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Unfiled Tax Returns

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Unfiled Tax Returns

Unfiled tax returns Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Unfiled tax returns S. Unfiled tax returns 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. Unfiled tax returns Full-time student. Unfiled tax returns Adjusted gross income. Unfiled tax returns More information. Unfiled tax returns 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). Unfiled tax returns 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. Unfiled tax returns Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Unfiled tax returns You are a member of a religious order who has taken a vow of poverty. Unfiled tax returns You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Unfiled tax returns See Exemption From Self-Employment (SE) Tax , later. Unfiled tax returns 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. Unfiled tax returns For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Unfiled tax returns 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. Unfiled tax returns See Ministerial Services , later. Unfiled tax returns 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. Unfiled tax returns However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Unfiled tax returns For the specific services covered, see Ministerial Services , later. Unfiled tax returns Ministers defined. Unfiled tax returns   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Unfiled tax returns 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. Unfiled tax returns   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. Unfiled tax returns Employment status for other tax purposes. Unfiled tax returns   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. Unfiled tax returns For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Unfiled tax returns Common-law employee. Unfiled tax returns   Under common-law rules, you are considered either an employee or a self-employed person. Unfiled tax returns 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. Unfiled tax returns For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns Example. Unfiled tax returns A church hires and pays you a salary to perform ministerial services subject to its control. Unfiled tax returns Under the common-law rules, you are an employee of the church while performing those services. Unfiled tax returns Form SS-8. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns See Ministerial Services , later. Unfiled tax returns However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Unfiled tax returns Vow of poverty. Unfiled tax returns   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. Unfiled tax returns You do not need to request a separate exemption. Unfiled tax returns For income tax purposes, the earnings are tax free to you. Unfiled tax returns Your earnings are considered the income of the religious order. Unfiled tax returns Services covered under FICA at the election of the order. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns   The order or subdivision elects coverage by filing Form SS-16. Unfiled tax returns 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. Unfiled tax returns If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Unfiled tax returns You do not pay any of the FICA tax. Unfiled tax returns Services performed outside the order. Unfiled tax returns   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. Unfiled tax returns   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Unfiled tax returns You may, however, be able to take a charitable deduction for the amount you turn over to the order. Unfiled tax returns See Publication 526, Charitable Contributions. Unfiled tax returns Rulings. Unfiled tax returns   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. Unfiled tax returns To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Unfiled tax returns R. Unfiled tax returns B. Unfiled tax returns 1, available at www. Unfiled tax returns irs. Unfiled tax returns gov/irb/2014-1_IRB/ar05. Unfiled tax returns html. Unfiled tax returns 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. Unfiled tax returns However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Unfiled tax returns Practitioners. Unfiled tax returns   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. Unfiled tax returns State law specifically exempts Christian Science practitioners from licensing requirements. Unfiled tax returns   Some Christian Science practitioners also are Christian Science teachers or lecturers. Unfiled tax returns Income from teaching or lecturing is considered the same as income from their work as practitioners. Unfiled tax returns Readers. Unfiled tax returns   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Unfiled tax returns 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. Unfiled tax returns Some exceptions are discussed next. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Unfiled tax returns 28 during the tax year. Unfiled tax returns However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Unfiled tax returns Churches and church organizations make this election by filing two copies of Form 8274. Unfiled tax returns For more information about making this election, see Form 8274. Unfiled tax returns 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. Unfiled tax returns This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Unfiled tax returns Make this choice by filing Form 4029. Unfiled tax returns See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Unfiled tax returns U. Unfiled tax returns S. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns S. Unfiled tax returns social security system. Unfiled tax returns To determine your alien status, see Publication 519, U. Unfiled tax returns S. Unfiled tax returns Tax Guide for Aliens. Unfiled tax returns Residents of Puerto Rico, the U. Unfiled tax returns S. Unfiled tax returns Virgin Islands, Guam, the CNMI, and American Samoa. Unfiled tax returns   If you are a resident of one of these U. Unfiled tax returns S. Unfiled tax returns possessions but not a U. Unfiled tax returns S. Unfiled tax returns citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Unfiled tax returns For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Unfiled tax returns 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. Unfiled tax returns Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Unfiled tax returns Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Unfiled tax returns The exemption does not apply to any other income. Unfiled tax returns The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Unfiled tax returns Ministers Most services you perform as a minister, priest, rabbi, etc. Unfiled tax returns , are ministerial services. Unfiled tax returns 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. Unfiled tax returns You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Unfiled tax returns 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. Unfiled tax returns Services for nonreligious organizations. Unfiled tax returns   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Unfiled tax returns Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Unfiled tax returns   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. Unfiled tax returns Services that are not part of your ministry. Unfiled tax returns   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. Unfiled tax returns The following are not ministerial services. Unfiled tax returns Services you perform for nonreligious organizations other than the services stated above. Unfiled tax returns 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. Unfiled tax returns These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Unfiled tax returns (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Unfiled tax returns ) Services you perform in a government-owned and operated hospital. Unfiled tax returns (These services are considered performed by a government employee, not by a minister as part of the ministry. Unfiled tax returns ) 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. Unfiled tax returns Books or articles. Unfiled tax returns   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Unfiled tax returns   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Unfiled tax returns 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. Unfiled tax returns The services are considered ministerial because you perform them as an agent of the order. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns Effect of employee status. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns This result is true even if you have taken a vow of poverty. Unfiled tax returns Example. Unfiled tax returns Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Unfiled tax returns They renounce all claims to their earnings. Unfiled tax returns The earnings belong to the order. Unfiled tax returns Pat is a licensed attorney. Unfiled tax returns The superiors of the order instructed her to get a job with a law firm. Unfiled tax returns Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Unfiled tax returns Chris is a secretary. Unfiled tax returns The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Unfiled tax returns Chris took the job and gave all his earnings to the order. Unfiled tax returns Pat's services are not duties required by the order. Unfiled tax returns Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Unfiled tax returns Chris' services are duties required by the order. Unfiled tax returns He is acting as an agent of the order and not as an employee of a third party. Unfiled tax returns 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. Unfiled tax returns Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Unfiled tax returns Amounts you receive for performing these services are generally subject to SE tax. Unfiled tax returns You may request an exemption from SE tax, discussed next, which applies only to those services. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns They do not have to request the exemption. Unfiled tax returns Who cannot be exempt. Unfiled tax returns   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Unfiled tax returns These elections are irrevocable. Unfiled tax returns 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. Unfiled tax returns You elected before 1968 to be covered under social security for your ministerial services. Unfiled tax returns Requesting exemption. Unfiled tax returns    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Unfiled tax returns More detailed explanations follow. Unfiled tax returns 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. Unfiled tax returns It does not apply to any other self-employment income. Unfiled tax returns Table 2. Unfiled tax returns 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. Unfiled tax returns You file Form 4361, described below under Requesting Exemption—Form 4361 . Unfiled tax returns 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. Unfiled tax returns You file for other than economic reasons. Unfiled tax returns 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). Unfiled tax returns This requirement does not apply to Christian Science practitioners or readers. Unfiled tax returns You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Unfiled tax returns You establish that the organization is a church or a convention or association of churches. Unfiled tax returns You did not make an election discussed earlier under Who cannot be exempt . Unfiled tax returns 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. Unfiled tax returns Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Unfiled tax returns The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Unfiled tax returns If it is approved, keep the approved copy of Form 4361 in your permanent records. Unfiled tax returns When to file. Unfiled tax returns   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. Unfiled tax returns You have net earnings from self-employment of at least $400. Unfiled tax returns 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. Unfiled tax returns The 2 years do not have to be consecutive tax years. Unfiled tax returns    The approval process can take some time, so you should file Form 4361 as soon as possible. Unfiled tax returns Example 1. Unfiled tax returns Rev. Unfiled tax returns Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Unfiled tax returns He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Unfiled tax returns However, if Rev. Unfiled tax returns Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Unfiled tax returns Example 2. Unfiled tax returns Rev. Unfiled tax returns 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. Unfiled tax returns She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Unfiled tax returns 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. Unfiled tax returns Example 3. Unfiled tax returns In 2011, Rev. Unfiled tax returns David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Unfiled tax returns In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Unfiled tax returns Therefore, he had no net self-employment earnings as a minister in 2012. Unfiled tax returns Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Unfiled tax returns In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Unfiled tax returns Rev. Unfiled tax returns 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. Unfiled tax returns Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Unfiled tax returns Death of individual. Unfiled tax returns   The right to file an application for exemption ends with an individual's death. Unfiled tax returns A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Unfiled tax returns Effective date of exemption. Unfiled tax returns   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. Unfiled tax returns Once the exemption is approved, it is irrevocable. Unfiled tax returns Example. Unfiled tax returns Rev. Unfiled tax returns Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Unfiled tax returns She files an application for exemption on February 20, 2014. Unfiled tax returns If an exemption is granted, it is effective for 2010 and the following years. Unfiled tax returns Refunds of SE tax. Unfiled tax returns   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Unfiled tax returns 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. Unfiled tax returns A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns Exception. Unfiled tax returns   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. Unfiled tax returns However, if you pay your benefits back, you may be considered for exemption. Unfiled tax returns Contact your local Social Security Administration office to find out the amount you must pay back. Unfiled tax returns Eligibility requirements. Unfiled tax returns   To claim this exemption from SE tax, all the following requirements must be met. Unfiled tax returns You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns The sect or division must complete part of the form. Unfiled tax returns The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Unfiled tax returns If it is approved, keep the approved copy of Form 4029 in your permanent records. Unfiled tax returns When to file. Unfiled tax returns   You can file Form 4029 at any time. Unfiled tax returns   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. Unfiled tax returns See Effective date of exemption next for information on when the newly approved exemption would become effective. Unfiled tax returns    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. Unfiled tax returns Effective date of exemption. Unfiled tax returns   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. Unfiled tax returns (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. Unfiled tax returns )   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. Unfiled tax returns 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. Unfiled tax returns The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Unfiled tax returns Refunds of SE tax paid. Unfiled tax returns    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Unfiled tax returns For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Unfiled tax returns Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Unfiled tax returns 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. Unfiled tax returns A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Unfiled tax returns 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. Unfiled tax returns Information for employers. Unfiled tax returns   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. Unfiled tax returns   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. Unfiled tax returns Form W-2. Unfiled tax returns   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Unfiled tax returns ” Do not make any entries in boxes 3, 4, 5, or 6. Unfiled tax returns Forms 941, 943, and 944. Unfiled tax returns   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Unfiled tax returns Instead, follow the instructions given below. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns Effective date. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns Regular method. Unfiled tax returns Nonfarm optional method. Unfiled tax returns You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Unfiled tax returns Blank worksheets are in the back of this publication, after the Comprehensive Example. Unfiled tax returns Regular Method Most people use the regular method. Unfiled tax returns 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. Unfiled tax returns Then, subtract your allowable business deductions and multiply the difference by 92. Unfiled tax returns 35% (. Unfiled tax returns 9235). Unfiled tax returns Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Unfiled tax returns 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. Unfiled tax returns 35% (. Unfiled tax returns 9235). Unfiled tax returns Do not reduce your wages by any business deductions when making this computation. Unfiled tax returns Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Unfiled tax returns 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. Unfiled tax returns Amounts included in gross income. Unfiled tax returns   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. Unfiled tax returns , 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. Unfiled tax returns This amount is also subject to income tax. Unfiled tax returns   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Unfiled tax returns Example. Unfiled tax returns Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Unfiled tax returns The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Unfiled tax returns His church owns a parsonage that has a fair rental value of $12,000 per year. Unfiled tax returns The church gives Pastor Adams the use of the parsonage. Unfiled tax returns He is not exempt from SE tax. Unfiled tax returns He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Unfiled tax returns 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. Unfiled tax returns Overseas duty. Unfiled tax returns   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. Unfiled tax returns S. Unfiled tax returns citizen or resident alien serving abroad and living in a foreign country. Unfiled tax returns   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Unfiled tax returns Example. Unfiled tax returns Diane Jones was the minister of a U. Unfiled tax returns S. Unfiled tax returns church in Mexico. Unfiled tax returns She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Unfiled tax returns The United States does not have a social security agreement with Mexico, so Mrs. Unfiled tax returns Jones is subject to U. Unfiled tax returns S. Unfiled tax returns SE tax and must include $35,000 when figuring net earnings from self-employment. Unfiled tax returns Specified U. Unfiled tax returns S. Unfiled tax returns possessions. Unfiled tax returns    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Unfiled tax returns Also see Residents of Puerto Rico, the U. Unfiled tax returns S. Unfiled tax returns Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Unfiled tax returns S. Unfiled tax returns Citizens and Resident and Nonresident Aliens. Unfiled tax returns Amounts not included in gross income. Unfiled tax returns   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Unfiled tax returns Offerings that others made to the church. Unfiled tax returns 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. Unfiled tax returns Pension payments or retirement allowances you receive for your past ministerial services. Unfiled tax returns The rental value of a parsonage or a parsonage allowance provided to you after you retire. Unfiled tax returns Allowable deductions. Unfiled tax returns   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Unfiled tax returns These are ministerial expenses you incurred while working other than as a common-law employee of the church. Unfiled tax returns They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Unfiled tax returns 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. Unfiled tax returns   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 . Unfiled tax returns 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. Unfiled tax returns Do not complete Schedule C or C-EZ (Form 1040). Unfiled tax returns 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. Unfiled tax returns Employee reimbursement arrangements. Unfiled tax returns   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. Unfiled tax returns Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Unfiled tax returns Accountable plans. Unfiled tax returns   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Unfiled tax returns 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. Unfiled tax returns You must adequately account to your employer for these expenses within a reasonable period of time. Unfiled tax returns You must return any excess reimbursement or allowance within a reasonable period of time. Unfiled tax returns   The reimbursement is not reported on your Form W-2. Unfiled tax returns Generally, if your expenses equal your reimbursement, you have no deduction. Unfiled tax returns If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Unfiled tax returns Nonaccountable plan. Unfiled tax returns   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Unfiled tax returns In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Unfiled tax returns Excess reimbursements you fail to return to your employer. Unfiled tax returns Reimbursement of nondeductible expenses related to your employer's business. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns The tax rate for the social security part is 12. Unfiled tax returns 4%. Unfiled tax returns In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Unfiled tax returns This tax rate is 2. Unfiled tax returns 9%. Unfiled tax returns The combined self-employment tax rate is 15. Unfiled tax returns 3%. Unfiled tax returns Additional Medicare Tax. Unfiled tax returns   Beginning in 2013, a 0. Unfiled tax returns 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. Unfiled tax returns Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Unfiled tax returns A self-employment loss is not considered for purposes of this tax. Unfiled tax returns RRTA compensation is separately compared to the threshold. Unfiled tax returns For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Unfiled tax returns Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Unfiled tax returns 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. Unfiled tax returns You may use the nonfarm optional method if you meet all the following tests. Unfiled tax returns You are self-employed on a regular basis. Unfiled tax returns 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. Unfiled tax returns The net earnings can be from either farm or nonfarm earnings or both. Unfiled tax returns You have used this method less than 5 prior years. Unfiled tax returns (There is a 5-year lifetime limit. Unfiled tax returns ) The years do not have to be consecutive. Unfiled tax returns Your net nonfarm profits were: Less than $5,024, and Less than 72. Unfiled tax returns 189% of your gross nonfarm income. Unfiled tax returns If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Unfiled tax returns Table 3. Unfiled tax returns Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Unfiled tax returns . Unfiled tax returns . Unfiled tax returns THEN your net earnings are equal to . Unfiled tax returns . Unfiled tax returns . Unfiled tax returns $6,960 or less Two-thirds of your gross nonfarm income. Unfiled tax returns More than $6,960 $4,640. Unfiled tax returns Actual net earnings. Unfiled tax returns   Multiply your total earnings subject to SE tax by 92. Unfiled tax returns 35% (. Unfiled tax returns 9235) to get actual net earnings. Unfiled tax returns Actual net earnings are equivalent to net earnings under the “Regular Method. Unfiled tax returns ” More information. Unfiled tax returns   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Unfiled tax returns 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. Unfiled tax returns Note. Unfiled tax returns For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns , in addition to your salary. Unfiled tax returns If the offering is made to the religious institution, it is not taxable to you. Unfiled tax returns 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. Unfiled tax returns However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Unfiled tax returns For more information, see Publication 526. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns This exclusion applies only for income tax purposes. Unfiled tax returns It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Unfiled tax returns Designation requirement. Unfiled tax returns   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Unfiled tax returns It must designate a definite amount. Unfiled tax returns It cannot determine the amount of the housing allowance at a later date. Unfiled tax returns 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. Unfiled tax returns   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. Unfiled tax returns The local congregation must officially designate the part of your salary that is a housing allowance. Unfiled tax returns However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Unfiled tax returns Rental allowances. Unfiled tax returns   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. Unfiled tax returns   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Unfiled tax returns Fair rental value of parsonage. Unfiled tax returns   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. Unfiled tax returns However, the exclusion cannot be more than the reasonable pay for your services. Unfiled tax returns If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Unfiled tax returns Example. Unfiled tax returns Rev. Unfiled tax returns Joanna Baker is a full-time minister. Unfiled tax returns The church allows her to use a parsonage that has an annual fair rental value of $24,000. Unfiled tax returns The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Unfiled tax returns Her actual utility costs during the year were $7,000. Unfiled tax returns For income tax purposes, Rev. Unfiled tax returns Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Unfiled tax returns She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Unfiled tax returns Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Unfiled tax returns Home ownership. Unfiled tax returns   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. Unfiled tax returns Excess rental allowance. Unfiled tax returns   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. Unfiled tax returns   Include in the total on Form 1040, line 7. Unfiled tax returns On the dotted line next to line 7, enter “Excess allowance” and the amount. Unfiled tax returns 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. Unfiled tax returns However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Unfiled tax returns Retired ministers. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns Teachers or administrators. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns    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. Unfiled tax returns In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Unfiled tax returns   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. Unfiled tax returns Theological students. Unfiled tax returns   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. Unfiled tax returns Traveling evangelists. Unfiled tax returns   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Unfiled tax returns You are an ordained minister. Unfiled tax returns You perform ministerial services at churches located away from your community. Unfiled tax returns You actually use the rental allowance to maintain your permanent home. Unfiled tax returns Cantors. Unfiled tax returns   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. Unfiled tax returns 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. Unfiled tax returns See Members of Religious Orders , earlier, under Social Security Coverage. Unfiled tax returns Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Unfiled tax returns S. Unfiled tax returns possession. Unfiled tax returns Publication 54 discusses the foreign earned income exclusion. Unfiled tax returns Publication 570, Tax Guide for Individuals With Income From U. Unfiled tax returns S. Unfiled tax returns Possessions, covers the rules for taxpayers with income from U. Unfiled tax returns S. Unfiled tax returns possessions. Unfiled tax returns You can get these free publications from the Internal Revenue Service at IRS. Unfiled tax returns gov or from most U. Unfiled tax returns S. Unfiled tax returns Embassies or consulates. Unfiled tax returns Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Unfiled tax returns 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. Unfiled tax returns You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Unfiled tax returns You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Unfiled tax returns See Publication 529 for more information on this limit. Unfiled tax returns However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Unfiled tax returns 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. Unfiled tax returns You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Unfiled tax returns Exception. Unfiled tax returns   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Unfiled tax returns Figuring the allocation. Unfiled tax returns   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. Unfiled tax returns    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Unfiled tax returns Example. Unfiled tax returns Rev. Unfiled tax returns 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. Unfiled tax returns He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Unfiled tax returns $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. Unfiled tax returns Rev. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Unfiled tax returns The statement must contain all of the following information. Unfiled tax returns A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Unfiled tax returns ) plus the amount. Unfiled tax returns A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Unfiled tax returns A list of each item of otherwise deductible ministerial expenses plus the amount. Unfiled tax returns How you figured the nondeductible part of your otherwise deductible expenses. Unfiled tax returns A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Unfiled tax returns   See the attachments prepared for the Comprehensive Example , later. Unfiled tax returns Following the example, you will find blank worksheets for your own use. Unfiled tax returns 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. Unfiled tax returns If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Unfiled tax returns See the Instructions for Form 1040 to figure your deduction. Unfiled tax returns The following special rules apply to the self-employed health insurance deduction. Unfiled tax returns 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. Unfiled tax returns You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Unfiled tax returns The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Unfiled tax returns Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Unfiled tax returns More information. Unfiled tax returns   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Unfiled tax returns Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Unfiled tax returns This is an income tax deduction only, on Form 1040, line 27. Unfiled tax returns Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Unfiled tax returns Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Unfiled tax returns You must pay the tax as you earn or receive income during the year. Unfiled tax returns An employee usually has income tax withheld from his or her wages or salary. Unfiled tax returns However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Unfiled tax returns 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. Unfiled tax returns Your salary is for ministerial services (see Ministerial Services , earlier). Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Unfiled tax returns Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Unfiled tax returns See Form 1040-ES for the different payment methods. Unfiled tax returns The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Unfiled tax returns For more information, see chapter 2 of Publication 505. Unfiled tax returns 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. Unfiled tax returns 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. Unfiled tax returns Table 4. Unfiled tax returns 2013 Filing Requirements for Most Taxpayers IF your filing status is . Unfiled tax returns . Unfiled tax returns . Unfiled tax returns AND at the end of 2013 you were* . Unfiled tax returns . Unfiled tax returns . Unfiled tax returns THEN file a return if your gross income** was at least . Unfiled tax returns . Unfiled tax returns . Unfiled tax returns 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. Unfiled tax returns ** 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). Unfiled tax returns 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). Unfiled tax returns 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. Unfiled tax returns Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Unfiled tax returns Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Unfiled tax returns 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. Unfiled tax returns *** 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. Unfiled tax returns Additional requirements. Unfiled tax returns   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. Unfiled tax returns 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Unfiled tax returns Self-employment tax. Unfiled tax returns   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Unfiled tax returns   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. Unfiled tax returns You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Unfiled tax returns You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Unfiled tax returns 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). Unfiled tax returns 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. Unfiled tax returns Note. Unfiled tax returns 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. Unfiled tax returns You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Unfiled tax returns Exemption from SE tax. Unfiled tax returns   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). Unfiled tax returns Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Unfiled tax returns 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. Unfiled tax returns    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). Unfiled tax returns Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Unfiled tax returns More information. Unfiled tax returns   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Unfiled tax returns Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Unfiled tax returns You generally can deduct your contributions to the plan. Unfiled tax returns Your contributions and the earnings on them are not taxed until they are distributed. Unfiled tax returns Retirement plans for the self-employed. Unfiled tax returns   To set up one of the following plans you must be self-employed. Unfiled tax returns SEP (simplified employee pension) plan. Unfiled tax returns SIMPLE (savings incentive match plan for employees) plan. Unfiled tax returns Qualified retirement plan (also called a Keogh or H. Unfiled tax returns R. Unfiled tax returns 10 plan). Unfiled tax returns   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Unfiled tax returns See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Unfiled tax returns This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Unfiled tax returns   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. Unfiled tax returns You are not a self-employed person for purposes of setting up a retirement plan. Unfiled tax returns This result is true even if your salary is subject to SE tax. Unfiled tax returns   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. Unfiled tax returns   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). Unfiled tax returns Individual retirement arrangements (IRAs). Unfiled tax returns   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Unfiled tax returns 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). Unfiled tax returns   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Unfiled tax returns 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. Unfiled tax returns   If you contribute to a traditional IRA, your contribution may be deductible. Unfiled tax returns 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). Unfiled tax returns   For more information on IRAs, see Publication 590. Unfiled tax returns Tax-sheltered annuity plans. Unfiled tax returns   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. Unfiled tax returns For more
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2008 Changes to Form 1065 – Frequently Asked Questions

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The Unfiled Tax Returns

Unfiled tax returns Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Unfiled tax returns Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Unfiled tax returns For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Unfiled tax returns Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Unfiled tax returns See Passive Activity Deductions, later. Unfiled tax returns Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Unfiled tax returns However, there is a special allowance under which some or all of your passive activity loss may be allowed. Unfiled tax returns See Special $25,000 allowance , later. Unfiled tax returns Definition of passive activity loss. Unfiled tax returns    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Unfiled tax returns See Passive Activity Income and Deductions , later. Unfiled tax returns   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Unfiled tax returns For details on net active income, see the Instructions for Form 8810. Unfiled tax returns For the definition of passive activity gross income, see Passive Activity Income , later. Unfiled tax returns For the definition of passive activity deductions, see Passive Activity Deductions , later. Unfiled tax returns Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Unfiled tax returns Allocation of disallowed passive activity loss among activities. Unfiled tax returns   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Unfiled tax returns The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Unfiled tax returns Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Unfiled tax returns Loss from an activity. Unfiled tax returns   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Unfiled tax returns   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Unfiled tax returns See Significant Participation Passive Activities , later. Unfiled tax returns Example. Unfiled tax returns John Pine holds interests in three passive activities, A, B, and C. Unfiled tax returns The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Unfiled tax returns Therefore, a ratable portion of the losses from activities A and B is disallowed. Unfiled tax returns He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Unfiled tax returns   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Unfiled tax returns The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Unfiled tax returns Excluded deductions. Unfiled tax returns    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Unfiled tax returns See Recharacterization of Passive Income , later. Unfiled tax returns Separately identified deductions. Unfiled tax returns   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Unfiled tax returns   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Unfiled tax returns   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Unfiled tax returns Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Unfiled tax returns See Active participation , later. Unfiled tax returns Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Unfiled tax returns See Active participation , later. Unfiled tax returns Losses from sales or exchanges of capital assets. Unfiled tax returns Section 1231 losses. Unfiled tax returns See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Unfiled tax returns Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Unfiled tax returns The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Unfiled tax returns For more information, see Regulations section 1. Unfiled tax returns 469-1(f)(4). Unfiled tax returns Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Unfiled tax returns The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Unfiled tax returns Credits that are included in figuring the general business credit are subject to the passive activity rules. Unfiled tax returns See the Instructions for Form 8582-CR for more information. Unfiled tax returns Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Unfiled tax returns You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Unfiled tax returns You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Unfiled tax returns Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Unfiled tax returns This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Unfiled tax returns For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Unfiled tax returns Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Unfiled tax returns These rules do not apply to C corporations. Unfiled tax returns For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Unfiled tax returns Passive Activities There are two kinds of passive activities. Unfiled tax returns Trade or business activities in which you do not materially participate during the year. Unfiled tax returns Rental activities, even if you do materially participate in them, unless you are a real estate professional. Unfiled tax returns Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Unfiled tax returns Treatment of former passive activities. Unfiled tax returns   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Unfiled tax returns You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Unfiled tax returns Treat any remaining prior year unallowed loss like you treat any other passive loss. Unfiled tax returns   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Unfiled tax returns The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Unfiled tax returns You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Unfiled tax returns Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Unfiled tax returns A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Unfiled tax returns You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Unfiled tax returns Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Unfiled tax returns See Real Estate Professional under Activities That Are Not Passive Activities, later. Unfiled tax returns An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Unfiled tax returns It does not matter whether the use is under a lease, a service contract, or some other arrangement. Unfiled tax returns Exceptions. Unfiled tax returns   Your activity is not a rental activity if any of the following apply. Unfiled tax returns The average period of customer use of the property is 7 days or less. Unfiled tax returns You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Unfiled tax returns If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Unfiled tax returns The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Unfiled tax returns The activity's average period of customer use will equal the sum of the amounts for each class. Unfiled tax returns The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Unfiled tax returns Significant personal services include only services performed by individuals. Unfiled tax returns To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Unfiled tax returns Significant personal services do not include the following. Unfiled tax returns Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Unfiled tax returns You provide extraordinary personal services in making the rental property available for customer use. Unfiled tax returns Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Unfiled tax returns The rental is incidental to a nonrental activity. Unfiled tax returns The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Unfiled tax returns The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Unfiled tax returns The rental of property is incidental to a trade or business activity if all of the following apply. Unfiled tax returns You own an interest in the trade or business activity during the year. Unfiled tax returns The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Unfiled tax returns Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Unfiled tax returns Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Unfiled tax returns You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Unfiled tax returns You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Unfiled tax returns    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Unfiled tax returns Special $25,000 allowance. Unfiled tax returns   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Unfiled tax returns This special allowance is an exception to the general rule disallowing the passive activity loss. Unfiled tax returns Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Unfiled tax returns   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Unfiled tax returns If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Unfiled tax returns   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Unfiled tax returns See Phaseout rule , later. Unfiled tax returns Example. Unfiled tax returns Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Unfiled tax returns She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Unfiled tax returns She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Unfiled tax returns Commercial revitalization deduction (CRD). Unfiled tax returns   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Unfiled tax returns Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Unfiled tax returns You cannot claim a CRD for a building placed in service after December 31, 2009. Unfiled tax returns Active participation. Unfiled tax returns   Active participation is not the same as material participation (defined later). Unfiled tax returns Active participation is a less stringent standard than material participation. Unfiled tax returns For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Unfiled tax returns Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Unfiled tax returns   Only individuals can actively participate in rental real estate activities. Unfiled tax returns However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Unfiled tax returns   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Unfiled tax returns The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Unfiled tax returns   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Unfiled tax returns   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Unfiled tax returns   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Unfiled tax returns   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Unfiled tax returns Example. Unfiled tax returns Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Unfiled tax returns He advertised and rented the house to the current tenant himself. Unfiled tax returns He also collected the rents and did the repairs or hired someone to do them. Unfiled tax returns Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Unfiled tax returns Phaseout rule. Unfiled tax returns   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Unfiled tax returns If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Unfiled tax returns    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Unfiled tax returns Taxable social security and tier 1 railroad retirement benefits. Unfiled tax returns Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Unfiled tax returns The exclusion from income of interest from qualified U. Unfiled tax returns S. Unfiled tax returns savings bonds used to pay qualified higher education expenses. Unfiled tax returns The exclusion from income of amounts received from an employer's adoption assistance program. Unfiled tax returns Passive activity income or loss included on Form 8582. Unfiled tax returns Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Unfiled tax returns Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Unfiled tax returns The deduction for the employer-equivalent portion of self-employment tax. Unfiled tax returns The deduction for domestic production activities. Unfiled tax returns The deduction allowed for interest on student loans. Unfiled tax returns The deduction for qualified tuition and related expenses. Unfiled tax returns Example. Unfiled tax returns During 2013, John was unmarried and was not a real estate professional. Unfiled tax returns For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Unfiled tax returns His modified adjusted gross income is $120,000. Unfiled tax returns When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Unfiled tax returns He must carry over the remaining $16,000 passive activity loss to 2014. Unfiled tax returns He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Unfiled tax returns   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Unfiled tax returns For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Unfiled tax returns   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Unfiled tax returns Ordering rules. Unfiled tax returns   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Unfiled tax returns The portion of passive activity losses not attributable to the CRD. Unfiled tax returns The portion of passive activity losses attributable to the CRD. Unfiled tax returns The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Unfiled tax returns The portion of passive activity credits attributable to the rehabilitation credit. Unfiled tax returns The portion of passive activity credits attributable to the low-income housing credit. Unfiled tax returns Activities That Are Not Passive Activities The following are not passive activities. Unfiled tax returns Trade or business activities in which you materially participated for the tax year. Unfiled tax returns A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Unfiled tax returns It does not matter whether you materially participated in the activity for the tax year. Unfiled tax returns However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Unfiled tax returns  See Temporary Regulations section 1. Unfiled tax returns 469-1T(e)(4)(ii). Unfiled tax returns The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Unfiled tax returns An activity of trading personal property for the account of those who own interests in the activity. Unfiled tax returns See Temporary Regulations section 1. Unfiled tax returns 469-1T(e)(6). Unfiled tax returns Rental real estate activities in which you materially participated as a real estate professional. Unfiled tax returns See Real Estate Professional , later. Unfiled tax returns You should not enter income and losses from these activities on Form 8582. Unfiled tax returns Instead, enter them on the forms or schedules you would normally use. Unfiled tax returns Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Unfiled tax returns Material participation tests. Unfiled tax returns    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Unfiled tax returns You participated in the activity for more than 500 hours. Unfiled tax returns Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Unfiled tax returns You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Unfiled tax returns The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Unfiled tax returns A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Unfiled tax returns See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Unfiled tax returns You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Unfiled tax returns The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Unfiled tax returns An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Unfiled tax returns Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Unfiled tax returns   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Unfiled tax returns Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Unfiled tax returns Participation. Unfiled tax returns   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Unfiled tax returns Work not usually performed by owners. Unfiled tax returns   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Unfiled tax returns The work is not work that is customarily done by the owner of that type of activity. Unfiled tax returns One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Unfiled tax returns Participation as an investor. Unfiled tax returns   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Unfiled tax returns Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Unfiled tax returns Spouse's participation. Unfiled tax returns   Your participation in an activity includes your spouse's participation. Unfiled tax returns This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Unfiled tax returns Proof of participation. Unfiled tax returns You can use any reasonable method to prove your participation in an activity for the year. Unfiled tax returns You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Unfiled tax returns For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Unfiled tax returns Limited partners. Unfiled tax returns   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Unfiled tax returns However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Unfiled tax returns   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Unfiled tax returns Retired or disabled farmer and surviving spouse of a farmer. Unfiled tax returns   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Unfiled tax returns Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Unfiled tax returns Corporations. Unfiled tax returns   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Unfiled tax returns   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Unfiled tax returns See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Unfiled tax returns Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Unfiled tax returns However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Unfiled tax returns For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Unfiled tax returns See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Unfiled tax returns If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Unfiled tax returns If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Unfiled tax returns Qualifications. Unfiled tax returns   You qualified as a real estate professional for the year if you met both of the following requirements. Unfiled tax returns More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Unfiled tax returns You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Unfiled tax returns   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Unfiled tax returns You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Unfiled tax returns   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Unfiled tax returns However, you can count your spouse's participation in an activity in determining if you materially participated. Unfiled tax returns Real property trades or businesses. Unfiled tax returns   A real property trade or business is a trade or business that does any of the following with real property. Unfiled tax returns Develops or redevelops it. Unfiled tax returns Constructs or reconstructs it. Unfiled tax returns Acquires it. Unfiled tax returns Converts it. Unfiled tax returns Rents or leases it. Unfiled tax returns Operates or manages it. Unfiled tax returns Brokers it. Unfiled tax returns Closely held corporations. Unfiled tax returns   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Unfiled tax returns Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Unfiled tax returns Self-charged interest. Unfiled tax returns   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Unfiled tax returns   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Unfiled tax returns This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Unfiled tax returns   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Unfiled tax returns    Exception. Unfiled tax returns The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Unfiled tax returns 469-7(g) to avoid the application of these rules. Unfiled tax returns For more details on the self-charged interest rules, see Regulations section 1. Unfiled tax returns 469-7. Unfiled tax returns Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Unfiled tax returns Passive activity income does not include the following items. Unfiled tax returns Income from an activity that is not a passive activity. Unfiled tax returns These activities are discussed under Activities That Are Not Passive Activities , earlier. Unfiled tax returns Portfolio income. Unfiled tax returns This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Unfiled tax returns It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Unfiled tax returns The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Unfiled tax returns For more information on self-charged interest, see Self-charged interest , earlier. Unfiled tax returns Personal service income. Unfiled tax returns This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Unfiled tax returns Income from positive section 481 adjustments allocated to activities other than passive activities. Unfiled tax returns (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Unfiled tax returns ) Income or gain from investments of working capital. Unfiled tax returns Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Unfiled tax returns This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Unfiled tax returns Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Unfiled tax returns Any other income that must be treated as nonpassive income. Unfiled tax returns See Recharacterization of Passive Income , later. Unfiled tax returns Overall gain from any interest in a publicly traded partnership. Unfiled tax returns See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Unfiled tax returns State, local, and foreign income tax refunds. Unfiled tax returns Income from a covenant not to compete. Unfiled tax returns Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Unfiled tax returns Alaska Permanent Fund dividends. Unfiled tax returns Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Unfiled tax returns See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Unfiled tax returns Disposition of property interests. Unfiled tax returns   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Unfiled tax returns The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Unfiled tax returns An exception to this general rule may apply if you previously used the property in a different activity. Unfiled tax returns Exception for more than one use in the preceding 12 months. Unfiled tax returns   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Unfiled tax returns Any gain allocated to a passive activity is passive activity income. Unfiled tax returns   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Unfiled tax returns Exception for substantially appreciated property. Unfiled tax returns   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Unfiled tax returns You used the property in a passive activity for 20% of the time you held your interest in the property. Unfiled tax returns You used the property in a passive activity for the entire 24-month period before its disposition. Unfiled tax returns If neither condition applies, the gain is not passive activity income. Unfiled tax returns However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Unfiled tax returns   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Unfiled tax returns Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Unfiled tax returns   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Unfiled tax returns Disposition of property converted to inventory. Unfiled tax returns   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Unfiled tax returns Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Unfiled tax returns This rule applies only if you meet all of the following conditions. Unfiled tax returns At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Unfiled tax returns Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Unfiled tax returns You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Unfiled tax returns Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Unfiled tax returns For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Unfiled tax returns See Coordination with other limitations on deductions that apply before the passive activity rules , later. Unfiled tax returns Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Unfiled tax returns Exceptions. Unfiled tax returns   Passive activity deductions do not include the following items. Unfiled tax returns Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Unfiled tax returns Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Unfiled tax returns For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Unfiled tax returns Losses from dispositions of property that produce portfolio income or property held for investment. Unfiled tax returns State, local, and foreign income taxes. Unfiled tax returns Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Unfiled tax returns Charitable contribution deductions. Unfiled tax returns Net operating loss deductions. Unfiled tax returns Percentage depletion carryovers for oil and gas wells. Unfiled tax returns Capital loss carrybacks and carryovers. Unfiled tax returns Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Unfiled tax returns See Coordination with other limitations on deductions that apply before the passive activity rules , later. Unfiled tax returns Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Unfiled tax returns Net negative section 481 adjustments allocated to activities other than passive activities. Unfiled tax returns (Section 481 adjustments are adjustments required due to changes in accounting methods. Unfiled tax returns ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Unfiled tax returns The deduction for the employer-equivalent portion of self-employment tax. Unfiled tax returns Coordination with other limitations on deductions that apply before the passive activity rules. Unfiled tax returns   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Unfiled tax returns The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Unfiled tax returns Proration of deductions disallowed under basis limitations. Unfiled tax returns   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Unfiled tax returns For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Unfiled tax returns   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Unfiled tax returns For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Unfiled tax returns Proration of deductions disallowed under at-risk limitation. Unfiled tax returns   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Unfiled tax returns For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Unfiled tax returns Coordination of basis and at-risk limitations. Unfiled tax returns   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Unfiled tax returns Separately identified items of deduction and loss. Unfiled tax returns   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Unfiled tax returns   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Unfiled tax returns See Grouping Your Activities , later. Unfiled tax returns Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Unfiled tax returns See Section 1231 Gains and Losses in Publication 544 for more information. Unfiled tax returns Are attributable to pre-enactment interests in activities. Unfiled tax returns See Regulations section 1. Unfiled tax returns 469-11T(c). Unfiled tax returns Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Unfiled tax returns Grouping is important for a number of reasons. Unfiled tax returns If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Unfiled tax returns But if the two activities are separate, you must show material participation in each one. Unfiled tax returns On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Unfiled tax returns But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Unfiled tax returns Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Unfiled tax returns Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Unfiled tax returns You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Unfiled tax returns The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Unfiled tax returns All of the factors do not have to apply to treat more than one activity as a single activity. Unfiled tax returns The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Unfiled tax returns Example 1. Unfiled tax returns John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Unfiled tax returns Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Unfiled tax returns For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Unfiled tax returns Example 2. Unfiled tax returns Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Unfiled tax returns Betty is also a partner in DEF (a trucking business). Unfiled tax returns ABC and DEF are under common control. Unfiled tax returns The main part of DEF's business is transporting goods for ABC. Unfiled tax returns DEF is the only trucking business in which Betty is involved. Unfiled tax returns Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Unfiled tax returns Consistency and disclosure requirement. Unfiled tax returns   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Unfiled tax returns You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Unfiled tax returns   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Unfiled tax returns   See Disclosure Requirement , later. Unfiled tax returns Regrouping by the IRS. Unfiled tax returns   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Unfiled tax returns Rental activities. Unfiled tax returns   In general, you cannot group a rental activity with a trade or business activity. Unfiled tax returns However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Unfiled tax returns Example. Unfiled tax returns Herbert and Wilma are married and file a joint return. Unfiled tax returns Healthy Food, an S corporation, is a grocery store business. Unfiled tax returns Herbert is Healthy Food's only shareholder. Unfiled tax returns Plum Tower, an S corporation, owns and rents out the building. Unfiled tax returns Wilma is Plum Tower's only shareholder. Unfiled tax returns Plum Tower rents part of its building to Healthy Food. Unfiled tax returns Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Unfiled tax returns Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Unfiled tax returns The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Unfiled tax returns If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Unfiled tax returns Grouping of real and personal property rentals. Unfiled tax returns   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Unfiled tax returns However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Unfiled tax returns Certain activities may not be grouped. Unfiled tax returns   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Unfiled tax returns Holding, producing, or distributing motion picture films or video tapes. Unfiled tax returns Farming. Unfiled tax returns Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Unfiled tax returns For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Unfiled tax returns Exploring for, or exploiting, oil and gas resources. Unfiled tax returns Exploring for, or exploiting, geothermal deposits. Unfiled tax returns   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Unfiled tax returns Limited entrepreneur. Unfiled tax returns   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Unfiled tax returns Activities conducted through another entity. Unfiled tax returns   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Unfiled tax returns Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Unfiled tax returns    You may not treat activities grouped together by the entity as separate activities. Unfiled tax returns Personal service and closely held corporations. Unfiled tax returns   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Unfiled tax returns See Material Participation , earlier, and Significant Participation Passive Activities , later. Unfiled tax returns Publicly traded partnership (PTP). Unfiled tax returns   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Unfiled tax returns Partial dispositions. Unfiled tax returns   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Unfiled tax returns However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Unfiled tax returns Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Unfiled tax returns You are required to report certain changes to your groupings that occur during the tax year to the IRS. Unfiled tax returns If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Unfiled tax returns You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Unfiled tax returns If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Unfiled tax returns New grouping. Unfiled tax returns   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Unfiled tax returns The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Unfiled tax returns In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Unfiled tax returns Addition to an existing grouping. Unfiled tax returns   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Unfiled tax returns The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Unfiled tax returns In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Unfiled tax returns Regrouping. Unfiled tax returns   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Unfiled tax returns The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Unfiled tax returns If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Unfiled tax returns In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Unfiled tax returns Groupings by partnerships and S corporations. Unfiled tax returns   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Unfiled tax returns Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Unfiled tax returns S. Unfiled tax returns Return of Partnership Income, or Form 1120S, U. Unfiled tax returns S. Unfiled tax returns Income Tax Return for an S Corporation, whichever is applicable. Unfiled tax returns   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Unfiled tax returns   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Unfiled tax returns Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Unfiled tax returns Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Unfiled tax returns If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Unfiled tax returns If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Unfiled tax returns If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Unfiled tax returns Instead, enter income or losses on the form and schedules you normally use. Unfiled tax returns However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Unfiled tax returns Limit on recharacterized passive income. Unfiled tax returns   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Unfiled tax returns Investment income and investment expense. Unfiled tax returns   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Unfiled tax returns Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Unfiled tax returns If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Unfiled tax returns Corporations. Unfiled tax returns   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Unfiled tax returns The corporation is not treated as materially participating in the activity for the year. Unfiled tax returns One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Unfiled tax returns Worksheet A. Unfiled tax returns   Complete Worksheet A. Unfiled tax returns Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Unfiled tax returns Begin by entering the name of each activity in the left column. Unfiled tax returns Column (a). Unfiled tax returns   Enter the number of hours you participated in each activity and total the column. Unfiled tax returns   If the total is more than 500, do not complete Worksheet A or B. Unfiled tax returns None of the activities are passive activities because you satisfy test 4 for material participation. Unfiled tax returns (See Material participation tests , earlier. Unfiled tax returns ) Report all the income and losses from these activities on the forms and schedules you normally use. Unfiled tax returns Do not include the income and losses on Form 8582. Unfiled tax returns Column (b). Unfiled tax returns   Enter the net loss, if any, from the activity. Unfiled tax returns Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Unfiled tax returns Enter -0- here if the prior year unallowed loss is the same as the current year net income. Unfiled tax returns Column (c). Unfiled tax returns   Enter net income (if any) from the activity. Unfiled tax returns Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Unfiled tax returns Column (d). Unfiled tax returns   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Unfiled tax returns If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Unfiled tax returns Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88