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Irs Forms 2011

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Irs Forms 2011

Irs forms 2011 13. Irs forms 2011   Payment of Taxes Table of Contents How To Make Deposits When To Make Deposits Amount of DepositsSafe Harbor Rule Generally, semimonthly deposits of excise taxes are required. Irs forms 2011 A semimonthly period is the first 15 days of a month (the first semimonthly period) or the 16th through the last day of a month (the second semimonthly period). Irs forms 2011 However, no deposit is required for the situations listed below; the taxes are payable with Form 720. Irs forms 2011 The net liability for taxes listed in Part I (Form 720) does not exceed $2,500 for the quarter. Irs forms 2011 The gas guzzler tax is being paid on a one-time filing. Irs forms 2011 The liability is for taxes listed in Part II (Form 720), except for the floor stocks tax which generally requires a single deposit. Irs forms 2011 How To Make Deposits Electronic deposit requirement. Irs forms 2011   You must use electronic funds transfer to make excise tax deposits. Irs forms 2011 Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). Irs forms 2011 If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf. Irs forms 2011 Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Irs forms 2011   EFTPS is a free service provided by the Department of Treasury. Irs forms 2011 Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Irs forms 2011 To get more information about EFTPS or to enroll in EFTPS, visit www. Irs forms 2011 eftps. Irs forms 2011 gov or call 1-800-555-4477. Irs forms 2011 Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide to Getting Started. Irs forms 2011    Depositing on time. Irs forms 2011 For EFTPS deposits to be on time, you must initiate the transaction at least 1 day before the date the deposit is due (before 8:00 p. Irs forms 2011 m. Irs forms 2011 Eastern time). Irs forms 2011 You will automatically be enrolled in EFTPS when you apply for an EIN. Irs forms 2011 You will receive a separate mailing containing instructions for activating your EFTPS enrollment after you receive your EIN. Irs forms 2011 When To Make Deposits There are two methods for determining deposits: the regular method and the alternative method. Irs forms 2011 The regular method applies to all taxes in Part I of Form 720 except for communications and air transportation taxes if deposits are based on amounts billed or tickets sold, rather than on amounts actually collected. Irs forms 2011 See Alternative method below. Irs forms 2011 If you are depositing more than one tax under a method, combine all the taxes under the method and make one deposit for the semimonthly period. Irs forms 2011 Regular method. Irs forms 2011   The deposit of tax for a semimonthly period is due by the 14th day following that period. Irs forms 2011 Generally, this is the 29th day of a month for the first semimonthly period and the 14th day of the following month for the second semimonthly period. Irs forms 2011 If the 14th or the 29th day falls on a Saturday, Sunday, or legal holiday, you must make the deposit by the immediately preceding day that is not a Saturday, Sunday, or legal holiday. Irs forms 2011 Alternative method (IRS Nos. Irs forms 2011 22, 26, 27, and 28). Irs forms 2011   Deposits of communications and air transportation taxes may be based on taxes included in amounts billed or tickets sold during a semimonthly period instead of on taxes actually collected during the period. Irs forms 2011 Under the alternative method, the tax included in amounts billed or tickets sold during a semimonthly period is considered collected during the first 7 days of the second following semimonthly period. Irs forms 2011 The deposit of tax is due by the 3rd banking day after the 7th day of that period. Irs forms 2011   For an example of the alternative method, see the Instructions for Form 720. Irs forms 2011 To use the alternative method, you must keep a separate account of the tax included in amounts billed or tickets sold during the month and report on Form 720 the tax included in amounts billed or tickets sold and not the amount of tax that is actually collected. Irs forms 2011 For example, amounts billed in December, January, and February are considered collected during January, February, and March and are reported on Form 720 as the tax for the 1st quarter of the calendar year. Irs forms 2011 The separate account for each month must reflect: All items of tax included in amounts billed or tickets sold during the month, and Other items of adjustment relating to tax for prior months (within the statute of limitations on credits or refunds). Irs forms 2011 The separate account for any month cannot include an adjustment resulting from a refusal to pay or inability to collect unless the refusal has been reported to the IRS. Irs forms 2011 See Uncollected Tax Report in chapter 4. Irs forms 2011 The net amount of tax that is considered collected during the semimonthly period must be either: The net amount of tax reflected in the separate account for the corresponding semimonthly period of the preceding month, or One-half of the net amount of tax reflected in the separate account for the preceding month. Irs forms 2011 Special rule for deposits of taxes in September. Irs forms 2011   See the Instructions for Form 720 for a special rule on deposits made in September. Irs forms 2011 Amount of Deposits Deposits for a semimonthly period generally must be at least 95% of the net tax liability for that period unless the safe harbor rule (discussed later) applies. Irs forms 2011 Generally, you do not have to make a deposit for a period in which you incurred no tax liability. Irs forms 2011 Net tax liability. Irs forms 2011   Your net tax liability is your tax liability for the period minus any claims on Schedule C (Form 720) for the period. Irs forms 2011 You may figure your net tax liability for a semimonthly period by dividing your net liability incurred during the calendar month by two. Irs forms 2011 If you use this method, you must use it for all semimonthly periods in the calendar quarter. Irs forms 2011 Do not reduce your liability by any amounts from Form 720X. Irs forms 2011 Safe Harbor Rule The safe harbor rule applies separately to deposits under the regular method and the alternative method. Irs forms 2011 Persons who filed Form 720 for the look-back quarter (the 2nd calendar quarter preceding the current quarter) are considered to meet the semimonthly deposit requirement if the deposit for each semimonthly period in the current quarter is at least 1/6 (16. Irs forms 2011 67%) of the net tax liability reported for the look-back quarter. Irs forms 2011 For the semimonthly period for which the additional deposit is required, the additional deposit must be at least 11/90 12. Irs forms 2011 23%), 10/90 (11. Irs forms 2011 12%) for non-EFTPS, of the net tax liability reported for the look-back quarter. Irs forms 2011 Also, the total deposit for that semimonthly period must be at least 1/6 (16. Irs forms 2011 67%) of the net tax liability reported for the look-back quarter. Irs forms 2011 Exceptions. Irs forms 2011   The safe harbor rule does not apply to: The 1st and 2nd quarters beginning on or after the effective date of an increase in the rate of tax unless the deposit of taxes for each semimonthly period in the calendar quarter is at least 1/6 (16. Irs forms 2011 67%) of the tax liability you would have had for the look-back quarter if the increased rate of tax had been in effect for that look-back quarter, Any quarter if liability includes any tax not in effect throughout the look-back quarter, or For deposits under the alternative method, any quarter if liability includes any tax not in effect throughout the look-back quarter and the month preceding the look-back quarter. Irs forms 2011 Requirements to be met. Irs forms 2011   For the safe harbor rule to apply, you must: Make each deposit timely at an authorized financial institution, and Pay any underpayment for the current quarter by the due date of the return. Irs forms 2011    The IRS may withdraw the right to make deposits of tax using the safe harbor rule from any person not complying with these rules. Irs forms 2011 Tax rate increases. Irs forms 2011   You must modify the safe harbor rule if there has been an increase in the rate of tax. Irs forms 2011 You must figure your tax liability in the look-back quarter as if the increased rate had been in effect. Irs forms 2011 To qualify for the safe harbor rule, your deposits cannot be less than 1/6 of the refigured tax liability. Irs forms 2011 Prev  Up  Next   Home   More Online Publications
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The Irs Forms 2011

Irs forms 2011 4. Irs forms 2011   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. Irs forms 2011 Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Irs forms 2011 Net unrelated income. Irs forms 2011 Net unrelated loss. Irs forms 2011 Control. Irs forms 2011 Income from property financed with qualified 501(c)(3) bonds. Irs forms 2011 Disposition of property received from taxable subsidiary and used in unrelated business. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Irs forms 2011 Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Irs forms 2011 Dividends, interest, annuities and other investment income. Irs forms 2011   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. Irs forms 2011 Exception for insurance activity income of a controlled foreign corporation. Irs forms 2011   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Irs forms 2011 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. Irs forms 2011 Certain exceptions to this rule apply. Irs forms 2011 For more information, see section 512(b)(17). Irs forms 2011 Other exceptions. Irs forms 2011   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). Irs forms 2011 Income from lending securities. Irs forms 2011   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. Irs forms 2011   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. Irs forms 2011 The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Irs forms 2011 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. Irs forms 2011 Royalties. Irs forms 2011   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Irs forms 2011   To be considered a royalty, a payment must relate to the use of a valuable right. Irs forms 2011 Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Irs forms 2011 Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Irs forms 2011 However, royalties do not include payments for personal services. Irs forms 2011 Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Irs forms 2011   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. Irs forms 2011   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Exceptions. Irs forms 2011   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). Irs forms 2011 Rents. Irs forms 2011   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Irs forms 2011 Rents from personal property are not excluded. Irs forms 2011 However, special rules apply to “mixed leases” of both real and personal property. Irs forms 2011 Mixed leases. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Irs forms 2011   Property is placed in service when the lessee first may use it under the terms of a lease. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011   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). Irs forms 2011 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. Irs forms 2011 Exception for rents based on net profit. Irs forms 2011   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. Irs forms 2011 Exception for income from personal services. Irs forms 2011   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Irs forms 2011 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. Irs forms 2011 Other exceptions. Irs forms 2011   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. Irs forms 2011 ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Irs forms 2011 See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Irs forms 2011 Income from research. Irs forms 2011   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Irs forms 2011 However, the extent of the exclusion depends on the nature of the organization and the type of research. Irs forms 2011   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. Irs forms 2011   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Irs forms 2011   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. Irs forms 2011   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. Irs forms 2011 In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Irs forms 2011 Gains and losses from disposition of property. Irs forms 2011   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. Irs forms 2011   It should be noted that the last exception relates only to cut timber. Irs forms 2011 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. Irs forms 2011 Lapse or termination of options. Irs forms 2011   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Irs forms 2011 The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Irs forms 2011 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. Irs forms 2011 Exception. Irs forms 2011   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Irs forms 2011 Gain or loss on disposition of certain brownfield property. Irs forms 2011   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. Irs forms 2011 See sections 512(b)(19) and 514(b)(1)(E). Irs forms 2011 Income from services provided under federal license. Irs forms 2011   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. Irs forms 2011   This exclusion applies only if the following requirements are met. Irs forms 2011 The trade or business must have been operated by the order or by the institution before May 27, 1959. Irs forms 2011 The trade or business must provide services under a license issued by a federal regulatory agency. Irs forms 2011 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. Irs forms 2011 The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Irs forms 2011 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. Irs forms 2011 Exception. Irs forms 2011    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Irs forms 2011 Member income of mutual or cooperative electric companies. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Exception. Irs forms 2011   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. Irs forms 2011 The limit on dues paid by an associate member is $148 for 2011. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 They cannot be directly connected with excluded income. Irs forms 2011 For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Irs forms 2011 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. Irs forms 2011 For an exception, see Expenses attributable to exploitation of exempt activities, later. Irs forms 2011 Expenses attributable solely to unrelated business. Irs forms 2011   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. Irs forms 2011   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. Irs forms 2011 Expenses attributable to dual use of facilities or personnel. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 Example 1. Irs forms 2011 A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Irs forms 2011 The school provides the tennis courts, housing, and dining facilities. Irs forms 2011 The contracted individual hires the instructors, recruits campers, and provides supervision. Irs forms 2011 The income the school receives from this activity is from a dual use of the facilities and personnel. Irs forms 2011 The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Irs forms 2011 Example 2. Irs forms 2011 An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Irs forms 2011 The president devotes approximately 10% of his time to the unrelated business. Irs forms 2011 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. Irs forms 2011 Expenses attributable to exploitation of exempt activities. Irs forms 2011   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. Irs forms 2011 (See Exploitation of exempt functions under Not substantially related in chapter 3. Irs forms 2011 ) 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. Irs forms 2011 Exception. Irs forms 2011   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. Irs forms 2011 The unrelated business exploits the exempt activity. Irs forms 2011 The unrelated business is a type normally conducted for profit by taxable organizations. Irs forms 2011 The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Irs forms 2011 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. Irs forms 2011   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Irs forms 2011 ) Figuring unrelated business taxable income (UBTI). Irs forms 2011   The UBTI of an advertising activity is the amount shown in the following chart. Irs forms 2011 IF gross advertising income is . Irs forms 2011 . Irs forms 2011 . Irs forms 2011 THEN UBTI is . Irs forms 2011 . Irs forms 2011 . Irs forms 2011 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. Irs forms 2011 Equal to or less than direct advertising costs Zero. Irs forms 2011   • Circulation income and readership costs are not taken into account. Irs forms 2011   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Irs forms 2011   The terms used in the chart are explained in the following discussions. Irs forms 2011 Periodical Income Gross advertising income. Irs forms 2011   This is all the income from the unrelated advertising activities of an exempt organization periodical. Irs forms 2011 Circulation income. Irs forms 2011   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Irs forms 2011 It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Irs forms 2011 It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Irs forms 2011 Allocable membership receipts. Irs forms 2011   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. Irs forms 2011   The amount used to allocate membership receipts is the amount shown in the following chart. Irs forms 2011   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Irs forms 2011 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. Irs forms 2011 IF . Irs forms 2011 . Irs forms 2011 . Irs forms 2011 THEN the amount used to allocate membership receipts is . Irs forms 2011 . Irs forms 2011 . Irs forms 2011 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Irs forms 2011 One of U's activities is publishing a monthly periodical distributed to all of its members. Irs forms 2011 U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Irs forms 2011 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. Irs forms 2011 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). Irs forms 2011 Example 2. Irs forms 2011 Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Irs forms 2011 U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Irs forms 2011 Periodical Costs Direct advertising costs. Irs forms 2011   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011 Readership costs. Irs forms 2011   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Irs forms 2011 Costs partly attributable to other activities. Irs forms 2011   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Irs forms 2011 When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Irs forms 2011 The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Irs forms 2011 Consolidated treatment, once adopted, must be followed consistently and is binding. Irs forms 2011 This treatment can be changed only with the consent of the Internal Revenue Service. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Example. Irs forms 2011 Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Irs forms 2011 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. Irs forms 2011 It is not engaged in for profit. Irs forms 2011 Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Irs forms 2011 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. Irs forms 2011 Modifications Net operating loss deduction. Irs forms 2011   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Irs forms 2011 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. Irs forms 2011 For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Irs forms 2011   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. Irs forms 2011 This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011   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. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011 Charitable contributions deduction. Irs forms 2011   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. Irs forms 2011   To be deductible, the contribution must be paid to another qualified organization. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011 Deduction limits. Irs forms 2011   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. Irs forms 2011 See the Instructions for Form 990-T for more information. Irs forms 2011    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. Irs forms 2011 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. Irs forms 2011   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Irs forms 2011 A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Irs forms 2011 Suspension of deduction limits for farmers and ranchers. Irs forms 2011   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Irs forms 2011 See the Instructions for Form 990-T for details. Irs forms 2011 Specific deduction. Irs forms 2011   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Irs forms 2011 However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Irs forms 2011   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Irs forms 2011 Exception. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 The local units cannot file separate returns. Irs forms 2011 However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Irs forms 2011 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. Irs forms 2011 Example. Irs forms 2011 X is an association of churches and is divided into local units A, B, C, and D. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 No distinction is made between limited and general partners. Irs forms 2011 The organization is required to notify the partnership of its tax-exempt status. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 The partnership is required to provide the organization this information on Schedule K-1. Irs forms 2011 Example. Irs forms 2011 An exempt educational organization is a partner in a partnership that operates a factory. Irs forms 2011 The partnership also holds stock in a corporation. Irs forms 2011 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. Irs forms 2011 Different tax years. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 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). Irs forms 2011 These organizations must figure unrelated business taxable income under special rules. Irs forms 2011 Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Irs forms 2011 ). Irs forms 2011 (See Exclusions under Income, earlier. Irs forms 2011 ) Therefore, they are generally subject to unrelated business income tax on this income. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Losses from nonexempt activities. Irs forms 2011   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. Irs forms 2011 Example. Irs forms 2011 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. Irs forms 2011 The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Irs forms 2011 Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Irs forms 2011 Modifications. Irs forms 2011   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Irs forms 2011 Exempt function income. Irs forms 2011   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. Irs forms 2011 Exempt function income also includes income set aside for qualified purposes. Irs forms 2011 Income that is set aside. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011 Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Irs forms 2011 These rules are explained in section 512(a)(3)(E)(ii). Irs forms 2011   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Irs forms 2011 In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 The income set aside must have been includible in gross income for that earlier year. Irs forms 2011 Nonrecognition of gain. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 For details, see section 512(a)(4) and the regulations under that section. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Irs forms 2011 Excess qualifying specified payments. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   If a controlled participant is not required to file a U. Irs forms 2011 S. Irs forms 2011 income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Irs forms 2011 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Irs forms 2011 S. Irs forms 2011 Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Irs forms 2011 S. Irs forms 2011 Corporation or a Foreign Corporation Engaged in a U. Irs forms 2011 S. Irs forms 2011 Trade or Business, or any Form 8865, Return of U. Irs forms 2011 S. Irs forms 2011 Persons With Respect to Certain Foreign Partnerships, filed for that participant. Irs forms 2011 Addition to tax for valuation misstatements. Irs forms 2011   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. Irs forms 2011 See section 512(b)(13)(E)(ii) for more information. Irs forms 2011 Net unrelated income. Irs forms 2011   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. Irs forms 2011 Net unrelated loss. Irs forms 2011   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. Irs forms 2011 Control. Irs forms 2011   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. Irs forms 2011 For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Irs forms 2011   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). Irs forms 2011 Income from property financed with qualified 501(c)(3) bonds. Irs forms 2011 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. Irs forms 2011 No deduction is allowed for interest on the private activity bond. Irs forms 2011 See sections 150(b)(3) and (c) for more information. Irs forms 2011 Disposition of property received from taxable subsidiary and used in unrelated business. Irs forms 2011 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). Irs forms 2011 The assets are treated as if sold at fair market value. Irs forms 2011 Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Irs forms 2011 S. Irs forms 2011 and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Irs forms 2011 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). Irs forms 2011 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. Irs forms 2011 In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Irs forms 2011 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. Irs forms 2011 If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Irs forms 2011 Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 The amount of income included is proportionate to the debt on the property. Irs forms 2011 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). Irs forms 2011 It includes rental real estate, tangible personal property, and corporate stock. Irs forms 2011 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. Irs forms 2011 The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Irs forms 2011 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. Irs forms 2011 Example 1. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Example 2. Irs forms 2011 X, an exempt organization, forms a partnership with A and B. Irs forms 2011 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. Irs forms 2011 X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Irs forms 2011 The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Irs forms 2011 The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Irs forms 2011 The loan is secured by a mortgage on the entire office building. Irs forms 2011 By agreement with Y bank, X is not personally liable for payment of the mortgage. Irs forms 2011 X has acquisition indebtedness of $7 million. Irs forms 2011 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). Irs forms 2011 Example 3. Irs forms 2011 A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Irs forms 2011 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. Irs forms 2011 Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Irs forms 2011 The union has no outstanding debt on the property. Irs forms 2011 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. Irs forms 2011 The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Irs forms 2011 Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Irs forms 2011 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. Irs forms 2011 Accordingly, the debt is not acquisition indebtedness. Irs forms 2011 Change in use of property. Irs forms 2011   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. Irs forms 2011 Example. Irs forms 2011 Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Irs forms 2011 Last year, the university rented the apartment building to the public for nonexempt purposes. Irs forms 2011 The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Irs forms 2011 Continued debt. Irs forms 2011   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. Irs forms 2011 This is true even if the original property was not debt-financed property. Irs forms 2011 Example. Irs forms 2011 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. Irs forms 2011 The office building was not debt-financed property. Irs forms 2011 The organization later sold the building for $1 million without repaying the $400,000 loan. Irs forms 2011 It used the sale proceeds to buy an apartment building it rents to the general public. Irs forms 2011 The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Irs forms 2011 Property acquired subject to mortgage or lien. Irs forms 2011   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. Irs forms 2011 Example. Irs forms 2011 An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Irs forms 2011 The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Irs forms 2011 Liens similar to a mortgage. Irs forms 2011   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Irs forms 2011 A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Irs forms 2011 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. Irs forms 2011 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). Irs forms 2011 Exception for property acquired by gift, bequest, or devise. Irs forms 2011   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. Irs forms 2011 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. Irs forms 2011   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). Irs forms 2011   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. Irs forms 2011 Modifying existing debt. Irs forms 2011   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Irs forms 2011 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. Irs forms 2011 Extension or renewal. Irs forms 2011   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. Irs forms 2011   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. Irs forms 2011 Debt increase. Irs forms 2011   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. Irs forms 2011 Example. Irs forms 2011 An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Irs forms 2011 These include the following. Irs forms 2011 Debts incurred in performing an exempt purpose. Irs forms 2011 Annuity obligations. Irs forms 2011 Securities loans. Irs forms 2011 Real property debts of qualified organizations. Irs forms 2011 Certain Federal financing. Irs forms 2011 Debt incurred in performing exempt purpose. Irs forms 2011   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Irs forms 2011 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. Irs forms 2011 Annuity obligation. Irs forms 2011   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Irs forms 2011 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. Irs forms 2011 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. Irs forms 2011 It must be payable over the lives of either one or two individuals living when issued. Irs forms 2011 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. Irs forms 2011 Example. Irs forms 2011 X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Irs forms 2011 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. Irs forms 2011 The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Irs forms 2011 The present value of this annuity is $81,156, determined from IRS valuation tables. Irs forms 2011 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. Irs forms 2011 Securities loans. Irs forms 2011   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). Irs forms 2011 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. Irs forms 2011   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from