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Federal1040x amendment 1. Federal1040x amendment Organizations Subject to the Tax Table of Contents The tax on unrelated business income applies to most organizations exempt from tax under section 501(a). Federal1040x amendment These organizations include charitable, religious, scientific, and other organizations described in section 501(c), as well as employees' trusts forming part of pension, profit-sharing, and stock bonus plans described in section 401(a). Federal1040x amendment In addition, the following are subject to the tax on unrelated business income. Federal1040x amendment Individual retirement arrangements (IRAs), including traditional IRAs, Roth IRAs, Coverdell IRAs, simplified employee pensions (SEP-IRAs), and savings incentive match plans for employees (SIMPLE IRAs). Federal1040x amendment State and municipal colleges and universities. Federal1040x amendment Qualified state tuition programs. Federal1040x amendment Medical savings accounts (MSAs) described in section 220(d). Federal1040x amendment Coverdell savings accounts described in section 530. Federal1040x amendment U. Federal1040x amendment S. Federal1040x amendment instrumentalities. Federal1040x amendment A corporation that is a U. Federal1040x amendment S. Federal1040x amendment instrumentality described in section 501(c)(1) is not subject to the tax on unrelated business income if the corporation is organized under an Act of Congress and, under the Act, is exempt from federal income taxes. Federal1040x amendment Colleges and universities. Federal1040x amendment Colleges and universities that are agencies or instrumentalities of any government or any political subdivision of a government, or that are owned or operated by a government or political subdivision of a government, are subject to the tax on unrelated business income. Federal1040x amendment As used here, the word government includes any foreign government (to the extent not contrary to a treaty) and all domestic governments (the United States and any of its possessions, any state, and the District of Columbia). Federal1040x amendment The tax is on the unrelated business income of both the universities and colleges themselves and on their wholly owned tax exempt subsidiary organizations. Federal1040x amendment It is immaterial whether the business is conducted by the university or by a separately incorporated wholly owned subsidiary. Federal1040x amendment If the business activity is unrelated, the income in both instances will be subject to the tax. Federal1040x amendment If the primary purpose of a wholly owned subsidiary is to operate or conduct any unrelated trade or business (other than holding title to property and collecting income from it), the subsidiary is not an exempt organization, and this rule does not apply. Federal1040x amendment Title-holding corporations. Federal1040x amendment When an exempt title-holding corporation, described in section 501(c)(2), pays any of its net income to an organization that itself is exempt from tax under section 501(a) (or would pay such an amount except that the expenses of collecting its income exceed the amount collected) and files a consolidated return with that organization, the title-holding corporation is treated, for unrelated business income tax purposes, as organized and operated for the same purposes as the exempt payee organization. Federal1040x amendment Thus, a title-holding corporation whose source of income is related to the exempt purposes of the payee organization is not subject to the unrelated business income tax if the holding corporation and the payee organization file a consolidated return. Federal1040x amendment However, if the source of the income is not so related, the title-holding corporation is subject to unrelated business income tax. Federal1040x amendment Example. Federal1040x amendment X, a title-holding corporation, is required to distribute its net income to A, an exempt organization. Federal1040x amendment During the tax year, X realizes net income of $900,000 from source M, which is related to A's exempt function. Federal1040x amendment X also receives $100,000 from source N, which is not related to A's exempt function. Federal1040x amendment X and A file a consolidated return for the tax year. Federal1040x amendment X has unrelated business income of $100,000. Federal1040x amendment Prev Up Next Home More Online Publications
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The Federal1040x Amendment
Federal1040x amendment 5. Federal1040x amendment Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. Federal1040x amendment This chapter discusses the records you need to keep to prove these expenses. Federal1040x amendment If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Federal1040x amendment You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Federal1040x amendment These plans are discussed in chapter 6 under Reimbursements . Federal1040x amendment How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Federal1040x amendment You must be able to prove the elements listed across the top portion of the chart. Federal1040x amendment You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Federal1040x amendment You cannot deduct amounts that you approximate or estimate. Federal1040x amendment You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Federal1040x amendment You must generally prepare a written record for it to be considered adequate. Federal1040x amendment This is because written evidence is more reliable than oral evidence alone. Federal1040x amendment However, if you prepare a record on a computer, it is considered an adequate record. Federal1040x amendment What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. Federal1040x amendment You should also keep documentary evidence that, together with your record, will support each element of an expense. Federal1040x amendment Documentary evidence. Federal1040x amendment You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Federal1040x amendment Exception. Federal1040x amendment Documentary evidence is not needed if any of the following conditions apply. Federal1040x amendment You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. Federal1040x amendment ( Accountable plans and per diem allowances are discussed in chapter 6. Federal1040x amendment ) Your expense, other than lodging, is less than $75. Federal1040x amendment You have a transportation expense for which a receipt is not readily available. Federal1040x amendment Adequate evidence. Federal1040x amendment Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Federal1040x amendment For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Federal1040x amendment The name and location of the hotel. Federal1040x amendment The dates you stayed there. Federal1040x amendment Separate amounts for charges such as lodging, meals, and telephone calls. Federal1040x amendment A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Federal1040x amendment The name and location of the restaurant. Federal1040x amendment The number of people served. Federal1040x amendment The date and amount of the expense. Federal1040x amendment If a charge is made for items other than food and beverages, the receipt must show that this is the case. Federal1040x amendment Canceled check. Federal1040x amendment A canceled check, together with a bill from the payee, ordinarily establishes the cost. Federal1040x amendment However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Federal1040x amendment Duplicate information. Federal1040x amendment You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Federal1040x amendment You do not have to record amounts your employer pays directly for any ticket or other travel item. Federal1040x amendment However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. Federal1040x amendment Timely-kept records. Federal1040x amendment You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. Federal1040x amendment A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Federal1040x amendment You do not need to write down the elements of every expense on the day of the expense. Federal1040x amendment If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. Federal1040x amendment If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Federal1040x amendment This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Federal1040x amendment Proving business purpose. Federal1040x amendment You must generally provide a written statement of the business purpose of an expense. Federal1040x amendment However, the degree of proof varies according to the circumstances in each case. Federal1040x amendment If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. Federal1040x amendment Example. Federal1040x amendment If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. Federal1040x amendment You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. Federal1040x amendment You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Federal1040x amendment Confidential information. Federal1040x amendment You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. Federal1040x amendment However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. Federal1040x amendment What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. Federal1040x amendment If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. Federal1040x amendment Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. Federal1040x amendment Documentary evidence can be receipts, paid bills, or similar evidence. Federal1040x amendment If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. Federal1040x amendment For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. Federal1040x amendment Invoices of deliveries establish when you used the car for business. Federal1040x amendment Table 5-1. Federal1040x amendment How To Prove Certain Business Expenses IF you have expenses for . Federal1040x amendment . Federal1040x amendment THEN you must keep records that show details of the following elements . Federal1040x amendment . Federal1040x amendment . Federal1040x amendment Amount Time Place or Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Federal1040x amendment Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Federal1040x amendment Dates you left and returned for each trip and number of days spent on business. Federal1040x amendment Destination or area of your travel (name of city, town, or other designation). Federal1040x amendment Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Federal1040x amendment Relationship: N/A Entertainment Cost of each separate expense. Federal1040x amendment Incidental expenses such as taxis, telephones, etc. Federal1040x amendment , may be totaled on a daily basis. Federal1040x amendment Date of entertainment. Federal1040x amendment (Also see Business Purpose. Federal1040x amendment ) Name and address or location of place of entertainment. Federal1040x amendment Type of entertainment if not otherwise apparent. Federal1040x amendment (Also see Business Purpose. Federal1040x amendment ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Federal1040x amendment For entertainment, the nature of the business discussion or activity. Federal1040x amendment If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Federal1040x amendment Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Federal1040x amendment For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Federal1040x amendment Gifts Cost of the gift. Federal1040x amendment Date of the gift. Federal1040x amendment Description of the gift. Federal1040x amendment Transportation Cost of each separate expense. Federal1040x amendment For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Federal1040x amendment Date of the expense. Federal1040x amendment For car expenses, the date of the use of the car. Federal1040x amendment Your business destination. Federal1040x amendment Purpose: Business purpose for the expense. Federal1040x amendment Relationship: N/A Sampling. Federal1040x amendment You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. Federal1040x amendment You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. Federal1040x amendment Example. Federal1040x amendment You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. Federal1040x amendment There is no other business use of the car, but you and your family use the car for personal purposes. Federal1040x amendment You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Federal1040x amendment Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Federal1040x amendment Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. Federal1040x amendment Exceptional circumstances. Federal1040x amendment You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. Federal1040x amendment This applies if all the following are true. Federal1040x amendment You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . Federal1040x amendment You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . Federal1040x amendment You have presented other evidence for the element that is the best proof possible under the circumstances. Federal1040x amendment Destroyed records. Federal1040x amendment If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Federal1040x amendment Reasons beyond your control include fire, flood, and other casualties. Federal1040x amendment Table 5-2. Federal1040x amendment Daily Business Mileage and Expense Log Name: Odometer Readings Expenses Date Destination (City, Town, or Area) Business Purpose Start Stop Miles this trip Type (Gas, oil, tolls, etc. Federal1040x amendment ) Amount Weekly Total Total Year-to-Date Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. Federal1040x amendment Separating expenses. Federal1040x amendment Each separate payment is generally considered a separate expense. Federal1040x amendment For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. Federal1040x amendment You must record them separately in your records. Federal1040x amendment Season or series tickets. Federal1040x amendment If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Federal1040x amendment To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. Federal1040x amendment You must keep records to show whether you use each ticket as a gift or entertainment. Federal1040x amendment Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. Federal1040x amendment See Entertainment tickets in chapter 2. Federal1040x amendment Combining items. Federal1040x amendment You can make one daily entry in your record for reasonable categories of expenses. Federal1040x amendment Examples are taxi fares, telephone calls, or other incidental travel costs. Federal1040x amendment Meals should be in a separate category. Federal1040x amendment You can include tips for meal-related services with the costs of the meals. Federal1040x amendment Expenses of a similar nature occurring during the course of a single event are considered a single expense. Federal1040x amendment For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. Federal1040x amendment Car expenses. Federal1040x amendment You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Federal1040x amendment Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. Federal1040x amendment Example. Federal1040x amendment You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. Federal1040x amendment You can account for these using a single record of miles driven. Federal1040x amendment Gift expenses. Federal1040x amendment You do not always have to record the name of each recipient of a gift. Federal1040x amendment A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. Federal1040x amendment For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. Federal1040x amendment Allocating total cost. Federal1040x amendment If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. Federal1040x amendment To do so, you must establish the number of persons who participated in the event. Federal1040x amendment An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Federal1040x amendment See Allocating between business and nonbusiness in chapter 2. Federal1040x amendment If your return is examined. Federal1040x amendment If your return is examined, you may have to provide additional information to the IRS. Federal1040x amendment This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. Federal1040x amendment THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Federal1040x amendment Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Federal1040x amendment Travel Expenses: Airlines Excess Baggage Bus – Train Cab and Limousine Tips Porter 2. Federal1040x amendment Meals and Lodging: Breakfast Lunch Dinner Hotel and Motel (Detail in Schedule B) 3. Federal1040x amendment Entertainment (Detail in Schedule C) 4. Federal1040x amendment Other Expenses: Postage Telephone & Telegraph Stationery & Printing Stenographer Sample Room Advertising Assistant(s) Trade Shows 5. Federal1040x amendment Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Federal1040x amendment ) (Detail mileage in Schedule A. Federal1040x amendment ) Gas, oil, lube, wash Repairs, parts Tires, supplies Parking fees, tolls 6. Federal1040x amendment Other (Identify) Total Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Federal1040x amendment 00 or more. Federal1040x amendment Schedule A – Car Mileage: End Start Total Business Mileage Schedule B – Lodging Hotel or Motel Name City Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship WEEKLY REIMBURSEMENTS: Travel and transportation expenses Other reimbursements TOTAL How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Federal1040x amendment Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. Federal1040x amendment A return filed early is considered filed on the due date. Federal1040x amendment For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Federal1040x amendment You must keep records of the business use of your car for each year of the recovery period. Federal1040x amendment See More-than-50%-use test in chapter 4 under Depreciation Deduction. Federal1040x amendment Reimbursed for expenses. Federal1040x amendment Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. Federal1040x amendment However, you may have to prove your expenses if any of the following conditions apply. Federal1040x amendment You claim deductions for expenses that are more than reimbursements. Federal1040x amendment Your expenses are reimbursed under a nonaccountable plan. Federal1040x amendment Your employer does not use adequate accounting procedures to verify expense accounts. Federal1040x amendment You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Federal1040x amendment Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Federal1040x amendment Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Federal1040x amendment Prev Up Next Home More Online Publications