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Back tax 3. Back tax   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. Back tax Dual use of assets or facilities. Back tax Exploitation of exempt functions. Back tax ExamplesExceptions. Back tax Excluded Trade or Business ActivitiesQualified sponsorship payment. Back tax Advertising. Back tax Exception for contingent payments. Back tax Exception for periodicals. Back tax Exception for conventions and trade shows. Back tax Legal definition. Back tax Legal where played. Back tax No for-profit games where played. Back tax Unrelated business income. Back tax   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Back tax   Certain trade or business activities are not treated as an unrelated trade or business. Back tax See Excluded Trade or Business Activities, later. Back tax Trade or business. Back tax   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. Back tax An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. Back tax   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. Back tax Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. Back tax Regularly conducted. Back tax   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Back tax   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. Back tax The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. Back tax However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. Back tax Not substantially related. Back tax    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Back tax Whether an activity contributes importantly depends in each case on the facts involved. Back tax   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. Back tax For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. Back tax The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Back tax   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. Back tax Selling of products of exempt functions. Back tax   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. Back tax Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. Back tax   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. Back tax For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. Back tax But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. Back tax , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. Back tax Dual use of assets or facilities. Back tax   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. Back tax The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. Back tax   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. Back tax The theater is a principal feature of the museum and operates continuously while the museum is open to the public. Back tax If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. Back tax   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. Back tax Exploitation of exempt functions. Back tax   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. Back tax When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. Back tax Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. Back tax   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. Back tax Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. Back tax Sales commissions. Back tax   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. Back tax Artists' facilities. Back tax   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. Back tax These two activities do not contribute importantly to accomplishing the organization's exempt purpose. Back tax Therefore, they are unrelated trades or businesses. Back tax Membership list sales. Back tax   An exempt educational organization regularly sells membership mailing lists to business firms. Back tax This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. Back tax Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. Back tax Hospital facilities. Back tax   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. Back tax The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. Back tax The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. Back tax   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. Back tax These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. Back tax Book publishing. Back tax   An exempt organization engages primarily in activities that further its exempt purposes. Back tax It also owns the publication rights to a book that does not relate to any of its exempt purposes. Back tax The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. Back tax These activities constitute a trade or business regularly conducted. Back tax Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. Back tax   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. Back tax See Royalties under Exclusions in chapter 4. Back tax School handicraft shop. Back tax   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. Back tax The students are paid a percentage of the sales price. Back tax In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. Back tax The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Back tax Although many local participants are former students of the school, any qualified person may participate in the program. Back tax The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. Back tax School facilities. Back tax   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. Back tax During the summer, the school operates a tennis club open to the general public. Back tax Employees of the school run the club, including collecting membership fees and scheduling court time. Back tax   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. Back tax The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. Back tax   In both situations, the exempt purpose is the advancement of education. Back tax Furnishing tennis facilities in the manner described does not further that exempt purpose. Back tax These activities are unrelated trades or businesses. Back tax However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. Back tax See Rents under Exclusions in chapter 4. Back tax Services provided with lease. Back tax   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Back tax Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. Back tax It also provides dressing room, linen, and stadium security services for the professional team. Back tax   Leasing of the stadium is an unrelated trade or business. Back tax In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. Back tax Therefore, the income from this lease is rent from real property and unrelated business taxable income. Back tax Broadcasting rights. Back tax   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. Back tax Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. Back tax An athletic program is considered an integral part of the educational process of a university. Back tax   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. Back tax Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. Back tax Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. Back tax   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. Back tax The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. Back tax   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. Back tax The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. Back tax Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. Back tax Yearbook advertising. Back tax   An exempt organization receives income from the sale of advertising in its annual yearbook. Back tax The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. Back tax This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Back tax This advertising activity is an unrelated trade or business. Back tax Pet boarding and grooming services. Back tax   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. Back tax These activities do not contribute importantly to its purpose of preventing cruelty to animals. Back tax Museum eating facilities. Back tax   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. Back tax Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. Back tax The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. Back tax Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. Back tax Halfway house workshop. Back tax   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. Back tax The profits are applied to the operating costs of the halfway house. Back tax The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. Back tax Travel tour programs. Back tax   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. Back tax Example 1. Back tax A tax-exempt university alumni association provides a travel tour program for its members and their families. Back tax The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. Back tax It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. Back tax The organization provides an employee for each tour as a tour leader. Back tax There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. Back tax By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. Back tax Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. Back tax Therefore, the sale of the travel tours is an unrelated trade or business. Back tax Example 2. Back tax A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. Back tax These tours are conducted by teachers and others certified by the state board of education. Back tax The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. Back tax A tour's study program consists of instruction on subjects related to the location being visited on the tour. Back tax Each tour group brings along a library of material related to the subjects being studied on the tour. Back tax During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. Back tax Examinations are given at the end of each tour. Back tax The state board of education awards academic credit for tour participation. Back tax Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. Back tax Insurance programs. Back tax   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. Back tax Exceptions. Back tax   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. Back tax Magazine publishing. Back tax   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. Back tax   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. Back tax This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. Back tax   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. Back tax Directory of members. Back tax   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. Back tax Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. Back tax The directory contains no commercial advertisement and is sold only to the organization's members. Back tax   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. Back tax Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. Back tax The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. Back tax This directory differs from the publication discussed next because of its noncommercial characteristics. Back tax Sales of advertising space. Back tax   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. Back tax The journal is distributed without charge, mainly to the organization's members. Back tax   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. Back tax Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. Back tax A business firm identified in a separate space is further identified in an Index of Advertisers. Back tax   The organization solicits advertising by personal contacts. Back tax Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. Back tax The organization also solicits advertising in form letters appealing for corporate and personal contributions. Back tax   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. Back tax Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. Back tax Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. Back tax However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. Back tax In that case, other factors should also be considered in determining whether a commercial benefit can be expected. Back tax Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. Back tax   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. Back tax However, the purchaser of a listing cannot expect more than an inconsequential benefit. Back tax Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. Back tax Publishing legal notices. Back tax   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. Back tax The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. Back tax The state designated the bar association's journal as the place to publish the required notices. Back tax   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. Back tax Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. Back tax Therefore, the advertising income is unrelated trade or business income. Back tax   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. Back tax This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. Back tax Therefore, the publishing of legal notices does not constitute an unrelated trade or business. Back tax Museum greeting card sales. Back tax    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. Back tax Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. Back tax The cards contain appropriate greetings and are personalized on request. Back tax   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. Back tax It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. Back tax As a result, a large number of cards are sold at a significant profit. Back tax   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. Back tax The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. Back tax The cards may encourage more people to visit the museum itself to share in its educational programs. Back tax The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. Back tax Therefore, these sales activities are not an unrelated trade or business. Back tax Museum shop. Back tax   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. Back tax   The shop also rents originals or reproductions of paintings contained in its collection. Back tax All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. Back tax   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. Back tax   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. Back tax The same is true for the sale of literature relating to art. Back tax Therefore, these sales activities are not an unrelated trade or business. Back tax   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. Back tax The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. Back tax Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. Back tax Therefore, these sales are an unrelated trade or business. Back tax Business league's parking and bus services. Back tax   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. Back tax It also operates, as an insubstantial part of its activities, a park and shop plan. Back tax   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. Back tax The merchants cannot offer free or discount parking or bus fares to their customers. Back tax   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. Back tax Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. Back tax   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. Back tax That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. Back tax   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. Back tax This provides a particular service to individual members of the organization and does not further its exempt purpose. Back tax Therefore, operating the park and shop plan is an unrelated trade or business. Back tax Youth residence. Back tax   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. Back tax The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. Back tax The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. Back tax The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. Back tax Health club program. Back tax   An exempt charitable organization's purpose is to provide for the welfare of young people. Back tax The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. Back tax Nominal annual dues are charged for membership in the organization and use of the facilities. Back tax   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. Back tax The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. Back tax   The health club program is in addition to the general physical fitness program of the organization. Back tax Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. Back tax Miniature golf course. Back tax   An exempt youth welfare organization operates a miniature golf course that is open to the general public. Back tax The course, which is managed by salaried employees, is substantially similar to commercial courses. Back tax The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. Back tax   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. Back tax Sales of hearing aids. Back tax   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. Back tax This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. Back tax It is not an unrelated trade or business. Back tax Nonpatient laboratory testing. Back tax   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. Back tax However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. Back tax Selling endorsements. Back tax   An exempt scientific organization enjoys an excellent reputation in the field of biological research. Back tax It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. Back tax Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. Back tax Accordingly, the sale of endorsements is an unrelated trade or business. Back tax Sponsoring entertainment events. Back tax   An exempt university has a regular faculty and a regularly enrolled student body. Back tax During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. Back tax Members of the general public also are admitted. Back tax The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. Back tax Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. Back tax Therefore, the activity is not an unrelated trade or business. Back tax Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. Back tax Volunteer workforce. Back tax   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. Back tax Example 1. Back tax A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. Back tax Example 2. Back tax A volunteer fire company conducts weekly public dances. Back tax Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. Back tax However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. Back tax Convenience of members. Back tax   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. Back tax For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. Back tax Qualified sponsorship activities. Back tax   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. Back tax Qualified sponsorship payment. Back tax   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. Back tax “Use or acknowledgment” does not include advertising the sponsor's products or services. Back tax The organization's activities include all its activities, whether or not related to its exempt purposes. Back tax   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. Back tax   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. Back tax Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. Back tax Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. Back tax   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. Back tax   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. Back tax For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. Back tax Advertising. Back tax   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. Back tax For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Back tax   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. Back tax   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. Back tax In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. Back tax Exception for contingent payments. Back tax   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. Back tax However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. Back tax Exception for periodicals. Back tax   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. Back tax For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. Back tax It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). Back tax   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. Back tax See Sales of advertising space under Examples, earlier in this chapter. Back tax Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Back tax Exception for conventions and trade shows. Back tax   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. Back tax The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. Back tax Selling donated merchandise. Back tax   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. Back tax For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. Back tax Employee association sales. Back tax   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. Back tax This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. Back tax Bingo games. Back tax   Certain bingo games are not included in the term “unrelated trade or business. Back tax ” To qualify for this exclusion, the bingo game must meet the following requirements. Back tax It meets the legal definition of bingo. Back tax It is legal where it is played. Back tax It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. Back tax Legal definition. Back tax   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. Back tax   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. Back tax For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. Back tax Legal where played. Back tax   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. Back tax The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. Back tax No for-profit games where played. Back tax   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. Back tax Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. Back tax Example. Back tax Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. Back tax In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. Back tax Several for-profit organizations conduct nightly games. Back tax Y conducts weekly bingo games in city S, while X conducts weekly games in county R. Back tax Since state law confines the for-profit organizations to city S, local jurisdiction controls. Back tax Y's bingo games conducted in city S are an unrelated trade or business. Back tax However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. Back tax Gambling activities other than bingo. Back tax   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. Back tax Pole rentals. Back tax   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). Back tax A qualified pole rental is the 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 the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. Back tax For this purpose, the term rental includes any sale of the right to use the pole (or other structure). Back tax Distribution of low cost articles. Back tax   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. Back tax This applies to organizations described in section 501 that are eligible to receive charitable contributions. Back tax   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. Back tax   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. Back tax The maximum cost of a low cost article is $9. Back tax 70 for 2011. Back tax The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. Back tax Exchange or rental of member lists. Back tax   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. Back tax Hospital services. Back tax   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. Back tax This exclusion applies only to services described in section 501(e)(1)(A). Back tax Public entertainment activity. Back tax   An unrelated trade or business does not include a qualified public entertainment activity. Back tax A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. Back tax   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. Back tax   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. Back tax Its conducting qualified public entertainment activities will not affect determination of its exempt status. Back tax Convention or trade show activity. Back tax   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. Back tax   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. Back tax   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). Back tax The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. Back tax   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. Back tax For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. Back tax    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. Back tax The trade show itself must be a qualified convention and trade show activity. Back tax The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. Back tax Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. Back tax Prev  Up  Next   Home   More Online Publications
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Am I Eligible to Claim an Education Credit?

This application will help you determine if you are eligible for certain educational credits or deductions including the American Opportunity Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction.

Information You Will Need:

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  • Student’s enrollment status
  • Your adjusted gross income
  • Who paid the expenses, when the expenses were paid and for what academic period 
  • If any expenses were paid with tax exempt funds
  • If any expenses were paid with distributions from a Coverdell Education Savings Account or Qualified Tuition Program

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The Back Tax

Back tax 7. Back tax   Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Back tax Costs not included. Back tax Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Back tax Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Back tax Film and Television Production Costs What's New Film and television productions costs. Back tax  The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Back tax See Film and Television Production Costs , later. Back tax Introduction This chapter discusses costs you can elect to deduct or capitalize. Back tax You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Back tax If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Back tax When you capitalize a cost, you add it to the basis of property to which it relates. Back tax A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Back tax Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Back tax You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Back tax For more information on the alternative minimum tax, see the instructions for the following forms. Back tax Form 6251, Alternative Minimum Tax—Individuals. Back tax Form 4626, Alternative Minimum Tax—Corporations. Back tax Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Back tax Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Back tax Certain carrying charges must be capitalized under the uniform capitalization rules. Back tax (For information on capitalization of interest, see chapter 4 . Back tax ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Back tax You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Back tax For unimproved and unproductive real property, your election is good for only 1 year. Back tax You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Back tax For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Back tax For personal property, your election is effective until the date you install or first use it, whichever is later. Back tax How to make the election. Back tax   To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Back tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Back tax Attach the statement to the amended return and write “Filed pursuant to section 301. Back tax 9100-2” on the statement. Back tax File the amended return at the same address you filed the original return. Back tax Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Back tax However, you can elect to deduct these costs as a current business expense. Back tax Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Back tax If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Back tax For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Back tax Research and experimental costs defined. Back tax   Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Back tax Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Back tax Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Back tax      The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Back tax However, costs paid or incurred to obtain another's patent are not research and experimental costs. Back tax Product. Back tax   The term “product” includes any of the following items. Back tax Formula. Back tax Invention. Back tax Patent. Back tax Pilot model. Back tax Process. Back tax Technique. Back tax Property similar to the items listed above. Back tax It also includes products used by you in your trade or business or held for sale, lease, or license. Back tax Costs not included. Back tax   Research and experimental costs do not include expenses for any of the following activities. Back tax Advertising or promotions. Back tax Consumer surveys. Back tax Efficiency surveys. Back tax Management studies. Back tax Quality control testing. Back tax Research in connection with literary, historical, or similar projects. Back tax The acquisition of another's patent, model, production, or process. Back tax When and how to elect. Back tax   You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Back tax If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Back tax Deducting or Amortizing Research and Experimentation Costs IF you . Back tax . Back tax . Back tax THEN . Back tax . Back tax . Back tax Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Back tax Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Back tax See Research and Experimental Costs in chapter 8. Back tax Research credit. Back tax   If you pay or incur qualified research expenses, you may be able to take the research credit. Back tax For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Back tax Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Back tax You can usually recover them through depreciation or depletion. Back tax However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Back tax These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Back tax You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Back tax You can elect to deduct only the costs of items with no salvage value. Back tax These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Back tax Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Back tax However, see Amounts paid to contractor that must be capitalized , later. Back tax You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Back tax It does not matter whether there is any intent to produce hydrocarbons. Back tax If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Back tax Amounts paid to contractor that must be capitalized. Back tax   Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Back tax How to make the election. Back tax   You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Back tax No formal statement is required. Back tax If you file Schedule C (Form 1040), enter these costs under “Other expenses. Back tax ”   For oil and gas wells, your election is binding for the year it is made and for all later years. Back tax For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Back tax You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Back tax Energy credit for costs of geothermal wells. Back tax   If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Back tax See the Instructions for Form 3468 for more information. Back tax Nonproductive well. Back tax   If you capitalize your IDCs, you have another option if the well is nonproductive. Back tax You can deduct the IDCs of the nonproductive well as an ordinary loss. Back tax You must indicate and clearly state your election on your tax return for the year the well is completed. Back tax Once made, the election for oil and gas wells is binding for all later years. Back tax You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Back tax Costs incurred outside the United States. Back tax   You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Back tax However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Back tax If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Back tax These rules do not apply to a nonproductive well. Back tax Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Back tax You recover these costs through depletion as the mineral is removed from the ground. Back tax However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Back tax How to make the election. Back tax   You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Back tax Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Back tax The election applies to the tax year you make this election and all later tax years. Back tax Partnerships and S corporations. Back tax   Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Back tax Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Back tax Reduced corporate deductions for exploration costs. Back tax   A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Back tax It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Back tax A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Back tax For more information on this method of amortization, see Internal Revenue Code section 59(e). Back tax   The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Back tax However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Back tax See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Back tax   These rules also apply to the deduction of development costs by corporations. Back tax See Development Costs , later. Back tax Recapture of exploration expenses. Back tax   When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Back tax Use either of the following methods. Back tax Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Back tax Your election must be clearly indicated on the return. Back tax Increase your adjusted basis in the mine by the amount included in income. Back tax Generally, you must elect this recapture method by the due date (including extensions) of your return. Back tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Back tax Make the election on your amended return and write “Filed pursuant to section 301. Back tax 9100-2” on the form where you are including the income. Back tax File the amended return at the same address you filed the original return. Back tax Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Back tax   You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Back tax Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Back tax   Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Back tax Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Back tax If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Back tax Foreign exploration costs. Back tax   If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Back tax You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Back tax (Cost depletion is discussed in chapter 9 . Back tax ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Back tax These rules also apply to foreign development costs. Back tax Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Back tax These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Back tax Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Back tax Development costs do not include the costs for the acquisition or improvement of depreciable property. Back tax Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Back tax This election applies each tax year to expenses paid or incurred in that year. Back tax Once made, the election is binding for the year and cannot be revoked for any reason. Back tax How to make the election. Back tax   The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Back tax Generally, you must make the election by the due date of the return (including extensions). Back tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Back tax Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Back tax 9100-2. Back tax ” File the amended return at the same address you filed the original return. Back tax Foreign development costs. Back tax   The rules discussed earlier for foreign exploration costs apply to foreign development costs. Back tax Reduced corporate deductions for development costs. Back tax   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Back tax Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Back tax For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Back tax Circulation costs are deductible even if they normally would be capitalized. Back tax This rule does not apply to the following costs that must be capitalized. Back tax The purchase of land or depreciable property. Back tax The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Back tax Other treatment of circulation costs. Back tax   If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Back tax Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Back tax Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Back tax How to make the election. Back tax   You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Back tax Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Back tax Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Back tax However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Back tax The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Back tax Any remaining costs must be amortized. Back tax For information about amortizing start-up and organizational costs, see chapter 8 . Back tax Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Back tax Organizational costs include the costs of creating a corporation. Back tax For more information on start-up and organizational costs, see chapter 8 . Back tax How to make the election. Back tax   You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Back tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Back tax Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Back tax 9100-2. Back tax ” File the amended return at the same address you filed the original return. Back tax The election applies when computing taxable income for the current tax year and all subsequent years. Back tax Reforestation Costs Reforestation costs are generally capital expenditures. Back tax However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Back tax The remaining costs can be amortized over an 84-month period. Back tax For information about amortizing reforestation costs, see chapter 8 . Back tax Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Back tax Qualified timber property is property that contains trees in significant commercial quantities. Back tax See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Back tax If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Back tax Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Back tax How to make the election. Back tax   You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Back tax If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Back tax If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Back tax The unique stand identification numbers. Back tax The total number of acres reforested during the tax year. Back tax The nature of the reforestation treatments. Back tax The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Back tax   If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Back tax Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Back tax 9100-2. Back tax ” File the amended return at the same address you filed the original return. Back tax The election applies when computing taxable income for the current tax year and all subsequent years. Back tax   For additional information on reforestation costs, see chapter 8 . Back tax Recapture. Back tax   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Back tax For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Back tax Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Back tax However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Back tax Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Back tax However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Back tax You must own or lease the facility or vehicle for use in connection with your trade or business. Back tax A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Back tax A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Back tax You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Back tax Deduction limit. Back tax   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Back tax However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Back tax Partners and partnerships. Back tax   The $15,000 limit applies to a partnership and also to each partner in the partnership. Back tax A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Back tax If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Back tax   A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Back tax If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Back tax Example. Back tax Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Back tax Emilio had $12,000 of similar expenses in his sole proprietorship. Back tax He elected to deduct $7,000 of them. Back tax Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Back tax Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Back tax Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Back tax Qualification standards. Back tax   You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Back tax You can view the Americans with Disabilities Act at www. Back tax ada. Back tax gov/pubs/ada. Back tax htm. Back tax   The following is a list of some architectural barrier removal costs that can be deducted. Back tax Ground and floor surfaces. Back tax Walks. Back tax Parking lots. Back tax Ramps. Back tax Entrances. Back tax Doors and doorways. Back tax Stairs. Back tax Floors. Back tax Toilet rooms. Back tax Water fountains. Back tax Public telephones. Back tax Elevators. Back tax Controls. Back tax Signage. Back tax Alarms. Back tax Protruding objects. Back tax Symbols of accessibility. Back tax You can find the ADA guidelines and requirements for architectural barrier removal at www. Back tax usdoj. Back tax gov/crt/ada/reg3a. Back tax html. Back tax   The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Back tax You can find the guidelines and requirements for transportation barrier removal at www. Back tax fta. Back tax dot. Back tax gov. Back tax   Also, you can access the ADA website at www. Back tax ada. Back tax gov for additional information. Back tax Other barrier removals. Back tax   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Back tax The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Back tax The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Back tax The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Back tax How to make the election. Back tax   If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Back tax Identify the deduction as a separate item. Back tax The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Back tax If you make this election, you must maintain adequate records to support your deduction. Back tax   For your election to be valid, you generally must file your return by its due date, including extensions. Back tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Back tax Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Back tax 9100-2. Back tax ” File the amended return at the same address you filed the original return. Back tax Your election is irrevocable after the due date, including extensions, of your return. Back tax Disabled access credit. Back tax   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Back tax If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Back tax   For more information, see Form 8826, Disabled Access Credit. Back tax Film and Television Production Costs Film and television production costs are generally capital expenses. Back tax However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Back tax For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. Back tax Prev  Up  Next   Home   More Online Publications