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Filing 2006 Taxes Online

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Filing 2006 Taxes Online

Filing 2006 taxes online 3. Filing 2006 taxes online   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. Filing 2006 taxes online Dual use of assets or facilities. Filing 2006 taxes online Exploitation of exempt functions. Filing 2006 taxes online ExamplesExceptions. Filing 2006 taxes online Excluded Trade or Business ActivitiesQualified sponsorship payment. Filing 2006 taxes online Advertising. Filing 2006 taxes online Exception for contingent payments. Filing 2006 taxes online Exception for periodicals. Filing 2006 taxes online Exception for conventions and trade shows. Filing 2006 taxes online Legal definition. Filing 2006 taxes online Legal where played. Filing 2006 taxes online No for-profit games where played. Filing 2006 taxes online Unrelated business income. Filing 2006 taxes online   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. Filing 2006 taxes online   Certain trade or business activities are not treated as an unrelated trade or business. Filing 2006 taxes online See Excluded Trade or Business Activities, later. Filing 2006 taxes online Trade or business. Filing 2006 taxes online   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Regularly conducted. Filing 2006 taxes online   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. Filing 2006 taxes online   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. Filing 2006 taxes online The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. Filing 2006 taxes online However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. Filing 2006 taxes online Not substantially related. Filing 2006 taxes online    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). Filing 2006 taxes online Whether an activity contributes importantly depends in each case on the facts involved. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Filing 2006 taxes online   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. Filing 2006 taxes online Selling of products of exempt functions. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. Filing 2006 taxes online , 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. Filing 2006 taxes online Dual use of assets or facilities. Filing 2006 taxes online   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. Filing 2006 taxes online The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. Filing 2006 taxes online   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. Filing 2006 taxes online The theater is a principal feature of the museum and operates continuously while the museum is open to the public. Filing 2006 taxes online 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. Filing 2006 taxes online   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. Filing 2006 taxes online Exploitation of exempt functions. Filing 2006 taxes online   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. Filing 2006 taxes online 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. Filing 2006 taxes online Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. Filing 2006 taxes online   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. Filing 2006 taxes online 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. Filing 2006 taxes online Sales commissions. Filing 2006 taxes online   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. Filing 2006 taxes online Artists' facilities. Filing 2006 taxes online   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. Filing 2006 taxes online These two activities do not contribute importantly to accomplishing the organization's exempt purpose. Filing 2006 taxes online Therefore, they are unrelated trades or businesses. Filing 2006 taxes online Membership list sales. Filing 2006 taxes online   An exempt educational organization regularly sells membership mailing lists to business firms. Filing 2006 taxes online This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. Filing 2006 taxes online Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. Filing 2006 taxes online Hospital facilities. Filing 2006 taxes online   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. Filing 2006 taxes online 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. Filing 2006 taxes online The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. Filing 2006 taxes online   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. Filing 2006 taxes online These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. Filing 2006 taxes online Book publishing. Filing 2006 taxes online   An exempt organization engages primarily in activities that further its exempt purposes. Filing 2006 taxes online It also owns the publication rights to a book that does not relate to any of its exempt purposes. Filing 2006 taxes online 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. Filing 2006 taxes online These activities constitute a trade or business regularly conducted. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online See Royalties under Exclusions in chapter 4. Filing 2006 taxes online School handicraft shop. Filing 2006 taxes online   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. Filing 2006 taxes online The students are paid a percentage of the sales price. Filing 2006 taxes online In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. Filing 2006 taxes online The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Filing 2006 taxes online Although many local participants are former students of the school, any qualified person may participate in the program. Filing 2006 taxes online 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. Filing 2006 taxes online School facilities. Filing 2006 taxes online   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. Filing 2006 taxes online During the summer, the school operates a tennis club open to the general public. Filing 2006 taxes online Employees of the school run the club, including collecting membership fees and scheduling court time. Filing 2006 taxes online   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. Filing 2006 taxes online The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. Filing 2006 taxes online   In both situations, the exempt purpose is the advancement of education. Filing 2006 taxes online Furnishing tennis facilities in the manner described does not further that exempt purpose. Filing 2006 taxes online These activities are unrelated trades or businesses. Filing 2006 taxes online 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. Filing 2006 taxes online See Rents under Exclusions in chapter 4. Filing 2006 taxes online Services provided with lease. Filing 2006 taxes online   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Filing 2006 taxes online Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. Filing 2006 taxes online It also provides dressing room, linen, and stadium security services for the professional team. Filing 2006 taxes online   Leasing of the stadium is an unrelated trade or business. Filing 2006 taxes online 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. Filing 2006 taxes online Therefore, the income from this lease is rent from real property and unrelated business taxable income. Filing 2006 taxes online Broadcasting rights. Filing 2006 taxes online   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. Filing 2006 taxes online Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. Filing 2006 taxes online An athletic program is considered an integral part of the educational process of a university. Filing 2006 taxes online   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. Filing 2006 taxes online 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. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. Filing 2006 taxes online Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. Filing 2006 taxes online Yearbook advertising. Filing 2006 taxes online   An exempt organization receives income from the sale of advertising in its annual yearbook. Filing 2006 taxes online 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. Filing 2006 taxes online This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Filing 2006 taxes online This advertising activity is an unrelated trade or business. Filing 2006 taxes online Pet boarding and grooming services. Filing 2006 taxes online   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. Filing 2006 taxes online These activities do not contribute importantly to its purpose of preventing cruelty to animals. Filing 2006 taxes online Museum eating facilities. Filing 2006 taxes online   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. Filing 2006 taxes online 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. Filing 2006 taxes online The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. Filing 2006 taxes online 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. Filing 2006 taxes online Halfway house workshop. Filing 2006 taxes online   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. Filing 2006 taxes online The profits are applied to the operating costs of the halfway house. Filing 2006 taxes online 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. Filing 2006 taxes online Travel tour programs. Filing 2006 taxes online   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. Filing 2006 taxes online Example 1. Filing 2006 taxes online A tax-exempt university alumni association provides a travel tour program for its members and their families. Filing 2006 taxes online The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. Filing 2006 taxes online It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. Filing 2006 taxes online The organization provides an employee for each tour as a tour leader. Filing 2006 taxes online There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. Filing 2006 taxes online By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. Filing 2006 taxes online 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. Filing 2006 taxes online Therefore, the sale of the travel tours is an unrelated trade or business. Filing 2006 taxes online Example 2. Filing 2006 taxes online 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. Filing 2006 taxes online These tours are conducted by teachers and others certified by the state board of education. Filing 2006 taxes online 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. Filing 2006 taxes online A tour's study program consists of instruction on subjects related to the location being visited on the tour. Filing 2006 taxes online Each tour group brings along a library of material related to the subjects being studied on the tour. Filing 2006 taxes online During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. Filing 2006 taxes online Examinations are given at the end of each tour. Filing 2006 taxes online The state board of education awards academic credit for tour participation. Filing 2006 taxes online Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. Filing 2006 taxes online Insurance programs. Filing 2006 taxes online   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. Filing 2006 taxes online Exceptions. Filing 2006 taxes online   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. Filing 2006 taxes online Magazine publishing. Filing 2006 taxes online   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. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. Filing 2006 taxes online Directory of members. Filing 2006 taxes online   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. Filing 2006 taxes online 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. Filing 2006 taxes online The directory contains no commercial advertisement and is sold only to the organization's members. Filing 2006 taxes online   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. Filing 2006 taxes online 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. Filing 2006 taxes online The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. Filing 2006 taxes online This directory differs from the publication discussed next because of its noncommercial characteristics. Filing 2006 taxes online Sales of advertising space. Filing 2006 taxes online   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. Filing 2006 taxes online The journal is distributed without charge, mainly to the organization's members. Filing 2006 taxes online   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. Filing 2006 taxes online Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. Filing 2006 taxes online A business firm identified in a separate space is further identified in an Index of Advertisers. Filing 2006 taxes online   The organization solicits advertising by personal contacts. Filing 2006 taxes online Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. Filing 2006 taxes online The organization also solicits advertising in form letters appealing for corporate and personal contributions. Filing 2006 taxes online   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. Filing 2006 taxes online Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. Filing 2006 taxes online 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. Filing 2006 taxes online However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. Filing 2006 taxes online In that case, other factors should also be considered in determining whether a commercial benefit can be expected. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online However, the purchaser of a listing cannot expect more than an inconsequential benefit. Filing 2006 taxes online Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. Filing 2006 taxes online Publishing legal notices. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online The state designated the bar association's journal as the place to publish the required notices. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Therefore, the advertising income is unrelated trade or business income. Filing 2006 taxes online   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. Filing 2006 taxes online This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. Filing 2006 taxes online Therefore, the publishing of legal notices does not constitute an unrelated trade or business. Filing 2006 taxes online Museum greeting card sales. Filing 2006 taxes online    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. Filing 2006 taxes online 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. Filing 2006 taxes online The cards contain appropriate greetings and are personalized on request. Filing 2006 taxes online   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. Filing 2006 taxes online It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. Filing 2006 taxes online As a result, a large number of cards are sold at a significant profit. Filing 2006 taxes online   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. Filing 2006 taxes online 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. Filing 2006 taxes online The cards may encourage more people to visit the museum itself to share in its educational programs. Filing 2006 taxes online 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. Filing 2006 taxes online Therefore, these sales activities are not an unrelated trade or business. Filing 2006 taxes online Museum shop. Filing 2006 taxes online   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. Filing 2006 taxes online   The shop also rents originals or reproductions of paintings contained in its collection. Filing 2006 taxes online 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. Filing 2006 taxes online   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. Filing 2006 taxes online   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. Filing 2006 taxes online The same is true for the sale of literature relating to art. Filing 2006 taxes online Therefore, these sales activities are not an unrelated trade or business. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online 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. Filing 2006 taxes online Therefore, these sales are an unrelated trade or business. Filing 2006 taxes online Business league's parking and bus services. Filing 2006 taxes online   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. Filing 2006 taxes online It also operates, as an insubstantial part of its activities, a park and shop plan. Filing 2006 taxes online   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. Filing 2006 taxes online The merchants cannot offer free or discount parking or bus fares to their customers. Filing 2006 taxes online   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. Filing 2006 taxes online Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. Filing 2006 taxes online   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. Filing 2006 taxes online That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. Filing 2006 taxes online   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. Filing 2006 taxes online This provides a particular service to individual members of the organization and does not further its exempt purpose. Filing 2006 taxes online Therefore, operating the park and shop plan is an unrelated trade or business. Filing 2006 taxes online Youth residence. Filing 2006 taxes online   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. Filing 2006 taxes online 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. Filing 2006 taxes online 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. Filing 2006 taxes online The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. Filing 2006 taxes online Health club program. Filing 2006 taxes online   An exempt charitable organization's purpose is to provide for the welfare of young people. Filing 2006 taxes online 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. Filing 2006 taxes online Nominal annual dues are charged for membership in the organization and use of the facilities. Filing 2006 taxes online   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. Filing 2006 taxes online 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. Filing 2006 taxes online   The health club program is in addition to the general physical fitness program of the organization. Filing 2006 taxes online Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. Filing 2006 taxes online Miniature golf course. Filing 2006 taxes online   An exempt youth welfare organization operates a miniature golf course that is open to the general public. Filing 2006 taxes online The course, which is managed by salaried employees, is substantially similar to commercial courses. Filing 2006 taxes online The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. Filing 2006 taxes online   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. Filing 2006 taxes online Sales of hearing aids. Filing 2006 taxes online   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. Filing 2006 taxes online 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. Filing 2006 taxes online It is not an unrelated trade or business. Filing 2006 taxes online Nonpatient laboratory testing. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Selling endorsements. Filing 2006 taxes online   An exempt scientific organization enjoys an excellent reputation in the field of biological research. Filing 2006 taxes online It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. Filing 2006 taxes online Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. Filing 2006 taxes online Accordingly, the sale of endorsements is an unrelated trade or business. Filing 2006 taxes online Sponsoring entertainment events. Filing 2006 taxes online   An exempt university has a regular faculty and a regularly enrolled student body. Filing 2006 taxes online 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. Filing 2006 taxes online Members of the general public also are admitted. Filing 2006 taxes online The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. Filing 2006 taxes online 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. Filing 2006 taxes online Therefore, the activity is not an unrelated trade or business. Filing 2006 taxes online Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. Filing 2006 taxes online Volunteer workforce. Filing 2006 taxes online   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. Filing 2006 taxes online Example 1. Filing 2006 taxes online 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. Filing 2006 taxes online Example 2. Filing 2006 taxes online A volunteer fire company conducts weekly public dances. Filing 2006 taxes online 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. Filing 2006 taxes online However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. Filing 2006 taxes online Convenience of members. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Qualified sponsorship activities. Filing 2006 taxes online   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. Filing 2006 taxes online Qualified sponsorship payment. Filing 2006 taxes online   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. Filing 2006 taxes online “Use or acknowledgment” does not include advertising the sponsor's products or services. Filing 2006 taxes online The organization's activities include all its activities, whether or not related to its exempt purposes. Filing 2006 taxes online   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. Filing 2006 taxes online   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. Filing 2006 taxes online Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. Filing 2006 taxes online 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. Filing 2006 taxes online Advertising. Filing 2006 taxes online   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. Filing 2006 taxes online For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Filing 2006 taxes online   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. Filing 2006 taxes online   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. Filing 2006 taxes online 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. Filing 2006 taxes online Exception for contingent payments. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Exception for periodicals. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online 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). Filing 2006 taxes online   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. Filing 2006 taxes online See Sales of advertising space under Examples, earlier in this chapter. Filing 2006 taxes online Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Filing 2006 taxes online Exception for conventions and trade shows. Filing 2006 taxes online   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. Filing 2006 taxes online 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. Filing 2006 taxes online Selling donated merchandise. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Employee association sales. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online Bingo games. Filing 2006 taxes online   Certain bingo games are not included in the term “unrelated trade or business. Filing 2006 taxes online ” To qualify for this exclusion, the bingo game must meet the following requirements. Filing 2006 taxes online It meets the legal definition of bingo. Filing 2006 taxes online It is legal where it is played. Filing 2006 taxes online It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. Filing 2006 taxes online Legal definition. Filing 2006 taxes online   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. Filing 2006 taxes online   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. Filing 2006 taxes online 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. Filing 2006 taxes online Legal where played. Filing 2006 taxes online   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. Filing 2006 taxes online 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. Filing 2006 taxes online No for-profit games where played. Filing 2006 taxes online   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. Filing 2006 taxes online Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. Filing 2006 taxes online Example. Filing 2006 taxes online 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. Filing 2006 taxes online In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. Filing 2006 taxes online Several for-profit organizations conduct nightly games. Filing 2006 taxes online Y conducts weekly bingo games in city S, while X conducts weekly games in county R. Filing 2006 taxes online Since state law confines the for-profit organizations to city S, local jurisdiction controls. Filing 2006 taxes online Y's bingo games conducted in city S are an unrelated trade or business. Filing 2006 taxes online However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. Filing 2006 taxes online Gambling activities other than bingo. Filing 2006 taxes online   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. Filing 2006 taxes online Pole rentals. Filing 2006 taxes online   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). Filing 2006 taxes online 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. Filing 2006 taxes online For this purpose, the term rental includes any sale of the right to use the pole (or other structure). Filing 2006 taxes online Distribution of low cost articles. Filing 2006 taxes online   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. Filing 2006 taxes online This applies to organizations described in section 501 that are eligible to receive charitable contributions. Filing 2006 taxes online   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. Filing 2006 taxes online   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. Filing 2006 taxes online The maximum cost of a low cost article is $9. Filing 2006 taxes online 70 for 2011. Filing 2006 taxes online The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. Filing 2006 taxes online Exchange or rental of member lists. Filing 2006 taxes online   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. Filing 2006 taxes online Hospital services. Filing 2006 taxes online   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. Filing 2006 taxes online This exclusion applies only to services described in section 501(e)(1)(A). Filing 2006 taxes online Public entertainment activity. Filing 2006 taxes online   An unrelated trade or business does not include a qualified public entertainment activity. Filing 2006 taxes online 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. Filing 2006 taxes online   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. Filing 2006 taxes online   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. Filing 2006 taxes online Its conducting qualified public entertainment activities will not affect determination of its exempt status. Filing 2006 taxes online Convention or trade show activity. Filing 2006 taxes online   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. Filing 2006 taxes online   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. Filing 2006 taxes online   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). Filing 2006 taxes online The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. Filing 2006 taxes online   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. Filing 2006 taxes online 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. Filing 2006 taxes online    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. Filing 2006 taxes online The trade show itself must be a qualified convention and trade show activity. Filing 2006 taxes online 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. Filing 2006 taxes online 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. Filing 2006 taxes online Prev  Up  Next   Home   More Online Publications
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The Filing 2006 Taxes Online

Filing 2006 taxes online 2. Filing 2006 taxes online   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Filing 2006 taxes online How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Filing 2006 taxes online Deferral percentage. Filing 2006 taxes online Employee compensation. Filing 2006 taxes online Compensation of self-employed individuals. Filing 2006 taxes online Choice not to treat deferrals as compensation. Filing 2006 taxes online Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Filing 2006 taxes online Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Filing 2006 taxes online S. Filing 2006 taxes online Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Filing 2006 taxes online Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Filing 2006 taxes online A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Filing 2006 taxes online SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Filing 2006 taxes online A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Filing 2006 taxes online Eligible employee. Filing 2006 taxes online   An eligible employee is an individual who meets all the following requirements. Filing 2006 taxes online Has reached age 21. Filing 2006 taxes online Has worked for you in at least 3 of the last 5 years. Filing 2006 taxes online Has received at least $550 in compensation from you in 2013. Filing 2006 taxes online This amount remains the same in 2014. Filing 2006 taxes online    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Filing 2006 taxes online Excludable employees. Filing 2006 taxes online   The following employees can be excluded from coverage under a SEP. Filing 2006 taxes online Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Filing 2006 taxes online Nonresident alien employees who have received no U. Filing 2006 taxes online S. Filing 2006 taxes online source wages, salaries, or other personal services compensation from you. Filing 2006 taxes online For more information about nonresident aliens, see Publication 519, U. Filing 2006 taxes online S. Filing 2006 taxes online Tax Guide for Aliens. Filing 2006 taxes online Setting Up a SEP There are three basic steps in setting up a SEP. Filing 2006 taxes online You must execute a formal written agreement to provide benefits to all eligible employees. Filing 2006 taxes online You must give each eligible employee certain information about the SEP. Filing 2006 taxes online A SEP-IRA must be set up by or for each eligible employee. Filing 2006 taxes online Many financial institutions will help you set up a SEP. Filing 2006 taxes online Formal written agreement. Filing 2006 taxes online   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Filing 2006 taxes online You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Filing 2006 taxes online However, see When not to use Form 5305-SEP, below. Filing 2006 taxes online   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Filing 2006 taxes online Keep the original form. Filing 2006 taxes online Do not file it with the IRS. Filing 2006 taxes online Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Filing 2006 taxes online See the Form 5305-SEP instructions for details. Filing 2006 taxes online If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Filing 2006 taxes online When not to use Form 5305-SEP. Filing 2006 taxes online   You cannot use Form 5305-SEP if any of the following apply. Filing 2006 taxes online You currently maintain any other qualified retirement plan other than another SEP. Filing 2006 taxes online You have any eligible employees for whom IRAs have not been set up. Filing 2006 taxes online You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Filing 2006 taxes online You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Filing 2006 taxes online An affiliated service group described in section 414(m). Filing 2006 taxes online A controlled group of corporations described in section 414(b). Filing 2006 taxes online Trades or businesses under common control described in section 414(c). Filing 2006 taxes online You do not pay the cost of the SEP contributions. Filing 2006 taxes online Information you must give to employees. Filing 2006 taxes online   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Filing 2006 taxes online An IRS model SEP is not considered adopted until you give each employee this information. Filing 2006 taxes online Setting up the employee's SEP-IRA. Filing 2006 taxes online   A SEP-IRA must be set up by or for each eligible employee. Filing 2006 taxes online SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Filing 2006 taxes online You send SEP contributions to the financial institution where the SEP-IRA is maintained. Filing 2006 taxes online Deadline for setting up a SEP. Filing 2006 taxes online   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Filing 2006 taxes online Credit for startup costs. Filing 2006 taxes online   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Filing 2006 taxes online For more information, see Credit for startup costs under Reminders, earlier. Filing 2006 taxes online How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Filing 2006 taxes online If you are self-employed, you can contribute to your own SEP-IRA. Filing 2006 taxes online Contributions must be in the form of money (cash, check, or money order). Filing 2006 taxes online You cannot contribute property. Filing 2006 taxes online However, participants may be able to transfer or roll over certain property from one retirement plan to another. Filing 2006 taxes online See Publication 590 for more information about rollovers. Filing 2006 taxes online You do not have to make contributions every year. Filing 2006 taxes online But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Filing 2006 taxes online When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Filing 2006 taxes online Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Filing 2006 taxes online A SEP-IRA cannot be a Roth IRA. Filing 2006 taxes online Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Filing 2006 taxes online Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Filing 2006 taxes online If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Filing 2006 taxes online Participants age 70½ or over must take required minimum distributions. Filing 2006 taxes online Time limit for making contributions. Filing 2006 taxes online   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Filing 2006 taxes online Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Filing 2006 taxes online Compensation generally does not include your contributions to the SEP. Filing 2006 taxes online The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Filing 2006 taxes online Example. Filing 2006 taxes online Your employee, Mary Plant, earned $21,000 for 2013. Filing 2006 taxes online The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Filing 2006 taxes online Contributions for yourself. Filing 2006 taxes online   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Filing 2006 taxes online However, special rules apply when figuring your maximum deductible contribution. Filing 2006 taxes online See Deduction Limit for Self-Employed Individuals , later. Filing 2006 taxes online Annual compensation limit. Filing 2006 taxes online   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Filing 2006 taxes online However, $51,000 is the maximum contribution for an eligible employee. Filing 2006 taxes online These limits are $260,000 and $52,000, respectively, in 2014. Filing 2006 taxes online Example. Filing 2006 taxes online Your employee, Susan Green, earned $210,000 for 2013. Filing 2006 taxes online Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Filing 2006 taxes online More than one plan. Filing 2006 taxes online   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Filing 2006 taxes online When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Filing 2006 taxes online Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Filing 2006 taxes online Tax treatment of excess contributions. Filing 2006 taxes online   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Filing 2006 taxes online 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Filing 2006 taxes online $51,000. Filing 2006 taxes online Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Filing 2006 taxes online For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Filing 2006 taxes online Reporting on Form W-2. Filing 2006 taxes online   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Filing 2006 taxes online Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Filing 2006 taxes online If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Filing 2006 taxes online Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Filing 2006 taxes online Your contributions (including any excess contributions carryover). Filing 2006 taxes online 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Filing 2006 taxes online In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Filing 2006 taxes online Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Filing 2006 taxes online When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Filing 2006 taxes online The deduction for the deductible part of your self-employment tax. Filing 2006 taxes online The deduction for contributions to your own SEP-IRA. Filing 2006 taxes online The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Filing 2006 taxes online For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Filing 2006 taxes online To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Filing 2006 taxes online Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Filing 2006 taxes online Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Filing 2006 taxes online However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Filing 2006 taxes online If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Filing 2006 taxes online Excise tax. Filing 2006 taxes online   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Filing 2006 taxes online For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Filing 2006 taxes online When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Filing 2006 taxes online If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Filing 2006 taxes online If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Filing 2006 taxes online Example. Filing 2006 taxes online You are a fiscal year taxpayer whose tax year ends June 30. Filing 2006 taxes online You maintain a SEP on a calendar year basis. Filing 2006 taxes online You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Filing 2006 taxes online Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Filing 2006 taxes online For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Filing 2006 taxes online S. Filing 2006 taxes online Return of Partnership Income; and corporations deduct them on Form 1120, U. Filing 2006 taxes online S. Filing 2006 taxes online Corporation Income Tax Return, or Form 1120S, U. Filing 2006 taxes online S. Filing 2006 taxes online Income Tax Return for an S Corporation. Filing 2006 taxes online Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Filing 2006 taxes online (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Filing 2006 taxes online , you receive from the partnership. Filing 2006 taxes online ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Filing 2006 taxes online Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Filing 2006 taxes online (See the Caution, next. Filing 2006 taxes online ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Filing 2006 taxes online This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Filing 2006 taxes online You are not allowed to set up a SARSEP after 1996. Filing 2006 taxes online However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Filing 2006 taxes online If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Filing 2006 taxes online Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Filing 2006 taxes online At least 50% of your employees eligible to participate choose to make elective deferrals. Filing 2006 taxes online You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Filing 2006 taxes online The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Filing 2006 taxes online SARSEP ADP test. Filing 2006 taxes online   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Filing 2006 taxes online A highly compensated employee is defined in chapter 1. Filing 2006 taxes online Deferral percentage. Filing 2006 taxes online   The deferral percentage for an employee for a year is figured as follows. Filing 2006 taxes online   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Filing 2006 taxes online Employee compensation. Filing 2006 taxes online   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Filing 2006 taxes online Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Filing 2006 taxes online See Compensation in chapter 1. Filing 2006 taxes online Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Filing 2006 taxes online Compensation of self-employed individuals. Filing 2006 taxes online   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Filing 2006 taxes online   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Filing 2006 taxes online Choice not to treat deferrals as compensation. Filing 2006 taxes online   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Filing 2006 taxes online Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Filing 2006 taxes online 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Filing 2006 taxes online $17,500. Filing 2006 taxes online The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Filing 2006 taxes online Cash or deferred arrangement (section 401(k) plan). Filing 2006 taxes online Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Filing 2006 taxes online SIMPLE IRA plan. Filing 2006 taxes online In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Filing 2006 taxes online Catch-up contributions. Filing 2006 taxes online   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Filing 2006 taxes online The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Filing 2006 taxes online Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Filing 2006 taxes online However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Filing 2006 taxes online The catch-up contribution limit. Filing 2006 taxes online The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Filing 2006 taxes online   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Filing 2006 taxes online Overall limit on SEP contributions. Filing 2006 taxes online   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Filing 2006 taxes online The same rule applies to contributions you make to your own SEP-IRA. Filing 2006 taxes online See Contribution Limits , earlier. Filing 2006 taxes online Figuring the elective deferral. Filing 2006 taxes online   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Filing 2006 taxes online Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Filing 2006 taxes online However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Filing 2006 taxes online Excess deferrals. Filing 2006 taxes online   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Filing 2006 taxes online For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Filing 2006 taxes online The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Filing 2006 taxes online See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Filing 2006 taxes online Excess SEP contributions. Filing 2006 taxes online   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Filing 2006 taxes online You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Filing 2006 taxes online If you do not notify them within this time period, you must pay a 10% tax on the excess. Filing 2006 taxes online For an explanation of the notification requirements, see Rev. Filing 2006 taxes online Proc. Filing 2006 taxes online 91-44, 1991-2 C. Filing 2006 taxes online B. Filing 2006 taxes online 733. Filing 2006 taxes online If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Filing 2006 taxes online Reporting on Form W-2. Filing 2006 taxes online   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Filing 2006 taxes online You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Filing 2006 taxes online You must also include them in box 12. Filing 2006 taxes online Mark the “Retirement plan” checkbox in box 13. Filing 2006 taxes online For more information, see the Form W-2 instructions. Filing 2006 taxes online Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Filing 2006 taxes online Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Filing 2006 taxes online Distributions are subject to IRA rules. Filing 2006 taxes online Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Filing 2006 taxes online For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Filing 2006 taxes online Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Filing 2006 taxes online Making excess contributions. Filing 2006 taxes online Making early withdrawals. Filing 2006 taxes online Not making required withdrawals. Filing 2006 taxes online For information about these taxes, see chapter 1 in Publication 590. Filing 2006 taxes online Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Filing 2006 taxes online Prohibited transaction. Filing 2006 taxes online   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Filing 2006 taxes online In that case, the SEP-IRA will no longer qualify as an IRA. Filing 2006 taxes online For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Filing 2006 taxes online Effects on employee. Filing 2006 taxes online   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Filing 2006 taxes online The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Filing 2006 taxes online Also, the employee may have to pay the additional tax for making early withdrawals. Filing 2006 taxes online Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Filing 2006 taxes online See Setting Up a SEP , earlier. Filing 2006 taxes online Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Filing 2006 taxes online You must also give them notice of any excess contributions. Filing 2006 taxes online For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Filing 2006 taxes online Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Filing 2006 taxes online For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Filing 2006 taxes online Prev  Up  Next   Home   More Online Publications