452 4. 2011 tax forms instructions Multiply line 1 by line 3. 2011 tax forms instructions This is your deduction. 2011 tax forms instructions Enter it on Schedule A (Form 1040), line 6 $214 Since the buyers of their old home paid all of the taxes, Dennis and Beth also include the $214 in the selling price of the old home. 2011 tax forms instructions (The buyers add the $214 to their cost of the home. 2011 tax forms instructions ) Dennis and Beth owned their new home during the real property tax year for 243 days (May 3 to December 31, including their date of purchase). 2011 tax forms instructions They figure their deduction for taxes on their new home as follows. 2011 tax forms instructions Worksheet 22-1. 2011 tax forms instructions Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. 2011 tax forms instructions Enter the total real estate taxes for the real property tax year $732 2. 2011 tax forms instructions Enter the number of days in the real property tax year that you owned the property 243 3. 2011 tax forms instructions Divide line 2 by 365 (for leap years, divide line 2 by 366) . 2011 tax forms instructions 6658 4. 2011 tax forms instructions Multiply line 1 by line 3. 2011 tax forms instructions This is your deduction. 2011 tax forms instructions Enter it on Schedule A (Form 1040), line 6 $487 Since Dennis and Beth paid all of the taxes on the new home, they add $245 ($732 paid less $487 deduction) to their cost of the new home. 2011 tax forms instructions (The sellers add this $245 to their selling price and deduct the $245 as a real estate tax. 2011 tax forms instructions ) Dennis and Beth's real estate tax deduction for their old and new homes is the sum of $214 and $487, or $701. 2011 tax forms instructions They will enter this amount on Schedule A (Form 1040), line 6. 2011 tax forms instructions Example 2. 2011 tax forms instructions George and Helen Brown bought a new home on May 3, 2013. 2011 tax forms instructions Their real property tax year for the new home is the calendar year. 2011 tax forms instructions Real estate taxes for 2012 were assessed in their state on January 1, 2013. 2011 tax forms instructions The taxes became due on May 31, 2013, and October 31, 2013. 2011 tax forms instructions The Browns agreed to pay all taxes due after the date of purchase. 2011 tax forms instructions Real estate taxes for 2012 were $680. 2011 tax forms instructions They paid $340 on May 31, 2013, and $340 on October 31, 2013. 2011 tax forms instructions These taxes were for the 2012 real property tax year. 2011 tax forms instructions The Browns cannot deduct them since they did not own the property until 2013. 2011 tax forms instructions Instead, they must add $680 to the cost of their new home. 2011 tax forms instructions In January 2014, the Browns receive their 2013 property tax statement for $752, which they will pay in 2014. 2011 tax forms instructions The Browns owned their new home during the 2013 real property tax year for 243 days (May 3 to December 31). 2011 tax forms instructions They will figure their 2014 deduction for taxes as follows. 2011 tax forms instructions Worksheet 22-1. 2011 tax forms instructions Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. 2011 tax forms instructions Enter the total real estate taxes for the real property tax year $752 2. 2011 tax forms instructions Enter the number of days in the real property tax year that you owned the property 243 3. 2011 tax forms instructions Divide line 2 by 365 (for leap years, divide line 2 by 366) . 2011 tax forms instructions 6658 4. 2011 tax forms instructions Multiply line 1 by line 3. 2011 tax forms instructions This is your deduction. 2011 tax forms instructions Claim it on Schedule A (Form 1040), line 6 $501 The remaining $251 ($752 paid less $501 deduction) of taxes paid in 2014, along with the $680 paid in 2013, is added to the cost of their new home. 2011 tax forms instructions Because the taxes up to the date of sale are considered paid by the seller on the date of sale, the seller is entitled to a 2013 tax deduction of $931. 2011 tax forms instructions This is the sum of the $680 for 2012 and the $251 for the 122 days the seller owned the home in 2013. 2011 tax forms instructions The seller must also include the $931 in the selling price when he or she figures the gain or loss on the sale. 2011 tax forms instructions The seller should contact the Browns in January 2014 to find out how much real estate tax is due for 2013. 2011 tax forms instructions Form 1099-S. 2011 tax forms instructions   For certain sales or exchanges of real estate, the person responsible for closing the sale (generally the settlement agent) prepares Form 1099-S, Proceeds From Real Estate Transactions, to report certain information to the IRS and to the seller of the property. 2011 tax forms instructions Box 2 of Form 1099-S is for the gross proceeds from the sale and should include the portion of the seller's real estate tax liability that the buyer will pay after the date of sale. 2011 tax forms instructions The buyer includes these taxes in the cost basis of the property, and the seller both deducts this amount as a tax paid and includes it in the sales price of the property. 2011 tax forms instructions   For a real estate transaction that involves a home, any real estate tax the seller paid in advance but that is the liability of the buyer appears on Form 1099-S, box 5. 2011 tax forms instructions The buyer deducts this amount as a real estate tax, and the seller reduces his or her real estate tax deduction (or includes it in income) by the same amount. 2011 tax forms instructions See Refund (or rebate) , later. 2011 tax forms instructions Taxes placed in escrow. 2011 tax forms instructions   If your monthly mortgage payment includes an amount placed in escrow (put in the care of a third party) for real estate taxes, you may not be able to deduct the total amount placed in escrow. 2011 tax forms instructions You can deduct only the real estate tax that the third party actually paid to the taxing authority. 2011 tax forms instructions If the third party does not notify you of the amount of real estate tax that was paid for you, contact the third party or the taxing authority to find the proper amount to show on your return. 2011 tax forms instructions Tenants by the entirety. 2011 tax forms instructions   If you and your spouse held property as tenants by the entirety and you file separate federal returns, each of you can deduct only the taxes each of you paid on the property. 2011 tax forms instructions Divorced individuals. 2011 tax forms instructions   If your divorce or separation agreement states that you must pay the real estate taxes for a home owned by you and your spouse, part of your payments may be deductible as alimony and part as real estate taxes. 2011 tax forms instructions See Taxes and insurance in chapter 18 for more information. 2011 tax forms instructions Ministers' and military housing allowances. 2011 tax forms instructions   If you are a minister or a member of the uniformed services and receive a housing allowance that you can exclude from income, you still can deduct all of the real estate taxes you pay on your home. 2011 tax forms instructions Refund (or rebate). 2011 tax forms instructions   If you received a refund or rebate in 2013 of real estate taxes you paid in 2013, you must reduce your deduction by the amount refunded to you. 2011 tax forms instructions If you received a refund or rebate in 2013 of real estate taxes you deducted in an earlier year (either as an itemized deduction or an increase to your standard deduction), you generally must include the refund or rebate in income in the year you receive it. 2011 tax forms instructions However, the amount you include in income is limited to the amount of the deduction that reduced your tax in the earlier year. 2011 tax forms instructions For more information, see Recoveries in chapter 12. 2011 tax forms instructions Table 22-1. 2011 tax forms instructions Which Taxes Can You Deduct? Type of Tax You Can Deduct You Cannot Deduct Fees and Charges Fees and charges that are expenses of your trade or business or of producing income. 2011 tax forms instructions Fees and charges that are not expenses of your trade or business or of producing income, such as fees for driver's licenses, car inspections, parking, or charges for water bills (see Taxes and Fees You Cannot Deduct ). 2011 tax forms instructions     Fines and penalties. 2011 tax forms instructions Income Taxes State and local income taxes. 2011 tax forms instructions Federal income taxes. 2011 tax forms instructions   Foreign income taxes. 2011 tax forms instructions     Employee contributions to state funds listed under Contributions to state benefit funds . 2011 tax forms instructions Employee contributions to private or voluntary disability plans. 2011 tax forms instructions     State and local general sales taxes if you choose to deduct state and local income taxes. 2011 tax forms instructions General Sales Taxes State and local general sales taxes, including compensating use taxes. 2011 tax forms instructions State and local income taxes if you choose to deduct state and local general sales taxes. 2011 tax forms instructions Other Taxes Taxes that are expenses of your trade or business. 2011 tax forms instructions Federal excise taxes, such as tax on gasoline, that are not expenses of your trade or business or of producing income. 2011 tax forms instructions   Taxes on property producing rent or royalty income. 2011 tax forms instructions Per capita taxes. 2011 tax forms instructions   Occupational taxes. 2011 tax forms instructions See chapter 28. 2011 tax forms instructions     One-half of self-employment tax paid. 2011 tax forms instructions   Personal Property Taxes State and local personal property taxes. 2011 tax forms instructions Customs duties that are not expenses of your trade or business or of producing income. 2011 tax forms instructions Real Estate Taxes State and local real estate taxes. 2011 tax forms instructions Real estate taxes that are treated as imposed on someone else (see Division of real estate taxes between buyers and sellers ). 2011 tax forms instructions   Foreign real estate taxes. 2011 tax forms instructions Taxes for local benefits (with exceptions). 2011 tax forms instructions See Real Estate-Related Items You Cannot Deduct . 2011 tax forms instructions   Tenant's share of real estate taxes paid by  cooperative housing corporation. 2011 tax forms instructions Trash and garbage pickup fees (with exceptions). 2011 tax forms instructions See Real Estate-Related Items You Cannot Deduct . 2011 tax forms instructions     Rent increase due to higher real estate taxes. 2011 tax forms instructions     Homeowners' association charges. 2011 tax forms instructions Real Estate-Related Items You Cannot Deduct Payments for the following items generally are not deductible as real estate taxes. 2011 tax forms instructions Taxes for local benefits. 2011 tax forms instructions Itemized charges for services (such as trash and garbage pickup fees). 2011 tax forms instructions Transfer taxes (or stamp taxes). 2011 tax forms instructions Rent increases due to higher real estate taxes. 2011 tax forms instructions Homeowners' association charges. 2011 tax forms instructions Taxes for local benefits. 2011 tax forms instructions   Deductible real estate taxes generally do not include taxes charged for local benefits and improvements tending to increase the value of your property. 2011 tax forms instructions These include assessments for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements. 2011 tax forms instructions You should increase the basis of your property by the amount of the assessment. 2011 tax forms instructions   Local benefit taxes are deductible only if they are for maintenance, repair, or interest charges related to those benefits. 2011 tax forms instructions If only a part of the taxes is for maintenance, repair, or interest, you must be able to show the amount of that part to claim the deduction. 2011 tax forms instructions If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible. 2011 tax forms instructions    Taxes for local benefits may be included in your real estate tax bill. 2011 tax forms instructions If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. 2011 tax forms instructions You should use the rules above to determine if the local benefit tax is deductible. 2011 tax forms instructions Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. 2011 tax forms instructions Itemized charges for services. 2011 tax forms instructions    An itemized charge for services assessed against specific property or certain people is not a tax, even if the charge is paid to the taxing authority. 2011 tax forms instructions For example, you cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or A flat fee charged for a single service provided by your government (such as a $30 charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance). 2011 tax forms instructions    You must look at your real estate tax bill to determine if any nondeductible itemized charges, such as those listed above, are included in the bill. 2011 tax forms instructions If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. 2011 tax forms instructions Exception. 2011 tax forms instructions   Service charges used to maintain or improve services (such as trash collection or police and fire protection) are deductible as real estate taxes if: The fees or charges are imposed at a like rate against all property in the taxing jurisdiction, The funds collected are not earmarked; instead, they are commingled with general revenue funds, and Funds used to maintain or improve services are not limited to or determined by the amount of these fees or charges collected. 2011 tax forms instructions Transfer taxes (or stamp taxes). 2011 tax forms instructions   Transfer taxes and similar taxes and charges on the sale of a personal home are not deductible. 2011 tax forms instructions If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. 2011 tax forms instructions If paid by the buyer, they are included in the cost basis of the property. 2011 tax forms instructions Rent increase due to higher real estate taxes. 2011 tax forms instructions   If your landlord increases your rent in the form of a tax surcharge because of increased real estate taxes, you cannot deduct the increase as taxes. 2011 tax forms instructions Homeowners' association charges. 2011 tax forms instructions   These charges are not deductible because they are imposed by the homeowners' association, rather than the state or local government. 2011 tax forms instructions Personal Property Taxes Personal property tax is deductible if it is a state or local tax that is: Charged on personal property, Based only on the value of the personal property, and Charged on a yearly basis, even if it is collected more or less than once a year. 2011 tax forms instructions A tax that meets the above requirements can be considered charged on personal property even if it is for the exercise of a privilege. 2011 tax forms instructions For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways. 2011 tax forms instructions If the tax is partly based on value and partly based on other criteria, it may qualify in part. 2011 tax forms instructions Example. 2011 tax forms instructions Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. 2011 tax forms instructions You paid $32 based on the value ($1,500) and weight (3,400 lbs. 2011 tax forms instructions ) of your car. 2011 tax forms instructions You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. 2011 tax forms instructions The remaining $17 ($. 2011 tax forms instructions 50 × 34), based on the weight, is not deductible. 2011 tax forms instructions Taxes and Fees You Cannot Deduct Many federal, state, and local government taxes are not deductible because they do not fall within the categories discussed earlier. 2011 tax forms instructions Other taxes and fees, such as federal income taxes, are not deductible because the tax law specifically prohibits a deduction for them. 2011 tax forms instructions See Table 22-1. 2011 tax forms instructions Taxes and fees that are generally not deductible include the following items. 2011 tax forms instructions Employment taxes. 2011 tax forms instructions This includes social security, Medicare, and railroad retirement taxes withheld from your pay. 2011 tax forms instructions However, one-half of self-employment tax you pay is deductible. 2011 tax forms instructions In addition, the social security and other employment taxes you pay on the wages of a household worker may be included in medical expenses that you can deduct or child care expenses that allow you to claim the child and dependent care credit. 2011 tax forms instructions For more information, see chapters 21 and 32. 2011 tax forms instructions Estate, inheritance, legacy, or succession taxes. 2011 tax forms instructions However, you can deduct the estate tax attributable to income in respect of a decedent if you, as a beneficiary, must include that income in your gross income. 2011 tax forms instructions In that case, deduct the estate tax as a miscellaneous deduction that is not subject to the 2%-of-adjusted-gross-income limit. 2011 tax forms instructions For more information, see Publication 559, Survivors, Executors, and Administrators. 2011 tax forms instructions Federal income taxes. 2011 tax forms instructions This includes income taxes withheld from your pay. 2011 tax forms instructions Fines and penalties. 2011 tax forms instructions You cannot deduct fines and penalties paid to a government for violation of any law, including related amounts forfeited as collateral deposits. 2011 tax forms instructions Gift taxes. 2011 tax forms instructions License fees. 2011 tax forms instructions You cannot deduct license fees for personal purposes (such as marriage, driver's, and dog license fees). 2011 tax forms instructions Per capita taxes. 2011 tax forms instructions You cannot deduct state or local per capita taxes. 2011 tax forms instructions Many taxes and fees other than those listed above are also nondeductible, unless they are ordinary and necessary expenses of a business or income producing activity. 2011 tax forms instructions For other nondeductible items, see Real Estate-Related Items You Cannot Deduct , earlier. 2011 tax forms instructions Where To Deduct You deduct taxes on the following schedules. 2011 tax forms instructions State and local income taxes. 2011 tax forms instructions    These taxes are deducted on Schedule A (Form 1040), line 5, even if your only source of income is from business, rents, or royalties. 2011 tax forms instructions Check box a on line 5. 2011 tax forms instructions General sales taxes. 2011 tax forms instructions   Sales taxes are deducted on Schedule A (Form 1040), line 5. 2011 tax forms instructions You must check box b on line 5. 2011 tax forms instructions If you elect to deduct sales taxes, you cannot deduct state and local income taxes on Schedule A (Form 1040), line 5, box a. 2011 tax forms instructions Foreign income taxes. 2011 tax forms instructions   Generally, income taxes you pay to a foreign country or U. 2011 tax forms instructions S. 2011 tax forms instructions possession can be claimed as an itemized deduction on Schedule A (Form 1040), line 8, or as a credit against your U. 2011 tax forms instructions S. 2011 tax forms instructions income tax on Form 1040, line 47. 2011 tax forms instructions To claim the credit, you may have to complete and attach Form 1116. 2011 tax forms instructions For more information, see chapter 37, the Form 1040 instructions, or Publication 514. 2011 tax forms instructions Real estate taxes and personal property taxes. 2011 tax forms instructions    Real estate and personal property taxes are deducted on Schedule A (Form 1040), lines 6 and 7, respectively, unless they are paid on property used in your business, in which case they are deducted on Schedule C, Schedule C-EZ, or Schedule F (Form 1040). 2011 tax forms instructions Taxes on property that produces rent or royalty income are deducted on Schedule E (Form 1040). 2011 tax forms instructions Self-employment tax. 2011 tax forms instructions    Deduct one-half of your self-employment tax on Form 1040, line 27. 2011 tax forms instructions Other taxes. 2011 tax forms instructions    All other deductible taxes are deducted on Schedule A (Form 1040), line 8. 2011 tax forms instructions Prev  Up  Next   Home   More Online Publications
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American Recipes

Our cooking reflects the great diversity of our country. Try some classic American recipes today.

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The 2011 Tax Forms Instructions

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