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Amending 2011 Tax Return

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Amending 2011 Tax Return

Amending 2011 tax return 8. Amending 2011 tax return   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Amending 2011 tax return Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Amending 2011 tax return Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Amending 2011 tax return Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Amending 2011 tax return Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Amending 2011 tax return This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Amending 2011 tax return A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Amending 2011 tax return An exchange is a transfer of property for other property or services. Amending 2011 tax return Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Amending 2011 tax return If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Amending 2011 tax return If the adjusted basis of the property is more than the amount you realize, you will have a loss. Amending 2011 tax return Basis and adjusted basis. Amending 2011 tax return   The basis of property you buy is usually its cost. Amending 2011 tax return The adjusted basis of property is basis plus certain additions and minus certain deductions. Amending 2011 tax return See chapter 6 for more information about basis and adjusted basis. Amending 2011 tax return Amount realized. Amending 2011 tax return   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Amending 2011 tax return The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Amending 2011 tax return   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Amending 2011 tax return Amount recognized. Amending 2011 tax return   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Amending 2011 tax return A recognized gain is a gain you must include in gross income and report on your income tax return. Amending 2011 tax return A recognized loss is a loss you deduct from gross income. Amending 2011 tax return However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Amending 2011 tax return See Like-Kind Exchanges next. Amending 2011 tax return Also, a loss from the disposition of property held for personal use is not deductible. Amending 2011 tax return Like-Kind Exchanges Certain exchanges of property are not taxable. Amending 2011 tax return This means any gain from the exchange is not recognized, and any loss cannot be deducted. Amending 2011 tax return Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Amending 2011 tax return The exchange of property for the same kind of property is the most common type of nontaxable exchange. Amending 2011 tax return To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Amending 2011 tax return Qualifying property. Amending 2011 tax return Like-kind property. Amending 2011 tax return These two requirements are discussed later. Amending 2011 tax return Multiple-party transactions. Amending 2011 tax return   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Amending 2011 tax return Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Amending 2011 tax return Receipt of title from third party. Amending 2011 tax return   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Amending 2011 tax return Basis of property received. Amending 2011 tax return   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Amending 2011 tax return See chapter 6 for more information. Amending 2011 tax return Money paid. Amending 2011 tax return   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Amending 2011 tax return The basis of the property received is the basis of the property given up, increased by the money paid. Amending 2011 tax return Example. Amending 2011 tax return You traded an old tractor with an adjusted basis of $15,000 for a new one. Amending 2011 tax return The new tractor costs $300,000. Amending 2011 tax return You were allowed $80,000 for the old tractor and paid $220,000 cash. Amending 2011 tax return You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Amending 2011 tax return If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Amending 2011 tax return In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Amending 2011 tax return Reporting the exchange. Amending 2011 tax return   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Amending 2011 tax return The Instructions for Form 8824 explain how to report the details of the exchange. Amending 2011 tax return   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Amending 2011 tax return You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Amending 2011 tax return See chapter 9 for more information. Amending 2011 tax return Qualifying property. Amending 2011 tax return   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Amending 2011 tax return Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Amending 2011 tax return Nonqualifying property. Amending 2011 tax return   The rules for like-kind exchanges do not apply to exchanges of the following property. Amending 2011 tax return Property you use for personal purposes, such as your home and family car. Amending 2011 tax return Stock in trade or other property held primarily for sale, such as crops and produce. Amending 2011 tax return Stocks, bonds, or notes. Amending 2011 tax return However, see Qualifying property above. Amending 2011 tax return Other securities or evidences of indebtedness, such as accounts receivable. Amending 2011 tax return Partnership interests. Amending 2011 tax return However, you may have a nontaxable exchange under other rules. Amending 2011 tax return See Other Nontaxable Exchanges in chapter 1 of Publication 544. Amending 2011 tax return Like-kind property. Amending 2011 tax return   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Amending 2011 tax return Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Amending 2011 tax return Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Amending 2011 tax return For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Amending 2011 tax return   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Amending 2011 tax return An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Amending 2011 tax return The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Amending 2011 tax return For example, the exchange of a bull for a cow is not a like-kind exchange. Amending 2011 tax return An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Amending 2011 tax return    Note. Amending 2011 tax return Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Amending 2011 tax return Personal property. Amending 2011 tax return   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Amending 2011 tax return Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Amending 2011 tax return Property classified in any General Asset Class may not be classified within a Product Class. Amending 2011 tax return Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Amending 2011 tax return General Asset Classes. Amending 2011 tax return   General Asset Classes describe the types of property frequently used in many businesses. Amending 2011 tax return They include, but are not limited to, the following property. Amending 2011 tax return Office furniture, fixtures, and equipment (asset class 00. Amending 2011 tax return 11). Amending 2011 tax return Information systems, such as computers and peripheral equipment (asset class 00. Amending 2011 tax return 12). Amending 2011 tax return Data handling equipment except computers (asset class 00. Amending 2011 tax return 13). Amending 2011 tax return Automobiles and taxis (asset class 00. Amending 2011 tax return 22). Amending 2011 tax return Light general purpose trucks (asset class 00. Amending 2011 tax return 241). Amending 2011 tax return Heavy general purpose trucks (asset class 00. Amending 2011 tax return 242). Amending 2011 tax return Tractor units for use over-the-road (asset class 00. Amending 2011 tax return 26). Amending 2011 tax return Trailers and trailer-mounted containers (asset class 00. Amending 2011 tax return 27). Amending 2011 tax return Industrial steam and electric generation and/or distribution systems (asset class 00. Amending 2011 tax return 4). Amending 2011 tax return Product Classes. Amending 2011 tax return   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Amending 2011 tax return The latest version of the manual can be accessed at www. Amending 2011 tax return census. Amending 2011 tax return gov/eos/www/naics/. Amending 2011 tax return Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Amending 2011 tax return ntis. Amending 2011 tax return gov/products/naics. Amending 2011 tax return aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Amending 2011 tax return A CD-ROM version with search and retrieval software is also available from NTIS. Amending 2011 tax return    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Amending 2011 tax return Partially nontaxable exchange. Amending 2011 tax return   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Amending 2011 tax return You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Amending 2011 tax return A loss is not deductible. Amending 2011 tax return Example 1. Amending 2011 tax return You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Amending 2011 tax return You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Amending 2011 tax return However, only $10,000, the cash received, is recognized (included in income). Amending 2011 tax return Example 2. Amending 2011 tax return Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Amending 2011 tax return Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Amending 2011 tax return Example 3. Amending 2011 tax return Assume in Example 1 that the FMV of the land you received was only $15,000. Amending 2011 tax return Your $5,000 loss is not recognized. Amending 2011 tax return Unlike property given up. Amending 2011 tax return   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Amending 2011 tax return The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Amending 2011 tax return Like-kind exchanges between related persons. Amending 2011 tax return   Special rules apply to like-kind exchanges between related persons. Amending 2011 tax return These rules affect both direct and indirect exchanges. Amending 2011 tax return Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amending 2011 tax return The gain or loss on the original exchange must be recognized as of the date of the later disposition. Amending 2011 tax return The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Amending 2011 tax return Related persons. Amending 2011 tax return   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Amending 2011 tax return ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Amending 2011 tax return   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Amending 2011 tax return Example. Amending 2011 tax return You used a grey pickup truck in your farming business. Amending 2011 tax return Your sister used a red pickup truck in her landscaping business. Amending 2011 tax return In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Amending 2011 tax return At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Amending 2011 tax return The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Amending 2011 tax return You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Amending 2011 tax return Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Amending 2011 tax return However, because this was a like-kind exchange, you recognized no gain. Amending 2011 tax return Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Amending 2011 tax return She recognized gain only to the extent of the money she received, $200. Amending 2011 tax return Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Amending 2011 tax return In 2013, you sold the red pickup truck to a third party for $7,000. Amending 2011 tax return Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amending 2011 tax return On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Amending 2011 tax return You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Amending 2011 tax return In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Amending 2011 tax return Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Amending 2011 tax return Exceptions to the rules for related persons. Amending 2011 tax return   The following property dispositions are excluded from these rules. Amending 2011 tax return Dispositions due to the death of either related person. Amending 2011 tax return Involuntary conversions. Amending 2011 tax return Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Amending 2011 tax return Multiple property exchanges. Amending 2011 tax return   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Amending 2011 tax return However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Amending 2011 tax return Transfer and receive properties in two or more exchange groups. Amending 2011 tax return Transfer or receive more than one property within a single exchange group. Amending 2011 tax return   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Amending 2011 tax return Deferred exchange. Amending 2011 tax return   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Amending 2011 tax return A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Amending 2011 tax return The property you receive is replacement property. Amending 2011 tax return The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Amending 2011 tax return In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Amending 2011 tax return   For more information see Deferred Exchanges in chapter 1 of Publication 544. Amending 2011 tax return Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Amending 2011 tax return This rule does not apply if the recipient is a nonresident alien. Amending 2011 tax return Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Amending 2011 tax return Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Amending 2011 tax return The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Amending 2011 tax return This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Amending 2011 tax return This rule applies for determining loss as well as gain. Amending 2011 tax return Any gain recognized on a transfer in trust increases the basis. Amending 2011 tax return For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Amending 2011 tax return Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Amending 2011 tax return You may also have a capital gain if your section 1231 transactions result in a net gain. Amending 2011 tax return See Section 1231 Gains and Losses in  chapter 9. Amending 2011 tax return To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Amending 2011 tax return Your net capital gains may be taxed at a lower tax rate than ordinary income. Amending 2011 tax return See Capital Gains Tax Rates , later. Amending 2011 tax return Your deduction for a net capital loss may be limited. Amending 2011 tax return See Treatment of Capital Losses , later. Amending 2011 tax return Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Amending 2011 tax return The following items are examples of capital assets. Amending 2011 tax return A home owned and occupied by you and your family. Amending 2011 tax return Household furnishings. Amending 2011 tax return A car used for pleasure. Amending 2011 tax return If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Amending 2011 tax return Stocks and bonds. Amending 2011 tax return However, there are special rules for gains on qualified small business stock. Amending 2011 tax return For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Amending 2011 tax return Personal-use property. Amending 2011 tax return   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Amending 2011 tax return Loss from the sale or exchange of personal-use property is not deductible. Amending 2011 tax return You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Amending 2011 tax return For information on casualties and thefts, see chapter 11. Amending 2011 tax return Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Amending 2011 tax return The time you own an asset before disposing of it is the holding period. Amending 2011 tax return If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Amending 2011 tax return Report it in Part I of Schedule D (Form 1040). Amending 2011 tax return If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Amending 2011 tax return Report it in Part II of Schedule D (Form 1040). Amending 2011 tax return Holding period. Amending 2011 tax return   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Amending 2011 tax return The day you disposed of the property is part of your holding period. Amending 2011 tax return Example. Amending 2011 tax return If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Amending 2011 tax return If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Amending 2011 tax return Inherited property. Amending 2011 tax return   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Amending 2011 tax return This rule does not apply to livestock used in a farm business. Amending 2011 tax return See Holding period under Livestock , later. Amending 2011 tax return Nonbusiness bad debt. Amending 2011 tax return   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Amending 2011 tax return See chapter 4 of Publication 550. Amending 2011 tax return Nontaxable exchange. Amending 2011 tax return   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Amending 2011 tax return That is, it begins on the same day as your holding period for the old property. Amending 2011 tax return Gift. Amending 2011 tax return   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Amending 2011 tax return Real property. Amending 2011 tax return   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Amending 2011 tax return   However, taking possession of real property under an option agreement is not enough to start the holding period. Amending 2011 tax return The holding period cannot start until there is an actual contract of sale. Amending 2011 tax return The holding period of the seller cannot end before that time. Amending 2011 tax return Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Amending 2011 tax return Net short-term capital gain or loss. Amending 2011 tax return   Combine your short-term capital gains and losses. Amending 2011 tax return Do this by adding all of your short-term capital gains. Amending 2011 tax return Then add all of your short-term capital losses. Amending 2011 tax return Subtract the lesser total from the greater. Amending 2011 tax return The difference is your net short-term capital gain or loss. Amending 2011 tax return Net long-term capital gain or loss. Amending 2011 tax return   Follow the same steps to combine your long-term capital gains and losses. Amending 2011 tax return The result is your net long-term capital gain or loss. Amending 2011 tax return Net gain. Amending 2011 tax return   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Amending 2011 tax return However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Amending 2011 tax return See Capital Gains Tax Rates , later. Amending 2011 tax return Net loss. Amending 2011 tax return   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Amending 2011 tax return But there are limits on how much loss you can deduct and when you can deduct it. Amending 2011 tax return See Treatment of Capital Losses next. Amending 2011 tax return Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Amending 2011 tax return For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Amending 2011 tax return If your other income is low, you may not be able to use the full $3,000. Amending 2011 tax return The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Amending 2011 tax return Capital loss carryover. Amending 2011 tax return   Generally, you have a capital loss carryover if either of the following situations applies to you. Amending 2011 tax return Your net loss on Schedule D (Form 1040), is more than the yearly limit. Amending 2011 tax return Your taxable income without your deduction for exemptions is less than zero. Amending 2011 tax return If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Amending 2011 tax return    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Amending 2011 tax return Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Amending 2011 tax return These lower rates are called the maximum capital gains rates. Amending 2011 tax return The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Amending 2011 tax return See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Amending 2011 tax return Also see Publication 550. Amending 2011 tax return Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Amending 2011 tax return A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Amending 2011 tax return Property held for sale in the ordinary course of your farm business. Amending 2011 tax return   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Amending 2011 tax return Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Amending 2011 tax return The treatment of this property is discussed in chapter 3. Amending 2011 tax return Land and depreciable properties. Amending 2011 tax return   Land and depreciable property you use in farming are not capital assets. Amending 2011 tax return Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Amending 2011 tax return However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Amending 2011 tax return The sales of these business assets are reported on Form 4797. Amending 2011 tax return See chapter 9 for more information. Amending 2011 tax return Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Amending 2011 tax return Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Amending 2011 tax return A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Amending 2011 tax return The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Amending 2011 tax return A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Amending 2011 tax return Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Amending 2011 tax return Hedging transactions. Amending 2011 tax return Transactions that are not hedging transactions. Amending 2011 tax return Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Amending 2011 tax return There is a limit on the amount of capital losses you can deduct each year. Amending 2011 tax return Hedging transactions are not subject to the mark-to-market rules. Amending 2011 tax return If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Amending 2011 tax return They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Amending 2011 tax return The gain or loss on the termination of these hedges is generally ordinary gain or loss. Amending 2011 tax return Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Amending 2011 tax return Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Amending 2011 tax return Examples include fuel and feed. Amending 2011 tax return If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Amending 2011 tax return Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Amending 2011 tax return It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Amending 2011 tax return Retain the identification of each hedging transaction with your books and records. Amending 2011 tax return Also, identify the item(s) or aggregate risk that is being hedged in your records. Amending 2011 tax return Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Amending 2011 tax return For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Amending 2011 tax return Accounting methods for hedging transactions. Amending 2011 tax return   The accounting method you use for a hedging transaction must clearly reflect income. Amending 2011 tax return This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Amending 2011 tax return There are requirements and limits on the method you can use for certain hedging transactions. Amending 2011 tax return See Regulations section 1. Amending 2011 tax return 446-4(e) for those requirements and limits. Amending 2011 tax return   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Amending 2011 tax return Cash method. Amending 2011 tax return Farm-price method. Amending 2011 tax return Unit-livestock-price method. Amending 2011 tax return   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Amending 2011 tax return   Your books and records must describe the accounting method used for each type of hedging transaction. Amending 2011 tax return They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Amending 2011 tax return You must make the additional identification no more than 35 days after entering into the hedging transaction. Amending 2011 tax return Example of a hedging transaction. Amending 2011 tax return   You file your income tax returns on the cash method. Amending 2011 tax return On July 2 you anticipate a yield of 50,000 bushels of corn this year. Amending 2011 tax return The December futures price is $5. Amending 2011 tax return 75 a bushel, but there are indications that by harvest time the price will drop. Amending 2011 tax return To protect yourself against a drop in the price, you enter into the following hedging transaction. Amending 2011 tax return You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Amending 2011 tax return 75 a bushel. Amending 2011 tax return   The price did not drop as anticipated but rose to $6 a bushel. Amending 2011 tax return In November, you sell your crop at a local elevator for $6 a bushel. Amending 2011 tax return You also close out your futures position by buying ten December contracts for $6 a bushel. Amending 2011 tax return You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Amending 2011 tax return   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Amending 2011 tax return Your loss on the hedge is 25 cents a bushel. Amending 2011 tax return In effect, the net selling price of your corn is $5. Amending 2011 tax return 75 a bushel. Amending 2011 tax return   Report the results of your futures transactions and your sale of corn separately on Schedule F. Amending 2011 tax return See the instructions for the 2013 Schedule F (Form 1040). Amending 2011 tax return   The loss on your futures transactions is $13,900, figured as follows. Amending 2011 tax return July 2 - Sold December corn futures (50,000 bu. Amending 2011 tax return @$5. Amending 2011 tax return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amending 2011 tax return @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Amending 2011 tax return   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Amending 2011 tax return × $6). Amending 2011 tax return Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Amending 2011 tax return   Assume you were right and the price went down 25 cents a bushel. Amending 2011 tax return In effect, you would still net $5. Amending 2011 tax return 75 a bushel, figured as follows. Amending 2011 tax return Sold cash corn, per bushel $5. Amending 2011 tax return 50 Gain on hedge, per bushel . Amending 2011 tax return 25 Net price, per bushel $5. Amending 2011 tax return 75       The gain on your futures transactions would have been $11,100, figured as follows. Amending 2011 tax return July 2 - Sold December corn futures (50,000 bu. Amending 2011 tax return @$5. Amending 2011 tax return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amending 2011 tax return @$5. Amending 2011 tax return 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Amending 2011 tax return   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Amending 2011 tax return Livestock This part discusses the sale or exchange of livestock used in your farm business. Amending 2011 tax return Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Amending 2011 tax return However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Amending 2011 tax return See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Amending 2011 tax return The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Amending 2011 tax return The sale of this livestock is reported on Schedule F. Amending 2011 tax return See chapter 3. Amending 2011 tax return Also, special rules apply to sales or exchanges caused by weather-related conditions. Amending 2011 tax return See chapter 3. Amending 2011 tax return Holding period. Amending 2011 tax return   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Amending 2011 tax return Livestock. Amending 2011 tax return   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Amending 2011 tax return Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Amending 2011 tax return Livestock used in farm business. Amending 2011 tax return   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Amending 2011 tax return The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Amending 2011 tax return An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Amending 2011 tax return However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Amending 2011 tax return Example 1. Amending 2011 tax return You discover an animal that you intend to use for breeding purposes is sterile. Amending 2011 tax return You dispose of it within a reasonable time. Amending 2011 tax return This animal was held for breeding purposes. Amending 2011 tax return Example 2. Amending 2011 tax return You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Amending 2011 tax return These young animals were held for breeding or dairy purposes. Amending 2011 tax return Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Amending 2011 tax return See Sales Caused by Weather-Related Conditions in chapter 3. Amending 2011 tax return Example 3. Amending 2011 tax return You are in the business of raising hogs for slaughter. Amending 2011 tax return Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Amending 2011 tax return You sell the brood sows after obtaining the litter. Amending 2011 tax return Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Amending 2011 tax return Example 4. Amending 2011 tax return You are in the business of raising registered cattle for sale to others for use as breeding cattle. Amending 2011 tax return The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Amending 2011 tax return Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Amending 2011 tax return Such use does not demonstrate that you are holding the cattle for breeding purposes. Amending 2011 tax return However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Amending 2011 tax return The same applies to hog and sheep breeders. Amending 2011 tax return Example 5. Amending 2011 tax return You breed, raise, and train horses for racing purposes. Amending 2011 tax return Every year you cull horses from your racing stable. Amending 2011 tax return In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Amending 2011 tax return These horses are all considered held for sporting purposes. Amending 2011 tax return Figuring gain or loss on the cash method. Amending 2011 tax return   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Amending 2011 tax return Raised livestock. Amending 2011 tax return   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Amending 2011 tax return Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Amending 2011 tax return The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Amending 2011 tax return However, see Uniform Capitalization Rules in chapter 6. Amending 2011 tax return Purchased livestock. Amending 2011 tax return   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Amending 2011 tax return Example. Amending 2011 tax return A farmer sold a breeding cow on January 8, 2013, for $1,250. Amending 2011 tax return Expenses of the sale were $125. Amending 2011 tax return The cow was bought July 2, 2009, for $1,300. Amending 2011 tax return Depreciation (not less than the amount allowable) was $867. Amending 2011 tax return Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Amending 2011 tax return Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Amending 2011 tax return Any loss on the disposition of such property is treated as a long-term capital loss. Amending 2011 tax return Converted wetland. Amending 2011 tax return   This is generally land that was drained or filled to make the production of agricultural commodities possible. Amending 2011 tax return It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Amending 2011 tax return   A wetland (before conversion) is land that meets all the following conditions. Amending 2011 tax return It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Amending 2011 tax return It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Amending 2011 tax return It supports, under normal circumstances, mostly plants that grow in saturated soil. Amending 2011 tax return Highly erodible cropland. Amending 2011 tax return   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Amending 2011 tax return Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Amending 2011 tax return Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Amending 2011 tax return Successor. Amending 2011 tax return   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Amending 2011 tax return Timber Standing timber you held as investment property is a capital asset. Amending 2011 tax return Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Amending 2011 tax return If you held the timber primarily for sale to customers, it is not a capital asset. Amending 2011 tax return Gain or loss on its sale is ordinary business income or loss. Amending 2011 tax return It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Amending 2011 tax return See the Instructions for Schedule F (Form 1040). Amending 2011 tax return Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Amending 2011 tax return Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Amending 2011 tax return , are ordinary farm income and expenses reported on Schedule F. Amending 2011 tax return Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Amending 2011 tax return Timber considered cut. Amending 2011 tax return   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Amending 2011 tax return This is true whether the timber is cut under contract or whether you cut it yourself. Amending 2011 tax return Christmas trees. Amending 2011 tax return   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Amending 2011 tax return They qualify for both rules discussed below. Amending 2011 tax return Election to treat cutting as a sale or exchange. Amending 2011 tax return   Under the general rule, the cutting of timber results in no gain or loss. Amending 2011 tax return It is not until a sale or exchange occurs that gain or loss is realized. Amending 2011 tax return But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Amending 2011 tax return Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Amending 2011 tax return Any later sale results in ordinary business income or loss. Amending 2011 tax return See the example below. Amending 2011 tax return   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Amending 2011 tax return Making the election. Amending 2011 tax return   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Amending 2011 tax return You do not have to make the election in the first year you cut the timber. Amending 2011 tax return You can make it in any year to which the election would apply. Amending 2011 tax return If the timber is partnership property, the election is made on the partnership return. Amending 2011 tax return This election cannot be made on an amended return. Amending 2011 tax return   Once you have made the election, it remains in effect for all later years unless you revoke it. Amending 2011 tax return Election under section 631(a) may be revoked. Amending 2011 tax return   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Amending 2011 tax return The prior election (and revocation) is disregarded for purposes of making a subsequent election. Amending 2011 tax return See Form T (Timber), Forest Activities Schedule, for more information. Amending 2011 tax return Gain or loss. Amending 2011 tax return   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Amending 2011 tax return   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Amending 2011 tax return Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Amending 2011 tax return 611-3. Amending 2011 tax return   Depletion of timber is discussed in chapter 7. Amending 2011 tax return Example. Amending 2011 tax return   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Amending 2011 tax return It had an adjusted basis for depletion of $40 per MBF. Amending 2011 tax return You are a calendar year taxpayer. Amending 2011 tax return On January 1, 2013, the timber had a FMV of $350 per MBF. Amending 2011 tax return It was cut in April for sale. Amending 2011 tax return On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Amending 2011 tax return You report the difference between the FMV and your adjusted basis for depletion as a gain. Amending 2011 tax return This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Amending 2011 tax return You figure your gain as follows. Amending 2011 tax return FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Amending 2011 tax return Outright sales of timber. Amending 2011 tax return   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Amending 2011 tax return However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Amending 2011 tax return Cutting contract. Amending 2011 tax return   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Amending 2011 tax return You are the owner of the timber. Amending 2011 tax return You held the timber longer than 1 year before its disposal. Amending 2011 tax return You kept an economic interest in the timber. Amending 2011 tax return   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Amending 2011 tax return   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Amending 2011 tax return Include this amount on Form 4797 along with your other section 1231 gains or losses. Amending 2011 tax return Date of disposal. Amending 2011 tax return   The date of disposal is the date the timber is cut. Amending 2011 tax return However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Amending 2011 tax return   This election applies only to figure the holding period of the timber. Amending 2011 tax return It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Amending 2011 tax return   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Amending 2011 tax return The statement must identify the advance payments subject to the election and the contract under which they were made. Amending 2011 tax return   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Amending 2011 tax return Attach the statement to the amended return and write “Filed pursuant to section 301. Amending 2011 tax return 9100-2” at the top of the statement. Amending 2011 tax return File the amended return at the same address the original return was filed. Amending 2011 tax return Owner. Amending 2011 tax return   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Amending 2011 tax return You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Amending 2011 tax return Tree stumps. Amending 2011 tax return   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Amending 2011 tax return Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Amending 2011 tax return However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Amending 2011 tax return Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Amending 2011 tax return   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Amending 2011 tax return Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Amending 2011 tax return If you have a gain from the sale, you may be allowed to exclude the gain on your home. Amending 2011 tax return For more information, see Publication 523, Selling Your Home. Amending 2011 tax return The gain on the sale of your business property is taxable. Amending 2011 tax return A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Amending 2011 tax return Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Amending 2011 tax return See chapter 9. Amending 2011 tax return Losses from personal-use property, other than casualty or theft losses, are not deductible. Amending 2011 tax return If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Amending 2011 tax return See chapter 10 for information about installment sales. Amending 2011 tax return When you sell your farm, the gain or loss on each asset is figured separately. Amending 2011 tax return The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Amending 2011 tax return Each of the assets sold must be classified as one of the following. Amending 2011 tax return Capital asset held 1 year or less. Amending 2011 tax return Capital asset held longer than 1 year. Amending 2011 tax return Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Amending 2011 tax return Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Amending 2011 tax return Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Amending 2011 tax return Allocation of consideration paid for a farm. Amending 2011 tax return   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Amending 2011 tax return The residual method is required only if the group of assets sold constitutes a trade or business. Amending 2011 tax return This method determines gain or loss from the transfer of each asset. Amending 2011 tax return It also determines the buyer's basis in the business assets. Amending 2011 tax return For more information, see Sale of a Business in chapter 2 of Publication 544. Amending 2011 tax return Property used in farm operation. Amending 2011 tax return   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Amending 2011 tax return Recognized gains and losses on business property must be reported on your return for the year of the sale. Amending 2011 tax return If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Amending 2011 tax return Example. Amending 2011 tax return You sell your farm, including your main home, which you have owned since December 2001. Amending 2011 tax return You realize gain on the sale as follows. Amending 2011 tax return   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Amending 2011 tax return All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Amending 2011 tax return Treat the balance as section 1231 gain. Amending 2011 tax return The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Amending 2011 tax return Partial sale. Amending 2011 tax return   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Amending 2011 tax return You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Amending 2011 tax return For a detailed discussion on installment sales, see Publication 544. Amending 2011 tax return Adjusted basis of the part sold. Amending 2011 tax return   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Amending 2011 tax return , on the part sold. Amending 2011 tax return If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Amending 2011 tax return Example. Amending 2011 tax return You bought a 600-acre farm for $700,000. Amending 2011 tax return The farm included land and buildings. Amending 2011 tax return The purchase contract designated $600,000 of the purchase price to the land. Amending 2011 tax return You later sold 60 acres of land on which you had installed a fence. Amending 2011 tax return Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Amending 2011 tax return Use this amount to determine your gain or loss on the sale of the 60 acres. Amending 2011 tax return Assessed values for local property taxes. Amending 2011 tax return   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Amending 2011 tax return Example. Amending 2011 tax return Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Amending 2011 tax return However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Amending 2011 tax return The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Amending 2011 tax return Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Amending 2011 tax return The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Amending 2011 tax return Sale of your home. Amending 2011 tax return   Your home is a capital asset and not property used in the trade or business of farming. Amending 2011 tax return If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Amending 2011 tax return Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Amending 2011 tax return   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Amending 2011 tax return For more information on basis, see chapter 6. Amending 2011 tax return More information. Amending 2011 tax return   For more information on selling your home, see Publication 523. Amending 2011 tax return Gain from condemnation. Amending 2011 tax return   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Amending 2011 tax return However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Amending 2011 tax return Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Amending 2011 tax return The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Amending 2011 tax return This is true even if you voluntarily return the property to the lender. Amending 2011 tax return You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Amending 2011 tax return Buyer's (borrower's) gain or loss. Amending 2011 tax return   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Amending 2011 tax return The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Amending 2011 tax return See Determining Gain or Loss , earlier. Amending 2011 tax return Worksheet 8-1. Amending 2011 tax return Worksheet for Foreclosures andRepossessions Part 1. Amending 2011 tax return Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Amending 2011 tax return Complete this part only if you were personally liable for the debt. Amending 2011 tax return Otherwise, go to Part 2. Amending 2011 tax return   1. Amending 2011 tax return Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Amending 2011 tax return Enter the Fair Market Value of the transferred property   3. Amending 2011 tax return Ordinary income from cancellation of debt upon foreclosure or repossession. Amending 2011 tax return * Subtract line 2 from line 1. Amending 2011 tax return If zero or less, enter -0-   Part 2. Amending 2011 tax return Figure your gain or loss from foreclosure or repossession. Amending 2011 tax return   4. Amending 2011 tax return If you completed Part 1, enter the smaller of line 1 or line 2. Amending 2011 tax return If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Amending 2011 tax return Enter any proceeds you received from the foreclosure sale   6. Amending 2011 tax return Add lines 4 and 5   7. Amending 2011 tax return Enter the adjusted basis of the transferred property   8. Amending 2011 tax return Gain or loss from foreclosure or repossession. Amending 2011 tax return Subtract line 7  from line 6   * The income may not be taxable. Amending 2011 tax return See Cancellation of debt . Amending 2011 tax return    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Amending 2011 tax return Amount realized on a nonrecourse debt. Amending 2011 tax return   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Amending 2011 tax return The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Amending 2011 tax return Example 1. Amending 2011 tax return Ann paid $200,000 for land used in her farming business. Amending 2011 tax return She paid $15,000 down and borrowed the remaining $185,000 from a bank. Amending 2011 tax return Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Amending 2011 tax return The bank foreclosed on the loan 2 years after Ann stopped making payments. Amending 2011 tax return When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Amending 2011 tax return The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Amending 2011 tax return She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Amending 2011 tax return She has a $20,000 deductible loss. Amending 2011 tax return Example 2. Amending 2011 tax return Assume the same facts as in Example 1 except the FMV of the land was $210,000. Amending 2011 tax return The result is the same. Amending 2011 tax return The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Amending 2011 tax return Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Amending 2011 tax return Amount realized on a recourse debt. Amending 2011 tax return   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Amending 2011 tax return   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Amending 2011 tax return The amount realized does not include the canceled debt that is your income from cancellation of debt. Amending 2011 tax return See Cancellation of debt , later. Amending 2011 tax return Example 3. Amending 2011 tax return Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Amending 2011 tax return In this case, the amount she realizes is $170,000. Amending 2011 tax return This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Amending 2011 tax return Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Amending 2011 tax return She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Amending 2011 tax return She is also treated as receiving ordinary income from cancellation of debt. Amending 2011 tax return That income is $10,000 ($180,000 − $170,000). Amending 2011 tax return This is the part of the canceled debt not included in the amount realized. Amending 2011 tax return She reports this as other income on Schedule F, line 8. Amending 2011 tax return Seller's (lender's) gain or loss on repossession. Amending 2011 tax return   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Amending 2011 tax return For more information, see Repossession in Publication 537, Installment Sales. Amending 2011 tax return Cancellation of debt. Amending 2011 tax return   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Amending 2011 tax return This income is separate from any gain or loss realized from the foreclosure or repossession. Amending 2011 tax return Report the income from cancellation of a business debt on Schedule F, line 8. Amending 2011 tax return Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amending 2011 tax return    You can use Worksheet 8-1 to figure your income from cancellation of debt. Amending 2011 tax return   However, income from cancellation of debt is not taxed if any of the following apply. Amending 2011 tax return The cancellation is intended as a gift. Amending 2011 tax return The debt is qualified farm debt (see chapter 3). Amending 2011 tax return The debt is qualified real property business debt (see chapter 5 of Publication 334). Amending 2011 tax return You are insolvent or bankrupt (see  chapter 3). Amending 2011 tax return The debt is qualified principal residence indebtedness (see chapter 3). Amending 2011 tax return   Use Form 982 to report the income exclusion. Amending 2011 tax return Abandonment The abandonment of property is a disposition of property. Amending 2011 tax return You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Amending 2011 tax return Business or investment property. Amending 2011 tax return   Loss from abandonment of business or investment property is deductible as a loss. Amending 2011 tax return Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Amending 2011 tax return If your adjusted basis is more than the amount you realize (if any), then you have a loss. Amending 2011 tax return If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Amending 2011 tax return This rule also applies to leasehold improvements the lessor made for the lessee. Amending 2011 tax return However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Amending 2011 tax return   If the abandoned property is secured by debt, special rules apply. Amending 2011 tax return The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Amending 2011 tax return For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Amending 2011 tax return The abandonment loss is deducted in the tax year in which the loss is sustained. Amending 2011 tax return Report the loss on Form 4797, Part II, line 10. Amending 2011 tax return Personal-use property. Amending 2011 tax return   You cannot deduct any loss from abandonment of your home or other property held for personal use. Amending 2011 tax return Canceled debt. Amending 2011 tax return   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Amending 2011 tax return This income is separate from any loss realized from abandonment of the property. Amending 2011 tax return Report income from cancellation of a debt related to a business or rental activity as business or rental income. Amending 2011 tax return Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amending 2011 tax return   However, income from cancellation of debt is not taxed in certain circumstances. Amending 2011 tax return See Cancellation of debt earlier under Foreclosure or Repossession . Amending 2011 tax return Forms 1099-A and 1099-C. Amending 2011 tax return   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Amending 2011 tax return However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Amending 2011 tax return The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Amending 2011 tax return For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Amending 2011 tax return Prev  Up  Next   Home   More Online Publications
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Strategic Plan and Other References

IRS Strategic Plan, Fiscal Years 2009-2013
The plan outlines how the IRS will improve service to taxpayers and enforcement of the law over the next five years.

IRS Long Term Measures
The IRS has identified long-term measures that can be used to evaluate progress in achieving the goals established by the IRS Strategic Plan.

Budget in Brief FY 2014
This summarizes how the budget request will enable the agency to meet its strategic goals: improve customer service and enhance enforcement of the tax laws.

Budget in Brief FY 2013
This summarizes how the budget request will enable the agency to meet its strategic goals: improve customer service and enhance enforcement of the tax laws.

Green Book
The Green Book contains general explanations of the administration’s fiscal year revenue proposals.

Priority Guidance Plan
Information relating to the Priority Guidance Plan, including links to both the current and prior versions, and news or notices about the Plan.

Modernization Vision and Strategy
This provides an executive summary of IRS's multi-year information technology strategic plan.

At-a-Glance: IRS Divisions and Principal Offices
Get an overview of the four primary operating divisions and the other principal offices in the IRS organization.

IRS Information Quality Guidelines
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Procurement
Solicitations, IRS contracts, the Small Business Program Office, Treasury Acquisition Institute (TAI), Total Information Processing Support Services (TIPSS-4) and other resources for those looking to do business with the IRS.

No FEAR Act
Quarterly report of IRS Equal Employment Opportunity internal complaint activity, posted in accordance with the Notification and Federal Employee Antidiscrimination and Retaliation (No FEAR) Act of 2002. (PDF file, maintained on the US Department of the Treasury's web site.)

IRS Oversight Organizations
A listing of federal agencies, House and Senate committees, advisory boards and advocacy panels that perform IRS oversight functions.

Workforce of Tomorrow Report
Publication 4783, a report from the Workforce of Tomorrow Task Force, contains recommendations on how the IRS can become the best place to work in federal government and ensure that it has the leadership and workforce it needs in the future.

Page Last Reviewed or Updated: 31-Mar-2014

The Amending 2011 Tax Return

Amending 2011 tax return 4. Amending 2011 tax return   Other Section 501(c) Organizations Table of Contents Introduction 501(c)(4) - Civic Leagues and Social Welfare OrganizationsSpecific Organizations 501(c)(5) - Labor, Agricultural and Horticultural OrganizationsLabor Organizations Agricultural and Horticultural Organizations 501(c)(6) - Business Leagues, etc. Amending 2011 tax return Line of business. Amending 2011 tax return Examples. Amending 2011 tax return Improvement of business conditions. Amending 2011 tax return Exception for local legislation. Amending 2011 tax return De minimis exception. Amending 2011 tax return Grass roots lobbying. Amending 2011 tax return 501(c)(7) - Social and Recreation ClubsLimited membership. Amending 2011 tax return Support. Amending 2011 tax return Facilities open to public. Amending 2011 tax return Gross receipts from nonmembership sources. Amending 2011 tax return Gross receipts. Amending 2011 tax return Nontraditional activities. Amending 2011 tax return 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal SocietiesFraternal Beneficiary Societies (501(c)(8)) Domestic Fraternal Societies (501(c)(10)) 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' AssociationsLocal Employees' Associations (501(c)(4)) Voluntary Employees' Beneficiary Associations (501(c)(9)) Supplemental Unemployment Benefit Trusts (501(c)(17)) 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like OrganizationsMembership. Amending 2011 tax return Losses and expenses. Amending 2011 tax return Distributions of proceeds. Amending 2011 tax return The 85% Requirement Local Life Insurance Associations Mutual or Cooperative Associations 501(c)(13) - Cemetery CompaniesBuying cemetery property. Amending 2011 tax return Perpetual care organization. Amending 2011 tax return Care of individual plots. Amending 2011 tax return 501(c)(14) - Credit Unions and Other Mutual Financial OrganizationsState-Chartered Credit Unions Other Mutual Financial Organizations 501(c)(19) - Veterans' Organizations 501(c)(20) - Group Legal Services Plan Organizations 501(c)(21) - Black Lung Benefit TrustsExcise taxes. Amending 2011 tax return 501(c)(2) - Title-Holding Corporations for Single Parent CorporationsExpenses. Amending 2011 tax return Waiver of payment of income. Amending 2011 tax return 501(c)(25) - Title-Holding Corporations or Trusts for Multiple Parent CorporationsUnrelated Business Income 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations 501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations 501(c)(29) - CO-OP Health Insurance Issuers New Guidance for IRC 501(c)(29) Qualified Nonprofit Health Insurance Issuers General Requirements for Exemption under 501(c)(29) and Annual Filing Requirement Additional Guidance for Prospective 501(c)(29) Organizations Introduction This chapter contains specific information for certain organizations described in section 501(c), other than those organizations that are described in section 501(c)(3). Amending 2011 tax return Section 501(c)(3) organizations are covered in chapter 3 of this publication. Amending 2011 tax return The Table of Contents at the beginning of this publication, as well as the Organization Reference Chart, may help you locate at a glance the type of organization discussed in this chapter. Amending 2011 tax return 501(c)(4) - Civic Leagues and Social Welfare Organizations If your organization is not organized for profit and will be operated primarily to promote social welfare to benefit the community, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4). Amending 2011 tax return The discussion that follows describes the information you must provide when applying. Amending 2011 tax return For application procedures, see chapter 1. Amending 2011 tax return To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted primarily to charitable, educational, or recreational purposes. Amending 2011 tax return In addition, no part of the organization's net earnings can inure to the benefit of any private shareholder or individual. Amending 2011 tax return If the organization provides an excess benefit to certain persons, an excise tax may be imposed. Amending 2011 tax return See Excise tax on excess benefit transactions , under Excess Benefit Transactions in chapter 5 for more information about this tax. Amending 2011 tax return Examples. Amending 2011 tax return   Types of organizations that are considered to be social welfare organizations are civic associations and volunteer fire companies. Amending 2011 tax return Nonprofit operation. Amending 2011 tax return   You must submit evidence that your organization is organized and will be operated on a nonprofit basis. Amending 2011 tax return However, such evidence, including the fact that your organization is organized under a state law relating to nonprofit corporations, will not in itself establish a social welfare purpose. Amending 2011 tax return Social welfare. Amending 2011 tax return   To establish that your organization is organized primarily to promote social welfare, you should submit evidence with your application showing that your organization will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). Amending 2011 tax return   An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community. Amending 2011 tax return It therefore does not qualify as a section 501(c)(4) organization. Amending 2011 tax return Similarly, an organization formed to represent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the community. Amending 2011 tax return However, an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization. Amending 2011 tax return Political activity. Amending 2011 tax return   Promoting social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Amending 2011 tax return However, if you submit proof that your organization is organized primarily to promote social welfare, it can obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for public office. Amending 2011 tax return See the discussion in chapter 2 under Political Organization Income Tax Return . Amending 2011 tax return Social or recreational activity. Amending 2011 tax return   If social activities will be the primary purpose of your organization, you should not file an application for exemption as a social welfare organization but should file for exemption as a social club described in section 501(c)(7). Amending 2011 tax return Retirement benefit program. Amending 2011 tax return   An organization established by its members that has as its primary activity providing supplemental retirement benefits to its members or death benefits to their beneficiaries does not qualify as an exempt social welfare organization. Amending 2011 tax return It may qualify under another paragraph of section 501(c) depending on all the facts. Amending 2011 tax return   However, a nonprofit association that is established, maintained, and funded by a local government to provide the only retirement benefits to a class of employees may qualify as a social welfare organization under section 501(c)(4). Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Donations to volunteer fire companies are deductible on the donor's federal income tax return, but only if made for exclusively public purposes. Amending 2011 tax return Contributions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions for federal income tax purposes. Amending 2011 tax return They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer's business. Amending 2011 tax return However, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Amending 2011 tax return for more information. Amending 2011 tax return For more information on social welfare organizations, see Life Cycle of a Social Welfare Organization at IRS. Amending 2011 tax return gov. Amending 2011 tax return Specific Organizations The following information should be contained in the application form and accompanying statements of certain types of civic leagues or social welfare organizations. Amending 2011 tax return Volunteer fire companies. Amending 2011 tax return   If your organization wishes to obtain exemption as a volunteer fire company or similar organization, you should submit evidence that its members are actively engaged in fire fighting and similar disaster assistance, whether it actually owns the fire fighting equipment, and whether it provides any assistance for its members, such as death and medical benefits in case of injury to them. Amending 2011 tax return   If your organization does not have an independent social purpose, such as providing recreational facilities for members, it may be exempt under section 501(c)(3). Amending 2011 tax return In this event, your organization should file Form 1023. Amending 2011 tax return Homeowners' associations. Amending 2011 tax return   A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. Amending 2011 tax return The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Amending 2011 tax return Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Amending 2011 tax return Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community. Amending 2011 tax return   The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. Amending 2011 tax return It also must show that it does not engage in exterior maintenance of private homes. Amending 2011 tax return   A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally can elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income. Amending 2011 tax return Other organizations. Amending 2011 tax return   Other nonprofit organizations that qualify as social welfare organizations include: An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and that serves the general public in an area with no other airport, A community association that works to improve public services, housing, and residential parking; publishes a free community newspaper; sponsors a community sports league, holiday programs, and meetings; and contracts with a private security service to patrol the community, A community association devoted to preserving the community's traditions, architecture, and appearance by representing it before the local legislature and administrative agencies in zoning, traffic, and parking matters, An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses so they will relocate to the area, and An organization that holds an annual festival of regional customs and traditions. Amending 2011 tax return 501(c)(5) - Labor, Agricultural and Horticultural Organizations If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural, or horticultural organization, you should submit an application on Form 1024. Amending 2011 tax return You must indicate in your application for exemption and accompanying statements that no part of the organization's net earnings will inure to the benefit of any member. Amending 2011 tax return In addition, you should follow the procedure for obtaining recognition of exempt status described in chapter 1. Amending 2011 tax return Submit any additional information that may be required, as described in this section. Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Contributions to labor, agricultural, and horticultural organizations are not deductible as charitable contributions on the donor's federal income tax return. Amending 2011 tax return However, such payments may be deductible as business expenses if they are ordinary and necessary in the conduct of the taxpayer's trade or business. Amending 2011 tax return For more information about certain limits affecting the deductibility of these business expenses, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Amending 2011 tax return Labor Organizations A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collectively with their employers to secure better working conditions. Amending 2011 tax return To show that your organization has the purpose of a labor organization, you should include in the articles of organization or accompanying statements (submitted with your exemption application) information establishing that the organization is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. Amending 2011 tax return In addition, no net earnings of the organization can inure to the benefit of any member. Amending 2011 tax return Composition of membership. Amending 2011 tax return   While a labor organization generally is composed of employees or representatives of the employees (in the form of collective bargaining agents) and similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate an exempt purpose. Amending 2011 tax return You must show in your application that your organization has the purposes described in the preceding paragraph. Amending 2011 tax return These purposes can be accomplished by a single labor organization acting alone or by several organizations acting together through a separate organization. Amending 2011 tax return Benefits to members. Amending 2011 tax return   The payment by a labor organization of death, sick, accident, and similar benefits to its individual members with funds contributed by its members, if made under a plan to better the conditions of the members, does not preclude exemption as a labor organization. Amending 2011 tax return However, an organization does not qualify for exemption as a labor organization if it has no authority to represent members in job-related matters, even if it provides weekly income to its members in the event of a lawful strike by the members' union, in return for an annual payment by the member. Amending 2011 tax return   For more information on labor organizations, see Life Cycle of a Labor Organization at IRS. Amending 2011 tax return gov. Amending 2011 tax return Agricultural and Horticultural Organizations Agricultural and horticultural organizations are connected with raising livestock, forestry, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits. Amending 2011 tax return For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. Amending 2011 tax return The term harvesting, in this case, includes fishing and related pursuits. Amending 2011 tax return Agricultural organizations can be quasi-public in character and are often designed to encourage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the necessary expenses of upkeep and operation. Amending 2011 tax return When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture, the organization must qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6) organizations. Amending 2011 tax return The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products. Amending 2011 tax return The following list contains some examples of activities that show an agricultural or horticultural purpose. Amending 2011 tax return Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state, farm, or home bureau. Amending 2011 tax return Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture. Amending 2011 tax return Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations being furnished to the community members to educate them in soil treatment. Amending 2011 tax return Guarding the purity of a specific breed of livestock. Amending 2011 tax return Encouraging improvements in the production of fish on privately owned fish farms. Amending 2011 tax return Negotiating with processors for the price to be paid to members for their crops. Amending 2011 tax return For more information on agricultural or horticultural organizations, see Life Cycle of an Agricultural or Horticultural Organization at IRS. Amending 2011 tax return gov. Amending 2011 tax return 501(c)(6) - Business Leagues, etc. Amending 2011 tax return If your association wants to apply for recognition of exemption from federal income tax as a nonprofit business league, chamber of commerce, real estate board, or board of trade, it should file Form 1024. Amending 2011 tax return For a discussion of the procedure to follow, see chapter 1. Amending 2011 tax return Your organization must indicate in its application form and attached statements that no part of its net earnings will inure to the benefit of any private shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining). Amending 2011 tax return In addition, your organization must be primarily engaged in activities or functions that are the basis for its exemption. Amending 2011 tax return It must be primarily supported by membership dues and other income from activities substantially related to its exempt purpose. Amending 2011 tax return A business league, in general, is an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Amending 2011 tax return Trade associations and professional associations are considered business leagues. Amending 2011 tax return Chamber of commerce. Amending 2011 tax return   A chamber of commerce usually is composed of the merchants and traders of a city. Amending 2011 tax return Board of trade. Amending 2011 tax return   A board of trade often consists of persons engaged in similar lines of business. Amending 2011 tax return For example, a nonprofit organization formed to regulate the sale of a specified agricultural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of trade. Amending 2011 tax return   Chambers of commerce and boards of trade usually promote the common economic interests of all the commercial enterprises in a given trade community. Amending 2011 tax return Real estate board. Amending 2011 tax return   A real estate board consists of members interested in improving the business conditions in the real estate field. Amending 2011 tax return It is not organized for profit and no part of the net earnings inures to the benefit of any private shareholder or individual. Amending 2011 tax return Professional football leagues. Amending 2011 tax return   The Internal Revenue Code specifically defines professional football leagues as exempt organizations under section 501(c)(6). Amending 2011 tax return They are exempt whether or not they administer a pension fund for football players. Amending 2011 tax return General purpose. Amending 2011 tax return   You must indicate in the material submitted with your application that your organization will be devoted to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. Amending 2011 tax return It must be shown that the conditions of a particular trade or the interests of the community will be advanced. Amending 2011 tax return Merely indicating the name of the organization or the object of the local statute under which it is created is not enough to demonstrate the required general purpose. Amending 2011 tax return Line of business. Amending 2011 tax return   This term generally refers either to an entire industry or to all components of an industry within a geographic area. Amending 2011 tax return It does not include a group composed of businesses that market a particular brand within an industry. Amending 2011 tax return Common business interest. Amending 2011 tax return   A common business interest of all members of the organization must be established by the application documents. Amending 2011 tax return Examples. Amending 2011 tax return   Activities that would tend to illustrate a common business interest are: Promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail merchants association, Education of the public in the use of credit, Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated by casualty insurance companies, Establishment and maintenance of the integrity of a local commercial market, Operation of a trade publication primarily intended to benefit an entire industry, and Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main purpose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying basis as a result). Amending 2011 tax return Improvement of business conditions. Amending 2011 tax return   Generally, this must be shown to be the purpose of the organization. Amending 2011 tax return This is not established by evidence of particular services that provide a convenience or economy to individual members in their businesses, such as advertising that carries the name of members, interest-free loans, assigning exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency. Amending 2011 tax return Stock or commodity exchange. Amending 2011 tax return   A stock or commodity exchange is not a business league, chamber of commerce, real estate board, or board of trade and is not exempt under section 501(c)(6). Amending 2011 tax return Legislative activity. Amending 2011 tax return   An organization that is exempt under section 501(c)(6) can work for the enactment of laws to advance the common business interests of the organization's members. Amending 2011 tax return Deduction not allowed for dues used for political or legislative activities. Amending 2011 tax return   A taxpayer cannot deduct the part of dues or other payments to a business league, trade association, labor union, or similar organization that is reported to the taxpayer by the organization as having been used for any of the following activities. Amending 2011 tax return Influencing legislation. Amending 2011 tax return Participating or intervening in a political campaign for, or against, any candidate for public office. Amending 2011 tax return Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or referendums (also known as grass roots lobbying). Amending 2011 tax return Communicating directly with certain executive branch officials to try to influence their official actions or positions. Amending 2011 tax return See Dues Used for Lobbying or Political Activities under Required Disclosures in chapter 2 for more information. Amending 2011 tax return Exception for local legislation. Amending 2011 tax return   Members can deduct dues (or assessments) to an organization that are for expenses of: Appearing before, submitting statements to, or sending communications to members of a local council or similar governing body with respect to legislation or proposed legislation of direct interest to the member, or Communicating information between the member and the organization with respect to local legislation or proposed legislation of direct interest to the organization or the member. Amending 2011 tax return Legislation or proposed legislation is of direct interest to a taxpayer if it will, or can reasonably be expected to, affect the taxpayer's trade or business. Amending 2011 tax return De minimis exception. Amending 2011 tax return   In-house expenditures of $2,000 or less for the year for activities (1) – (4) listed earlier will not prevent a deduction for dues if the dues meet all other tests to be deductible as a business expense. Amending 2011 tax return Grass roots lobbying. Amending 2011 tax return   A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grass roots lobbying if it contacts prospective members or calls upon its own members to contact their employees and customers for the purpose of urging such persons to communicate with their elected state or Congressional representatives to support the promotion, defeat, or repeal of legislation that is of direct interest to the organization. Amending 2011 tax return Any dues or assessments directly related to such activities are not deductible by the taxpayer, since the individuals being contacted, who are not members of the organization, are a segment of the general public. Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Contributions to organizations described in this section are not deductible as charitable contributions on the donor's federal income tax return. Amending 2011 tax return They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer's business. Amending 2011 tax return   For more information on business leagues, see Life Cycle of a Business League (Trade Association) on IRS. Amending 2011 tax return gov. Amending 2011 tax return 501(c)(7) - Social and Recreation Clubs If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax. Amending 2011 tax return In applying for recognition of exemption, you should submit the information described in this section. Amending 2011 tax return Also see chapter 1 for the procedures to follow. Amending 2011 tax return Typical organizations that should file for recognition of exemption as social clubs include: College alumni associations that are not described in chapter 3 under Alumni association , College fraternities or sororities operating chapter houses for students, Country clubs, Amateur hunting, fishing, tennis, swimming, and other sport clubs, Dinner clubs that provide a meeting place, library, and dining room for members, Hobby clubs, Garden clubs, and Variety clubs. Amending 2011 tax return Discrimination prohibited. Amending 2011 tax return   Your organization will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any written policy statement provides for discrimination against any person on the basis of race, color, or religion. Amending 2011 tax return   However, a club that in good faith limits its membership to the members of a particular religion to further the teachings or principles of that religion and not to exclude individuals of a particular race or color will not be considered as discriminating on the basis of religion. Amending 2011 tax return Also, the restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed later) if that society is described in section 501(c)(8) and exempt from tax under section 501(a) and limits its membership to the members of a particular religion. Amending 2011 tax return Private benefit prohibited. Amending 2011 tax return   No part of the organization's net earnings can inure to the benefit of any person having a personal and private interest in the activities of the organization. Amending 2011 tax return For purposes of this requirement, it is not necessary that net earnings be actually distributed. Amending 2011 tax return Even undistributed earnings can benefit members. Amending 2011 tax return Examples of this include a decrease in membership dues or an increase in the services the club provides to its members without a corresponding increase in dues or other fees paid for club support. Amending 2011 tax return However, fixed-fee payments to members who bring new members into the club are not an inurement of the club's net earnings, if the payments are reasonable compensation for performance of a necessary administrative service. Amending 2011 tax return Purposes. Amending 2011 tax return   To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you should submit evidence with your application that personal contact, commingling, and fellowship exist among members. Amending 2011 tax return You must show that members are bound together by a common objective of pleasure, recreation, and other nonprofitable purposes. Amending 2011 tax return   Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organization. Amending 2011 tax return A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group. Amending 2011 tax return   The term other nonprofitable purposes means other purposes similar to pleasure and recreation. Amending 2011 tax return For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits is not operating exclusively for pleasure, recreation, and other nonprofitable purposes. Amending 2011 tax return Limited membership. Amending 2011 tax return   The membership in a social club must be limited. Amending 2011 tax return To show that your organization has a purpose that would characterize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club. Amending 2011 tax return   A social club that issues corporate membership is dealing with the general public in the form of the corporation's employees. Amending 2011 tax return Corporate members of a club are not the kind of members contemplated by the law. Amending 2011 tax return Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. Amending 2011 tax return See Gross receipts from nonmembership sources , later. Amending 2011 tax return Bona fide individual memberships paid for by a corporation would not have an effect on the gross receipts source. Amending 2011 tax return   The fact that a social club may have an associate (nonvoting) class of membership will not be, in and of itself, a cause for nonrecognition of exemption. Amending 2011 tax return However, if one membership class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited class, resulting in a denial of the club's exemption. Amending 2011 tax return Support. Amending 2011 tax return   In general, your club should be supported solely by membership fees, dues, and assessments. Amending 2011 tax return However, if otherwise entitled to exemption, your club will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. Amending 2011 tax return Business activities. Amending 2011 tax return   If your club will engage in business, such as selling real estate, timber, or other products or services, it generally will be denied exemption. Amending 2011 tax return However, evidence submitted with your application form that your organization will provide meals, refreshments, or services related to its exempt purposes only to its own members or their dependents or guests will not cause denial of exemption. Amending 2011 tax return Facilities open to public. Amending 2011 tax return   Evidence that your club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. Amending 2011 tax return This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. Amending 2011 tax return Gross receipts from nonmembership sources. Amending 2011 tax return   A section 501(c)(7) organization can receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Amending 2011 tax return Income from nontraditional business activity with members is not exempt function income, and thus is included as income from sources outside of the membership. Amending 2011 tax return Of the 35% gross receipts listed above, up to 15% of the gross receipts can be derived from the use of the club's facilities or services by the general public. Amending 2011 tax return If an organization has outside income that is more than these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. Amending 2011 tax return Gross receipts. Amending 2011 tax return   Gross receipts, for this purpose, are receipts from the normal and usual (traditionally conducted) activities of the club. Amending 2011 tax return These receipts include charges, admissions, membership fees, dues, assessments, investment income, and normal recurring capital gains on investments. Amending 2011 tax return Receipts do not include initiation fees and capital contributions. Amending 2011 tax return Unusual amounts of income, such as from the sale of a clubhouse or similar facility, are not included in gross receipts or in figuring the percentage limits. Amending 2011 tax return Nontraditional activities. Amending 2011 tax return   Activities conducted by a social club need to further its exempt purposes. Amending 2011 tax return Traditional business activities are those that further a social club's exempt purposes. Amending 2011 tax return Nontraditional business activities do not further the exempt purposes of a social club even if conducted solely on a membership basis. Amending 2011 tax return Nontraditional business activities are prohibited (subject to an insubstantial, trivial, and nonrecurrent test) for businesses conducted with both members and nonmembers. Amending 2011 tax return Examples of nontraditional business activities include sale of package liquor, take-out food, and long-term room rental. Amending 2011 tax return Fraternity foundations. Amending 2011 tax return   If your organization is a foundation formed for the exclusive purpose of acquiring and leasing a chapter house to a local fraternity chapter or sorority chapter maintained at an educational institution and does not engage in any social or recreational activities, it may be a title holding corporation (discussed later under section 501(c)(2) organizations and under section 501(c)(25) organizations) rather than a social club. Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor's federal income tax return. Amending 2011 tax return 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies This section describes the information to be provided upon application for recognition of exemption by two types of fraternal societies: beneficiary and domestic. Amending 2011 tax return The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other benefits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather devote their earnings to fraternal, religious, charitable, etc. Amending 2011 tax return , purposes. Amending 2011 tax return The procedures to follow in applying for recognition of exemption are described in chapter 1. Amending 2011 tax return If your organization is controlled by a central organization, you should check with your controlling organization to determine whether your unit has been included in a group exemption letter or can be added. Amending 2011 tax return If so, your organization need not apply for individual recognition of exemption. Amending 2011 tax return For more information, see Group Exemption Letter in chapter 1 of this publication. Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Donations by an individual to a domestic fraternal beneficiary society or a domestic fraternal society operating under the lodge system are deductible as charitable contributions only if used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Amending 2011 tax return Fraternal Beneficiary Societies (501(c)(8)) A fraternal beneficiary society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Amending 2011 tax return The application and accompanying statements should establish that the organization: Is a fraternal organization, Operates under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system, and Provides for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or their dependents. Amending 2011 tax return Lodge system. Amending 2011 tax return   Operating under the lodge system means carrying on activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. Amending 2011 tax return Payment of benefits. Amending 2011 tax return   It is not essential that every member be covered by the society's program of sick, accident, or death benefits. Amending 2011 tax return An organization can qualify for exemption if most of its members are eligible for benefits, and the benefits are paid from contributions or dues paid by those members. Amending 2011 tax return   The benefits must be limited to members and their dependents. Amending 2011 tax return If members will have the ability to confer benefits to other than themselves and their dependents, exemption will not be recognized. Amending 2011 tax return Whole-life insurance. Amending 2011 tax return   Whole-life insurance constitutes a life benefit under section 501(c)(8) even though the policy may contain investment features such as a cash surrender value or a policy loan. Amending 2011 tax return Reinsurance pool. Amending 2011 tax return   Payments by a fraternal beneficiary society into a state-sponsored reinsurance pool that protects participating insurers against excessive losses on major medical health and accident insurance will not preclude exemption as a fraternal beneficiary society. Amending 2011 tax return Domestic Fraternal Societies (501(c)(10)) A domestic fraternal society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Amending 2011 tax return The application and accompanying statements should establish that the organization: Is a domestic fraternal organization organized in the U. Amending 2011 tax return S. Amending 2011 tax return , Operates under the lodge system, Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and Does not provide for the payment of life, sick, accident, or other benefits to its members. Amending 2011 tax return The organization can arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status. Amending 2011 tax return 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' Associations This section describes the information to be provided upon application for recognition of exemption by the following types of employees' associations: A voluntary employees' beneficiary association (including federal employees' associations) organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries, if no part of the net earnings of the association inures to the benefit of any private shareholder or individual, and A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemployment benefits. Amending 2011 tax return Both the application form to file and the information to provide are discussed later under the section that describes your employee association. Amending 2011 tax return Chapter 1 describes the procedures to follow in applying for exemption. Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Donations to these organizations are not deductible as charitable contributions on the donor's federal income tax return. Amending 2011 tax return Local Employees' Associations (501(c)(4)) A local association of employees whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. Amending 2011 tax return A local employees' association must apply for recognition of exemption by filing Form 1024. Amending 2011 tax return The organization must submit evidence that: It is of a purely local character, Its membership is limited to employees of a designated person or persons in a particular locality, and Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes. Amending 2011 tax return A local association of employees that has established a system of paying retirement or death benefits, or both, to its members will not qualify for exemption since the payment of these benefits is not considered as being for charitable, educational, or recreational purposes. Amending 2011 tax return Similarly, a local association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount prices on merchandise, services, and activities does not qualify for exemption. Amending 2011 tax return Voluntary Employees' Beneficiary Associations (501(c)(9)) An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. Amending 2011 tax return The material submitted with the application must show that your organization: Is a voluntary association of employees, Will provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and Will not allow any of its net earnings to inure to the benefit of any private individual or shareholder except in the form of scheduled benefit payments. Amending 2011 tax return To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Amending 2011 tax return Note. Amending 2011 tax return Under section 4976, the reversion of funds from a section 501(c)(9) organization to the employer who created the beneficiary association may subject the employer to a 100% penalty excise tax on the amount of the reversion. Amending 2011 tax return Notice requirement. Amending 2011 tax return   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Amending 2011 tax return The organization gives notice by filing Form 1024. Amending 2011 tax return If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before notice is given. Amending 2011 tax return An extension of time for filing the notice can be granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Amending 2011 tax return Membership. Amending 2011 tax return   Membership of a section 501(c)(9) organization must consist of individuals who are employees and have an employment-related common bond. Amending 2011 tax return This common bond can be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. Amending 2011 tax return   The membership of an association can include some individuals who are not employees, provided they have an employment-related bond with the employee-members. Amending 2011 tax return For example, the owner of a business whose employees are members of the association can be a member. Amending 2011 tax return An association will be considered composed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees. Amending 2011 tax return Employees. Amending 2011 tax return   Employees include individuals who became entitled to membership because they are or were employees. Amending 2011 tax return For example, an individual will qualify as an employee even though the individual is on a leave of absence or has been terminated due to retirement, disability, or layoff. Amending 2011 tax return   Generally, membership is voluntary if an affirmative act is required on the part of an employee to become a member. Amending 2011 tax return Conversely, membership is involuntary if the designation as a member is due to employee status. Amending 2011 tax return However, an association will be considered voluntary if employees are required to be members of the organization as a condition of their employment and they do not incur a detriment (such as a payroll deduction) as a result of their membership. Amending 2011 tax return An employer has not imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization. Amending 2011 tax return Payment of benefits. Amending 2011 tax return   The information submitted with your application must show that your organization will pay life, sick, accident, supplemental unemployment, or other similar benefits. Amending 2011 tax return The benefits can be provided directly by your association or indirectly by your association through the payments of premiums to an insurance company (or fees to a medical clinic). Amending 2011 tax return Benefits can be in the form of medical, clinical, or hospital services, transportation furnished for medical care, or money payments. Amending 2011 tax return Nondiscrimination requirements. Amending 2011 tax return   An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. Amending 2011 tax return However, if the organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between employee organizations and employers, the plan need not meet these requirements for the organization to qualify as tax exempt. Amending 2011 tax return   A plan meets the nondiscrimination requirements only if both of the following statements are true. Amending 2011 tax return Each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and does not discriminate in favor of employees who are highly compensated individuals. Amending 2011 tax return The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals. Amending 2011 tax return A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor of highly compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan. Amending 2011 tax return   For purposes of determining whether a plan meets the nondiscrimination requirements, the employer can elect to exclude all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. Amending 2011 tax return This will not apply to any increase in such payment by any plan amendment adopted after June 22, 1984. Amending 2011 tax return   If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal Revenue Code as a condition of that benefit being excluded from gross income, these nondiscrimination requirements do not apply. Amending 2011 tax return The benefit will be considered nondiscriminatory only if it meets the nondiscrimination provision of the applicable Code section. Amending 2011 tax return For example, benefits provided under a medical reimbursement plan would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimination requirements of section 105(h)(3) and 105(h)(4). Amending 2011 tax return Excluded employees. Amending 2011 tax return   Certain employees who are not covered by a plan can be excluded from consideration in applying these requirements. Amending 2011 tax return These include employees: Who have not completed 3 years of service, Who have not attained age 21, Who are seasonal or less than half-time employees, Who are not in the plan and who are included in a unit of employees covered by a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining, or Who are nonresident aliens and who receive no earned income from the employer that has United States source income. Amending 2011 tax return Highly compensated individual. Amending 2011 tax return   A highly compensated individual is one who: Owned 5 percent or more of the employer at any time during the current year or the preceding year, Received more than $115,000 in compensation from the employer for the preceding year (the amount is annualized for inflation. Amending 2011 tax return Go to IRS. Amending 2011 tax return gov, and search “Pension Plan Limitation” for the year), and Was among the top 20% of employees by compensation for the preceding year. Amending 2011 tax return However, the employer can choose not to have (3) apply. Amending 2011 tax return Aggregation rules. Amending 2011 tax return   The employer can choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination requirements. Amending 2011 tax return Employees of controlled groups of corporations, trades, or businesses under common control, or members of an affiliated service group, are treated as employees of a single employer. Amending 2011 tax return Leased employees are treated as employees of the recipient. Amending 2011 tax return One employee. Amending 2011 tax return   A trust created to provide benefits to one employee will not qualify as a voluntary employees' beneficiary association under section 501(c)(9). Amending 2011 tax return Supplemental Unemployment Benefit Trusts (501(c)(17)) A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. Amending 2011 tax return The trust must be a valid, existing trust under local law and must be evidenced by an executed document. Amending 2011 tax return A conformed copy of the plan of which the trust is a part should be attached to the application. Amending 2011 tax return To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Amending 2011 tax return Note. Amending 2011 tax return Under section 4976, the reversion of funds from a section 501(c)(17) organization to the employer who created the supplemental unemployment benefit trust may subject the employer to a 100% penalty excise tax on the amount of the reversion. Amending 2011 tax return Notice requirement. Amending 2011 tax return   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Amending 2011 tax return The organization gives notice by filing Form 1024. Amending 2011 tax return If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before such notice is given. Amending 2011 tax return An extension of time for filing the notice is granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Amending 2011 tax return Types of payments. Amending 2011 tax return   You must show that the supplemental unemployment compensation benefits will be benefits paid to an employee because of the employee's involuntary separation from employment (whether or not the separation is temporary) resulting directly from a reduction-in-force, discontinuance of a plant or operation, or other similar conditions. Amending 2011 tax return In addition, sickness and accident benefits (but not vacation, retirement, or death benefits) may be included in the plan if these are subordinate to the unemployment compensation benefits. Amending 2011 tax return Diversion of funds. Amending 2011 tax return   It must be impossible under the plan (at any time before the satisfaction of all liabilities with respect to employees under the plan) to use or to divert any of the corpus or income of the trust to any purpose other than the payment of supplemental unemployment compensation benefits (or sickness or accident benefits to the extent just explained). Amending 2011 tax return Discrimination in benefits. Amending 2011 tax return   Neither the terms of the plan nor the actual payment of benefits can be discriminatory in favor of the company's officers, stockholders, supervisors, or highly paid employees. Amending 2011 tax return However, a plan is not discriminatory merely because benefits bear a uniform relationship to compensation or the rate of compensation. Amending 2011 tax return Prohibited transactions and exemption. Amending 2011 tax return   If your organization is a supplemental unemployment benefit trust and has received a denial of exemption because it engaged in a prohibited transaction, as defined by section 503(b), it can file a claim for exemption in any tax year following the tax year in which the notice of denial was issued. Amending 2011 tax return It must file the claim on Form 1024. Amending 2011 tax return The organization must include a written declaration that it will not knowingly again engage in a prohibited transaction. Amending 2011 tax return An authorized principal officer of your organization must make this declaration under the penalties of perjury. Amending 2011 tax return   If your organization has satisfied all requirements as a supplemental unemployment benefit trust described in section 501(c)(17), it will be notified in writing that it has been recognized as exempt. Amending 2011 tax return However, the organization will be exempt only for those tax years after the tax year in which the claim for exemption (Form 1024) is filed. Amending 2011 tax return Tax year in this case means the established annual accounting period of the organization or, if the organization has not established an annual accounting period, the calendar year. Amending 2011 tax return For more information about the requirements for reestablishing an exemption previously denied, contact the IRS. Amending 2011 tax return 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations Each of the following organizations apply for recognition of exemption from federal income tax by filing Form 1024. Amending 2011 tax return Benevolent life insurance associations of a purely local character and like organizations. Amending 2011 tax return Mutual ditch or irrigation companies and like organizations. Amending 2011 tax return Mutual or cooperative telephone companies and like organizations. Amending 2011 tax return A like organization is an organization that performs a service comparable to that performed by any one of the above organizations. Amending 2011 tax return The information to be provided upon application by each of these organizations is described in this section. Amending 2011 tax return For information as to the procedures to follow in applying for exemption, see chapter 1. Amending 2011 tax return General requirements. Amending 2011 tax return   These organizations must use their income solely to cover losses and expenses, with any excess being returned to members or retained to cover future losses and expenses. Amending 2011 tax return They must collect at least 85% of their income from members for the sole purpose of meeting losses and expenses. Amending 2011 tax return Mutual character. Amending 2011 tax return   These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual or cooperative basis. Amending 2011 tax return They are associations of persons or organizations, or both, banded together to provide themselves a mutually desirable service approximately at cost and on a mutual basis. Amending 2011 tax return To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated that their members have the right to choose the management, to receive services at cost, to receive a return of any excess of payments over losses and expenses, and to share in any assets upon dissolution. Amending 2011 tax return   The rights and interests of members in the annual savings of the organization must be determined in proportion to their business with the organization. Amending 2011 tax return Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members during the period the assets were owned by the organization in proportion to the amount of business done during that period. Amending 2011 tax return The bylaws must not provide for forfeiture of a member's rights and interest upon withdrawal or termination. Amending 2011 tax return Membership. Amending 2011 tax return   Membership of a mutual organization consists of those who join the organization to obtain its services, and have a voice in its management. Amending 2011 tax return In a stock company, the stockholders are members. Amending 2011 tax return However, a mutual life insurance organization cannot have policyholders other than its members. Amending 2011 tax return Losses and expenses. Amending 2011 tax return   In furnishing services substantially at cost, an organization must use its income solely for paying losses and expenses. Amending 2011 tax return Any excess income not retained in reasonable reserves for future losses and expenses belongs to members in proportion to their patronage or business done with the organization. Amending 2011 tax return If such patronage refunds are retained in reasonable amounts for purposes of expanding and improving facilities, retiring capital indebtedness, acquiring other assets, and unexpected expenses, the organization must maintain records sufficient to reflect the equity of each member in the assets acquired with the funds. Amending 2011 tax return Distributions of proceeds. Amending 2011 tax return   The cooperative may distribute the unexpended balance of collections or assessments remaining on hand at the end of the year to members or patrons prorated on the basis of their patronage or business done with the cooperative. Amending 2011 tax return Such distribution represents a refund in the costs of services rendered to the member. Amending 2011 tax return The 85% Requirement All of the organizations listed above must submit evidence with their application that they receive 85% or more of their gross income from their members for the sole purpose of meeting losses and expenses. Amending 2011 tax return Nevertheless, certain items of income are excluded from the computation of the 85% requirement if the organization is a mutual or cooperative telephone or electric company. Amending 2011 tax return Mutual or cooperative telephone company. Amending 2011 tax return   A mutual or cooperative telephone company will exclude from the computation of the 85% requirement any income received or accrued from: A nonmember telephone company for the performance of communication services involving the completion of long distance calls to, from, or between members of the mutual or cooperative telephone company, Qualified pole rentals, The sale of display listings in a directory furnished to its members, or The prepayment of a loan created in 1987, 1988, or 1989, under section 306A, 306B, or 311 of the Rural Electrification Act of 1936. Amending 2011 tax return Mutual or cooperative electric company. Amending 2011 tax return   A mutual or cooperative electric company will exclude from the computation of the 85% requirement any income received or accrued from: Qualified pole rentals, Any provision or sale of electric energy transmission services or ancillary service if the services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by the Federal Energy Regulatory Commission (FERC) or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member), The provision or sale of electric energy distribution services or ancillary services if the services are provided on a nondiscriminatory open-access basis to distribute electric energy not owned by the mutual or electric cooperative company: To end-users who are served by distribution facilities not owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), or Generated by a generation facility not owned or leased by the company or any of its members and which is directly connected to distribution facilities owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), Any nuclear decommissioning transaction, or Any asset exchange or conversion transaction. Amending 2011 tax return   An electric cooperative's sale of excess fuel at cost in the year of purchase is not income for purposes of determining compliance with the 85% requirement. Amending 2011 tax return Qualified pole rental. Amending 2011 tax return   The term qualified pole rental means any rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that are used by the company in providing telephone or electric services to its members, and Pursuant to the rental to support one or more wires (in addition to wires described in (1)) for use in connection with the transmission by wire of electricity or of telephone or other communications. Amending 2011 tax return   The term rental, for this purpose, includes any sale of the right to use the pole (or other structure). Amending 2011 tax return The 85% requirement is applied on the basis of an annual accounting period. Amending 2011 tax return Failure of an organization to meet the requirement in a particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement is met. Amending 2011 tax return Gain from the sale or conversion of the organization's property is not considered an amount received from members in determining whether the organization's income consists of amounts collected from members. Amending 2011 tax return Because the 85% income test is based on gross income, capital losses cannot be used to reduce capital gains for purposes of this test. Amending 2011 tax return Example. Amending 2011 tax return   The books of an organization reflect the following for the calendar year. Amending 2011 tax return Collections from members $2,400 Short-term capital gains 600 Short-term capital losses 400 Other income None Gross income ($2,400 + $600 =$3000) 100% Collected from members ($2,400) 80%   Since amounts collected from members do not constitute at least 85% of gross income, the organization is not entitled to exemption from federal income tax for the year. Amending 2011 tax return   Voluntary contributions in the nature of gifts are not taken into account for purposes of the 85% computation. Amending 2011 tax return   Other tax-exempt income besides gifts is considered as income received from other than members in applying the 85% test. Amending 2011 tax return   If the 85% test is not met, your organization, if classifiable under this section, will not qualify for exemption as any other type of organization described in this publication. Amending 2011 tax return Tax treatment of donations. Amending 2011 tax return   Donations to an organization described in this section are not deductible as charitable contributions on the donor's federal income tax return. Amending 2011 tax return Local Life Insurance Associations A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a benevolent life insurance association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that its excess funds will be refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income requirement. Amending 2011 tax return If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15% of its income is derived, it will not be entitled to exemption. Amending 2011 tax return To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular community, place, or district irrespective of political subdivisions. Amending 2011 tax return If the activities of an organization are limited only by the borders of a state, it cannot be purely local in character. Amending 2011 tax return A benevolent life insurance association that does not terminate membership when a member moves from the local area in which the association operates will qualify for exemption if it meets the other requirements. Amending 2011 tax return A copy of each type of policy issued by your organization should be included with the application for recognition of exemption. Amending 2011 tax return Organizations similar to local benevolent life insurance companies. Amending 2011 tax return   These organizations include those that in addition to paying death benefits also provide for the payment of sick, accident, or health benefits. Amending 2011 tax return However, an organization that pays only sick, accident, or health benefits, but not life insurance benefits, is not an organization similar to a benevolent life insurance association and should not apply for recognition of exemption as described in this section. Amending 2011 tax return Burial and funeral benefit insurance organization. Amending 2011 tax return   This type of organization can apply for recognition of exemption as an organization similar to a benevolent life insurance company if it establishes that the benefits are paid in cash and if it is not engaged directly in the manufacture of funeral supplies or the performance of funeral services. Amending 2011 tax return An organization that provides its benefits in the form of supplies and service is not a life insurance company. Amending 2011 tax return Such an organization can seek recognition of exemption from federal income tax, however, as a mutual insurance company other than life. Amending 2011 tax return Mutual or Cooperative Associations Mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations need not establish that they are of a purely local character. Amending 2011 tax return They can serve noncontiguous areas. Amending 2011 tax return Like organization. Amending 2011 tax return   A like organization is a cooperative or mutual organization that performs a service similar to mutual ditch, irrigation, telephone, or electric companies. Amending 2011 tax return Examples include the following: cooperatives that provide protection of river banks to prevent erosion, water and sewer services, cable television, satellite, television, cellular phone services, two-way radio service, or natural gas services. Amending 2011 tax return 501(c)(13) - Cemetery Companies If your organization wishes to obtain recognition of exemption from federal income tax as a cemetery company or a corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, it must file an application on Form 1024. Amending 2011 tax return For the procedure to follow to file an application, see Application, Approval, and Appeal Procedures in chapter 1. Amending 2011 tax return A nonprofit mutual cemetery company that seeks recognition of exemption should submit evidence with its application that it is owned and operated exclusively for the benefit of its lot owners who hold lots for bona fide burial purposes and not for purposes of resale. Amending 2011 tax return A mutual cemetery company that also engages in charitable activities, such as the burial of paupers, will be regarded as operating within this standard. Amending 2011 tax return The fact that a mutual cemetery company limits its membership to a particular class of individuals, such as members of a family, will not affect its status as mutual so long as all the other requirements of section 501(c)(13) are met. Amending 2011 tax return If your organization is a nonprofit corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, you should show that it is not permitted by its charter to engage in any business not necessarily incident to that purpose. Amending 2011 tax return Operating a mortuary is not permitted. Amending 2011 tax return However, selling monuments, markers, vaults, and flowers solely for use in the cemetery is permitted if the profits from these sales are used to maintain the cemetery as a whole. Amending 2011 tax return How income can be used. Amending 2011 tax return   You should show that your organization's earnings are or will be used only in one or more of the following ways. Amending 2011 tax return To pay the ordinary and necessary expenses of operating, maintaining, and improving the cemetery or crematorium. Amending 2011 tax return To buy cemetery property. Amending 2011 tax return To create a fund that will provide a source of income for the perpetual care of the cemetery or a reasonable reserve for any ordinary or necessary purpose. Amending 2011 tax return No part of the net earnings of your organization can inure to the benefit of any private shareholder or individual. Amending 2011 tax return Ordinary and necessary expenses in connection with the operation, management, maintenance, and improvement of the cemetery are permitted, as are reasonable fees for the services of a manager. Amending 2011 tax return Buying cemetery property. Amending 2011 tax return   Payments can be made to amortize debt incurred to buy land, but cannot be in the nature of profit distributions. Amending 2011 tax return You must show the method used to finance the purchase of the cemetery property and that the purchase price of the land at the time of its sale to the cemetery was not unreasonable. Amending 2011 tax return   Except for holders of preferred stock (discussed later), no person can have any interest in the net earnings of a tax-exempt cemetery company or crematorium. Amending 2011 tax return Therefore, if property is transferred to the organization in exchange for an interest in the organization's net earnings, the organization will not