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Free Tax Filing 2012

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Free Tax Filing 2012

Free tax filing 2012 Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Free tax filing 2012 S. Free tax filing 2012 Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Free tax filing 2012 Full-time student. Free tax filing 2012 Adjusted gross income. Free tax filing 2012 More information. Free tax filing 2012 Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Free tax filing 2012 Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Free tax filing 2012 Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Free tax filing 2012 You are a member of a religious order who has taken a vow of poverty. Free tax filing 2012 You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Free tax filing 2012 See Exemption From Self-Employment (SE) Tax , later. Free tax filing 2012 You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Free tax filing 2012 For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Free tax filing 2012 Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Free tax filing 2012 See Ministerial Services , later. Free tax filing 2012 Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Free tax filing 2012 However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Free tax filing 2012 For the specific services covered, see Ministerial Services , later. Free tax filing 2012 Ministers defined. Free tax filing 2012   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Free tax filing 2012 Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Free tax filing 2012   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Free tax filing 2012 Employment status for other tax purposes. Free tax filing 2012   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Free tax filing 2012 For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Free tax filing 2012 Common-law employee. Free tax filing 2012   Under common-law rules, you are considered either an employee or a self-employed person. Free tax filing 2012 Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Free tax filing 2012 For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Free tax filing 2012   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Free tax filing 2012 However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Free tax filing 2012 Example. Free tax filing 2012 A church hires and pays you a salary to perform ministerial services subject to its control. Free tax filing 2012 Under the common-law rules, you are an employee of the church while performing those services. Free tax filing 2012 Form SS-8. Free tax filing 2012   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Free tax filing 2012 Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Free tax filing 2012 See Ministerial Services , later. Free tax filing 2012 However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Free tax filing 2012 Vow of poverty. Free tax filing 2012   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Free tax filing 2012 You do not need to request a separate exemption. Free tax filing 2012 For income tax purposes, the earnings are tax free to you. Free tax filing 2012 Your earnings are considered the income of the religious order. Free tax filing 2012 Services covered under FICA at the election of the order. Free tax filing 2012   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Free tax filing 2012 Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Free tax filing 2012   The order or subdivision elects coverage by filing Form SS-16. Free tax filing 2012 The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Free tax filing 2012 If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Free tax filing 2012 You do not pay any of the FICA tax. Free tax filing 2012 Services performed outside the order. Free tax filing 2012   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Free tax filing 2012   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Free tax filing 2012 You may, however, be able to take a charitable deduction for the amount you turn over to the order. Free tax filing 2012 See Publication 526, Charitable Contributions. Free tax filing 2012 Rulings. Free tax filing 2012   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Free tax filing 2012 To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Free tax filing 2012 R. Free tax filing 2012 B. Free tax filing 2012 1, available at www. Free tax filing 2012 irs. Free tax filing 2012 gov/irb/2014-1_IRB/ar05. Free tax filing 2012 html. Free tax filing 2012 Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Free tax filing 2012 However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Free tax filing 2012 Practitioners. Free tax filing 2012   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Free tax filing 2012 State law specifically exempts Christian Science practitioners from licensing requirements. Free tax filing 2012   Some Christian Science practitioners also are Christian Science teachers or lecturers. Free tax filing 2012 Income from teaching or lecturing is considered the same as income from their work as practitioners. Free tax filing 2012 Readers. Free tax filing 2012   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Free tax filing 2012 Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Free tax filing 2012 Some exceptions are discussed next. Free tax filing 2012 Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Free tax filing 2012 If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Free tax filing 2012 Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Free tax filing 2012 28 during the tax year. Free tax filing 2012 However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Free tax filing 2012 Churches and church organizations make this election by filing two copies of Form 8274. Free tax filing 2012 For more information about making this election, see Form 8274. Free tax filing 2012 Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Free tax filing 2012 This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Free tax filing 2012 Make this choice by filing Form 4029. Free tax filing 2012 See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Free tax filing 2012 U. Free tax filing 2012 S. Free tax filing 2012 Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Free tax filing 2012 Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Free tax filing 2012 S. Free tax filing 2012 social security system. Free tax filing 2012 To determine your alien status, see Publication 519, U. Free tax filing 2012 S. Free tax filing 2012 Tax Guide for Aliens. Free tax filing 2012 Residents of Puerto Rico, the U. Free tax filing 2012 S. Free tax filing 2012 Virgin Islands, Guam, the CNMI, and American Samoa. Free tax filing 2012   If you are a resident of one of these U. Free tax filing 2012 S. Free tax filing 2012 possessions but not a U. Free tax filing 2012 S. Free tax filing 2012 citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Free tax filing 2012 For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Free tax filing 2012 Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Free tax filing 2012 Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Free tax filing 2012 Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Free tax filing 2012 The exemption does not apply to any other income. Free tax filing 2012 The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Free tax filing 2012 Ministers Most services you perform as a minister, priest, rabbi, etc. Free tax filing 2012 , are ministerial services. Free tax filing 2012 These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Free tax filing 2012 You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Free tax filing 2012 A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Free tax filing 2012 Services for nonreligious organizations. Free tax filing 2012   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Free tax filing 2012 Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Free tax filing 2012   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Free tax filing 2012 Services that are not part of your ministry. Free tax filing 2012   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Free tax filing 2012 The following are not ministerial services. Free tax filing 2012 Services you perform for nonreligious organizations other than the services stated above. Free tax filing 2012 Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Free tax filing 2012 These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Free tax filing 2012 (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Free tax filing 2012 ) Services you perform in a government-owned and operated hospital. Free tax filing 2012 (These services are considered performed by a government employee, not by a minister as part of the ministry. Free tax filing 2012 ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Free tax filing 2012 Books or articles. Free tax filing 2012   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Free tax filing 2012   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Free tax filing 2012 Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Free tax filing 2012 The services are considered ministerial because you perform them as an agent of the order. Free tax filing 2012 For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Free tax filing 2012 However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Free tax filing 2012 Effect of employee status. Free tax filing 2012   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Free tax filing 2012 In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Free tax filing 2012 This result is true even if you have taken a vow of poverty. Free tax filing 2012 Example. Free tax filing 2012 Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Free tax filing 2012 They renounce all claims to their earnings. Free tax filing 2012 The earnings belong to the order. Free tax filing 2012 Pat is a licensed attorney. Free tax filing 2012 The superiors of the order instructed her to get a job with a law firm. Free tax filing 2012 Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Free tax filing 2012 Chris is a secretary. Free tax filing 2012 The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Free tax filing 2012 Chris took the job and gave all his earnings to the order. Free tax filing 2012 Pat's services are not duties required by the order. Free tax filing 2012 Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Free tax filing 2012 Chris' services are duties required by the order. Free tax filing 2012 He is acting as an agent of the order and not as an employee of a third party. Free tax filing 2012 He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Free tax filing 2012 Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Free tax filing 2012 Amounts you receive for performing these services are generally subject to SE tax. Free tax filing 2012 You may request an exemption from SE tax, discussed next, which applies only to those services. Free tax filing 2012 Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Free tax filing 2012 Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Free tax filing 2012 They do not have to request the exemption. Free tax filing 2012 Who cannot be exempt. Free tax filing 2012   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Free tax filing 2012 These elections are irrevocable. Free tax filing 2012 You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Free tax filing 2012 You elected before 1968 to be covered under social security for your ministerial services. Free tax filing 2012 Requesting exemption. Free tax filing 2012    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Free tax filing 2012 More detailed explanations follow. Free tax filing 2012 If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Free tax filing 2012 It does not apply to any other self-employment income. Free tax filing 2012 Table 2. Free tax filing 2012 The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Free tax filing 2012 You file Form 4361, described below under Requesting Exemption—Form 4361 . Free tax filing 2012 You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Free tax filing 2012 You file for other than economic reasons. Free tax filing 2012 You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Free tax filing 2012 This requirement does not apply to Christian Science practitioners or readers. Free tax filing 2012 You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Free tax filing 2012 You establish that the organization is a church or a convention or association of churches. Free tax filing 2012 You did not make an election discussed earlier under Who cannot be exempt . Free tax filing 2012 You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Free tax filing 2012 Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Free tax filing 2012 The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Free tax filing 2012 If it is approved, keep the approved copy of Form 4361 in your permanent records. Free tax filing 2012 When to file. Free tax filing 2012   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Free tax filing 2012 You have net earnings from self-employment of at least $400. Free tax filing 2012 Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Free tax filing 2012 The 2 years do not have to be consecutive tax years. Free tax filing 2012    The approval process can take some time, so you should file Form 4361 as soon as possible. Free tax filing 2012 Example 1. Free tax filing 2012 Rev. Free tax filing 2012 Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Free tax filing 2012 He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Free tax filing 2012 However, if Rev. Free tax filing 2012 Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Free tax filing 2012 Example 2. Free tax filing 2012 Rev. Free tax filing 2012 Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Free tax filing 2012 She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Free tax filing 2012 However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Free tax filing 2012 Example 3. Free tax filing 2012 In 2011, Rev. Free tax filing 2012 David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Free tax filing 2012 In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Free tax filing 2012 Therefore, he had no net self-employment earnings as a minister in 2012. Free tax filing 2012 Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Free tax filing 2012 In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Free tax filing 2012 Rev. Free tax filing 2012 Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Free tax filing 2012 Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Free tax filing 2012 Death of individual. Free tax filing 2012   The right to file an application for exemption ends with an individual's death. Free tax filing 2012 A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Free tax filing 2012 Effective date of exemption. Free tax filing 2012   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Free tax filing 2012 Once the exemption is approved, it is irrevocable. Free tax filing 2012 Example. Free tax filing 2012 Rev. Free tax filing 2012 Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Free tax filing 2012 She files an application for exemption on February 20, 2014. Free tax filing 2012 If an exemption is granted, it is effective for 2010 and the following years. Free tax filing 2012 Refunds of SE tax. Free tax filing 2012   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Free tax filing 2012 Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Free tax filing 2012 A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Free tax filing 2012   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Free tax filing 2012 Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Free tax filing 2012 Exception. Free tax filing 2012   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Free tax filing 2012 However, if you pay your benefits back, you may be considered for exemption. Free tax filing 2012 Contact your local Social Security Administration office to find out the amount you must pay back. Free tax filing 2012 Eligibility requirements. Free tax filing 2012   To claim this exemption from SE tax, all the following requirements must be met. Free tax filing 2012 You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Free tax filing 2012 As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Free tax filing 2012 You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Free tax filing 2012 The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Free tax filing 2012 Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Free tax filing 2012 The sect or division must complete part of the form. Free tax filing 2012 The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Free tax filing 2012 If it is approved, keep the approved copy of Form 4029 in your permanent records. Free tax filing 2012 When to file. Free tax filing 2012   You can file Form 4029 at any time. Free tax filing 2012   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Free tax filing 2012 See Effective date of exemption next for information on when the newly approved exemption would become effective. Free tax filing 2012    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Free tax filing 2012 Effective date of exemption. Free tax filing 2012   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Free tax filing 2012 (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Free tax filing 2012 )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Free tax filing 2012 You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Free tax filing 2012 The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Free tax filing 2012 Refunds of SE tax paid. Free tax filing 2012    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Free tax filing 2012 For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Free tax filing 2012 Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Free tax filing 2012 Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Free tax filing 2012 A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Free tax filing 2012 If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Free tax filing 2012 Information for employers. Free tax filing 2012   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Free tax filing 2012   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Free tax filing 2012 Form W-2. Free tax filing 2012   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Free tax filing 2012 ” Do not make any entries in boxes 3, 4, 5, or 6. Free tax filing 2012 Forms 941, 943, and 944. Free tax filing 2012   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Free tax filing 2012 Instead, follow the instructions given below. Free tax filing 2012 Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Free tax filing 2012 Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Free tax filing 2012 Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Free tax filing 2012 Effective date. Free tax filing 2012   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Free tax filing 2012 The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Free tax filing 2012 Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Free tax filing 2012 Regular method. Free tax filing 2012 Nonfarm optional method. Free tax filing 2012 You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Free tax filing 2012 Blank worksheets are in the back of this publication, after the Comprehensive Example. Free tax filing 2012 Regular Method Most people use the regular method. Free tax filing 2012 Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Free tax filing 2012 Then, subtract your allowable business deductions and multiply the difference by 92. Free tax filing 2012 35% (. Free tax filing 2012 9235). Free tax filing 2012 Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Free tax filing 2012 If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Free tax filing 2012 35% (. Free tax filing 2012 9235). Free tax filing 2012 Do not reduce your wages by any business deductions when making this computation. Free tax filing 2012 Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Free tax filing 2012 If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Free tax filing 2012 Amounts included in gross income. Free tax filing 2012   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Free tax filing 2012 , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Free tax filing 2012 This amount is also subject to income tax. Free tax filing 2012   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Free tax filing 2012 Example. Free tax filing 2012 Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Free tax filing 2012 The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Free tax filing 2012 His church owns a parsonage that has a fair rental value of $12,000 per year. Free tax filing 2012 The church gives Pastor Adams the use of the parsonage. Free tax filing 2012 He is not exempt from SE tax. Free tax filing 2012 He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Free tax filing 2012 The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Free tax filing 2012 Overseas duty. Free tax filing 2012   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Free tax filing 2012 S. Free tax filing 2012 citizen or resident alien serving abroad and living in a foreign country. Free tax filing 2012   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Free tax filing 2012 Example. Free tax filing 2012 Diane Jones was the minister of a U. Free tax filing 2012 S. Free tax filing 2012 church in Mexico. Free tax filing 2012 She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Free tax filing 2012 The United States does not have a social security agreement with Mexico, so Mrs. Free tax filing 2012 Jones is subject to U. Free tax filing 2012 S. Free tax filing 2012 SE tax and must include $35,000 when figuring net earnings from self-employment. Free tax filing 2012 Specified U. Free tax filing 2012 S. Free tax filing 2012 possessions. Free tax filing 2012    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Free tax filing 2012 Also see Residents of Puerto Rico, the U. Free tax filing 2012 S. Free tax filing 2012 Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Free tax filing 2012 S. Free tax filing 2012 Citizens and Resident and Nonresident Aliens. Free tax filing 2012 Amounts not included in gross income. Free tax filing 2012   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Free tax filing 2012 Offerings that others made to the church. Free tax filing 2012 Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Free tax filing 2012 Pension payments or retirement allowances you receive for your past ministerial services. Free tax filing 2012 The rental value of a parsonage or a parsonage allowance provided to you after you retire. Free tax filing 2012 Allowable deductions. Free tax filing 2012   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Free tax filing 2012 These are ministerial expenses you incurred while working other than as a common-law employee of the church. Free tax filing 2012 They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Free tax filing 2012 Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Free tax filing 2012   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Free tax filing 2012 Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Free tax filing 2012 Do not complete Schedule C or C-EZ (Form 1040). Free tax filing 2012 However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Free tax filing 2012 Employee reimbursement arrangements. Free tax filing 2012   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Free tax filing 2012 Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Free tax filing 2012 Accountable plans. Free tax filing 2012   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Free tax filing 2012 Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Free tax filing 2012 You must adequately account to your employer for these expenses within a reasonable period of time. Free tax filing 2012 You must return any excess reimbursement or allowance within a reasonable period of time. Free tax filing 2012   The reimbursement is not reported on your Form W-2. Free tax filing 2012 Generally, if your expenses equal your reimbursement, you have no deduction. Free tax filing 2012 If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Free tax filing 2012 Nonaccountable plan. Free tax filing 2012   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Free tax filing 2012 In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Free tax filing 2012 Excess reimbursements you fail to return to your employer. Free tax filing 2012 Reimbursement of nondeductible expenses related to your employer's business. Free tax filing 2012   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Free tax filing 2012 Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Free tax filing 2012   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free tax filing 2012 Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Free tax filing 2012 If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Free tax filing 2012 Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Free tax filing 2012 The tax rate for the social security part is 12. Free tax filing 2012 4%. Free tax filing 2012 In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Free tax filing 2012 This tax rate is 2. Free tax filing 2012 9%. Free tax filing 2012 The combined self-employment tax rate is 15. Free tax filing 2012 3%. Free tax filing 2012 Additional Medicare Tax. Free tax filing 2012   Beginning in 2013, a 0. Free tax filing 2012 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Free tax filing 2012 Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Free tax filing 2012 A self-employment loss is not considered for purposes of this tax. Free tax filing 2012 RRTA compensation is separately compared to the threshold. Free tax filing 2012 For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Free tax filing 2012 Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Free tax filing 2012 In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Free tax filing 2012 You may use the nonfarm optional method if you meet all the following tests. Free tax filing 2012 You are self-employed on a regular basis. Free tax filing 2012 You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Free tax filing 2012 The net earnings can be from either farm or nonfarm earnings or both. Free tax filing 2012 You have used this method less than 5 prior years. Free tax filing 2012 (There is a 5-year lifetime limit. Free tax filing 2012 ) The years do not have to be consecutive. Free tax filing 2012 Your net nonfarm profits were: Less than $5,024, and Less than 72. Free tax filing 2012 189% of your gross nonfarm income. Free tax filing 2012 If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Free tax filing 2012 Table 3. Free tax filing 2012 Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Free tax filing 2012 . Free tax filing 2012 . Free tax filing 2012 THEN your net earnings are equal to . Free tax filing 2012 . Free tax filing 2012 . Free tax filing 2012 $6,960 or less Two-thirds of your gross nonfarm income. Free tax filing 2012 More than $6,960 $4,640. Free tax filing 2012 Actual net earnings. Free tax filing 2012   Multiply your total earnings subject to SE tax by 92. Free tax filing 2012 35% (. Free tax filing 2012 9235) to get actual net earnings. Free tax filing 2012 Actual net earnings are equivalent to net earnings under the “Regular Method. Free tax filing 2012 ” More information. Free tax filing 2012   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Free tax filing 2012 Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Free tax filing 2012 Note. Free tax filing 2012 For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Free tax filing 2012 Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Free tax filing 2012 Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Free tax filing 2012 , in addition to your salary. Free tax filing 2012 If the offering is made to the religious institution, it is not taxable to you. Free tax filing 2012 Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Free tax filing 2012 However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Free tax filing 2012 For more information, see Publication 526. Free tax filing 2012 Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Free tax filing 2012 Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Free tax filing 2012 This exclusion applies only for income tax purposes. Free tax filing 2012 It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Free tax filing 2012 Designation requirement. Free tax filing 2012   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Free tax filing 2012 It must designate a definite amount. Free tax filing 2012 It cannot determine the amount of the housing allowance at a later date. Free tax filing 2012 If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Free tax filing 2012   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Free tax filing 2012 The local congregation must officially designate the part of your salary that is a housing allowance. Free tax filing 2012 However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Free tax filing 2012 Rental allowances. Free tax filing 2012   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Free tax filing 2012   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Free tax filing 2012 Fair rental value of parsonage. Free tax filing 2012   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Free tax filing 2012 However, the exclusion cannot be more than the reasonable pay for your services. Free tax filing 2012 If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Free tax filing 2012 Example. Free tax filing 2012 Rev. Free tax filing 2012 Joanna Baker is a full-time minister. Free tax filing 2012 The church allows her to use a parsonage that has an annual fair rental value of $24,000. Free tax filing 2012 The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Free tax filing 2012 Her actual utility costs during the year were $7,000. Free tax filing 2012 For income tax purposes, Rev. Free tax filing 2012 Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Free tax filing 2012 She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Free tax filing 2012 Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Free tax filing 2012 Home ownership. Free tax filing 2012   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Free tax filing 2012 Excess rental allowance. Free tax filing 2012   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Free tax filing 2012   Include in the total on Form 1040, line 7. Free tax filing 2012 On the dotted line next to line 7, enter “Excess allowance” and the amount. Free tax filing 2012 You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Free tax filing 2012 However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Free tax filing 2012 Retired ministers. Free tax filing 2012   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Free tax filing 2012 However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Free tax filing 2012 Teachers or administrators. Free tax filing 2012   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Free tax filing 2012 However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Free tax filing 2012    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Free tax filing 2012 In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Free tax filing 2012   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Free tax filing 2012 Theological students. Free tax filing 2012   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Free tax filing 2012 Traveling evangelists. Free tax filing 2012   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Free tax filing 2012 You are an ordained minister. Free tax filing 2012 You perform ministerial services at churches located away from your community. Free tax filing 2012 You actually use the rental allowance to maintain your permanent home. Free tax filing 2012 Cantors. Free tax filing 2012   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Free tax filing 2012 Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Free tax filing 2012 See Members of Religious Orders , earlier, under Social Security Coverage. Free tax filing 2012 Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Free tax filing 2012 S. Free tax filing 2012 possession. Free tax filing 2012 Publication 54 discusses the foreign earned income exclusion. Free tax filing 2012 Publication 570, Tax Guide for Individuals With Income From U. Free tax filing 2012 S. Free tax filing 2012 Possessions, covers the rules for taxpayers with income from U. Free tax filing 2012 S. Free tax filing 2012 possessions. Free tax filing 2012 You can get these free publications from the Internal Revenue Service at IRS. Free tax filing 2012 gov or from most U. Free tax filing 2012 S. Free tax filing 2012 Embassies or consulates. Free tax filing 2012 Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Free tax filing 2012 Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Free tax filing 2012 You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Free tax filing 2012 You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Free tax filing 2012 See Publication 529 for more information on this limit. Free tax filing 2012 However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Free tax filing 2012 Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Free tax filing 2012 You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Free tax filing 2012 Exception. Free tax filing 2012   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Free tax filing 2012 Figuring the allocation. Free tax filing 2012   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Free tax filing 2012    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Free tax filing 2012 Example. Free tax filing 2012 Rev. Free tax filing 2012 Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Free tax filing 2012 He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Free tax filing 2012 $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Free tax filing 2012 Rev. Free tax filing 2012 Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Free tax filing 2012 Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Free tax filing 2012   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Free tax filing 2012 The statement must contain all of the following information. Free tax filing 2012 A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Free tax filing 2012 ) plus the amount. Free tax filing 2012 A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Free tax filing 2012 A list of each item of otherwise deductible ministerial expenses plus the amount. Free tax filing 2012 How you figured the nondeductible part of your otherwise deductible expenses. Free tax filing 2012 A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Free tax filing 2012   See the attachments prepared for the Comprehensive Example , later. Free tax filing 2012 Following the example, you will find blank worksheets for your own use. Free tax filing 2012 Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Free tax filing 2012 If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Free tax filing 2012 See the Instructions for Form 1040 to figure your deduction. Free tax filing 2012 The following special rules apply to the self-employed health insurance deduction. Free tax filing 2012 You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Free tax filing 2012 You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Free tax filing 2012 The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Free tax filing 2012 Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Free tax filing 2012 More information. Free tax filing 2012   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Free tax filing 2012 Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Free tax filing 2012 This is an income tax deduction only, on Form 1040, line 27. Free tax filing 2012 Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Free tax filing 2012 Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Free tax filing 2012 You must pay the tax as you earn or receive income during the year. Free tax filing 2012 An employee usually has income tax withheld from his or her wages or salary. Free tax filing 2012 However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Free tax filing 2012 You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Free tax filing 2012 Your salary is for ministerial services (see Ministerial Services , earlier). Free tax filing 2012 If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Free tax filing 2012 You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Free tax filing 2012 Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Free tax filing 2012 Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Free tax filing 2012 See Form 1040-ES for the different payment methods. Free tax filing 2012 The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Free tax filing 2012 For more information, see chapter 2 of Publication 505. Free tax filing 2012 If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Free tax filing 2012 Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Free tax filing 2012 Table 4. Free tax filing 2012 2013 Filing Requirements for Most Taxpayers IF your filing status is . Free tax filing 2012 . Free tax filing 2012 . Free tax filing 2012 AND at the end of 2013 you were* . Free tax filing 2012 . Free tax filing 2012 . Free tax filing 2012 THEN file a return if your gross income** was at least . Free tax filing 2012 . Free tax filing 2012 . Free tax filing 2012 single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Free tax filing 2012 ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Free tax filing 2012 Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Free tax filing 2012 If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Free tax filing 2012 Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Free tax filing 2012 Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Free tax filing 2012 But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Free tax filing 2012 *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Free tax filing 2012 Additional requirements. Free tax filing 2012   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Free tax filing 2012 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Free tax filing 2012 Self-employment tax. Free tax filing 2012   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Free tax filing 2012   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Free tax filing 2012 You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Free tax filing 2012 You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Free tax filing 2012 However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Free tax filing 2012 Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Free tax filing 2012 Note. Free tax filing 2012 For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Free tax filing 2012 You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Free tax filing 2012 Exemption from SE tax. Free tax filing 2012   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Free tax filing 2012 Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Free tax filing 2012 However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Free tax filing 2012    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Free tax filing 2012 Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Free tax filing 2012 More information. Free tax filing 2012   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Free tax filing 2012 Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Free tax filing 2012 You generally can deduct your contributions to the plan. Free tax filing 2012 Your contributions and the earnings on them are not taxed until they are distributed. Free tax filing 2012 Retirement plans for the self-employed. Free tax filing 2012   To set up one of the following plans you must be self-employed. Free tax filing 2012 SEP (simplified employee pension) plan. Free tax filing 2012 SIMPLE (savings incentive match plan for employees) plan. Free tax filing 2012 Qualified retirement plan (also called a Keogh or H. Free tax filing 2012 R. Free tax filing 2012 10 plan). Free tax filing 2012   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Free tax filing 2012 See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Free tax filing 2012 This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Free tax filing 2012   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Free tax filing 2012 You are not a self-employed person for purposes of setting up a retirement plan. Free tax filing 2012 This result is true even if your salary is subject to SE tax. Free tax filing 2012   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Free tax filing 2012   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Free tax filing 2012 Individual retirement arrangements (IRAs). Free tax filing 2012   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Free tax filing 2012 Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Free tax filing 2012   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Free tax filing 2012 You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Free tax filing 2012   If you contribute to a traditional IRA, your contribution may be deductible. Free tax filing 2012 However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Free tax filing 2012   For more information on IRAs, see Publication 590. Free tax filing 2012 Tax-sheltered annuity plans. Free tax filing 2012   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Free tax filing 2012 For more
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Foreign Visitors Driving in the U.S.

Quick facts for foreign visitors, students, and residents about driving in the United States of America.

Short-Term Visitors

If you plan to drive when you visit the United States, check the driving rules in the state(s) you'll be visiting to verify that you can use your non-U.S. driver's license. You should get an International Driving Permit (IDP), which translates the information contained on your official driver's license into 10 languages.

The United States does not issue International Driving Permits to foreign visitors, so you will need to obtain this document in your home country before you travel to the United States.

Students

If you are a foreign student coming to the United States to study, you should contact the university or college you'll be attending for information about driving.

Residents (Non-U.S. Citizens)

The residency requirement for obtaining a U.S. driver's license is different in each state. Check the department of motor vehicles in the state where you live to see the requirements.

If you are eligible to apply for a driver's license, you can only get a driver's license from the state where you live. Check with your state's department of motor vehicles to find out how to apply.

Once you receive your U.S. driver's license from a state motor vehicle department, you can drive in all U.S. states. Remember that the driving laws in each state differ and it is your responsibility to know and obey the laws of the state where you are driving.

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The Free Tax Filing 2012

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