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1040 Ez Instructions

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1040 Ez Instructions

1040 ez instructions Publication 521 - Introductory Material Table of Contents What's New Reminders IntroductionOrdering forms and publications. 1040 ez instructions Tax questions. 1040 ez instructions Useful Items - You may want to see: What's New Standard mileage rate. 1040 ez instructions  For 2013, the standard mileage rate for using your vehicle to move to a new home is 24 cents per mile. 1040 ez instructions See Travel by car under Deductible Moving Expenses. 1040 ez instructions Reminders Future developments. 1040 ez instructions  For the latest information about developments related to Publication 521, such as legislation enacted after it was published, go to www. 1040 ez instructions irs. 1040 ez instructions gov/pub521. 1040 ez instructions Change of address. 1040 ez instructions  If you change your mailing address, be sure to notify the IRS using Form 8822, Change of Address. 1040 ez instructions Mail it to the Internal Revenue Service Center for your old address. 1040 ez instructions Addresses for the service centers are on the back of the form. 1040 ez instructions If you change your business address or the identity of your responsible party, use Form 8822-B, Change of Address or Responsible Party—Business. 1040 ez instructions Photographs of missing children. 1040 ez instructions  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 1040 ez instructions Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 1040 ez instructions You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 1040 ez instructions Introduction This publication explains the deduction of certain expenses of moving to a new home because you changed job locations or started a new job. 1040 ez instructions It includes the following topics. 1040 ez instructions Who can deduct moving expenses. 1040 ez instructions What moving expenses are deductible. 1040 ez instructions What moving expenses are not deductible. 1040 ez instructions How a reimbursement affects your moving expense deduction. 1040 ez instructions How and when to report moving expenses. 1040 ez instructions Special rules for members of the Armed Forces. 1040 ez instructions Form 3903, Moving Expenses, is used to claim the moving expense deduction. 1040 ez instructions An example of how to report your moving expenses, including a filled-in Form 3903, is shown near the end of the publication. 1040 ez instructions You may be able to deduct moving expenses whether you are self-employed or an employee. 1040 ez instructions Your expenses generally must be related to starting work at your new job location. 1040 ez instructions However, certain retirees and survivors may qualify to claim the deduction even though they are not starting work at a new job location. 1040 ez instructions See Who Can Deduct Moving Expenses. 1040 ez instructions Recordkeeping. 1040 ez instructions    It is important to maintain an accurate record of expenses you paid to move. 1040 ez instructions You should save items such as receipts, bills, cancelled checks, credit card statements, and mileage logs. 1040 ez instructions Also, you should save your Form W-2 and statements of reimbursement from your employer. 1040 ez instructions Comments and suggestions. 1040 ez instructions   We welcome your comments about this publication and your suggestions for future editions. 1040 ez instructions   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 1040 ez instructions NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 1040 ez instructions Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 1040 ez instructions   You can send your comments from www. 1040 ez instructions irs. 1040 ez instructions gov/formspubs/. 1040 ez instructions Click on “More Information” and then on “Comment on Tax Forms and Publications”. 1040 ez instructions   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 1040 ez instructions Ordering forms and publications. 1040 ez instructions   Visit www. 1040 ez instructions irs. 1040 ez instructions gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 1040 ez instructions Internal Revenue Service 1201 N. 1040 ez instructions Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 1040 ez instructions   If you have a tax question, check the information available on IRS. 1040 ez instructions gov or call 1-800-829-1040. 1040 ez instructions We cannot answer tax questions sent to either of the above addresses. 1040 ez instructions Useful Items - You may want to see: Publication 3 Armed Forces' Tax Guide Forms (and Instructions) 1040 U. 1040 ez instructions S. 1040 ez instructions Individual Income Tax Return 1040X Amended U. 1040 ez instructions S. 1040 ez instructions Individual Income Tax Return 3903 Moving Expenses 8822 Change of Address 8822–B Change of Address or Responsible Party-Business See How To Get Tax Help, near the end of this publication, for information about getting the publications and the forms listed above. 1040 ez instructions Prev  Up  Next   Home   More Online Publications
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The 1040 Ez Instructions

1040 ez instructions 4. 1040 ez instructions   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. 1040 ez instructions Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. 1040 ez instructions Net unrelated income. 1040 ez instructions Net unrelated loss. 1040 ez instructions Control. 1040 ez instructions Income from property financed with qualified 501(c)(3) bonds. 1040 ez instructions Disposition of property received from taxable subsidiary and used in unrelated business. 1040 ez instructions Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. 1040 ez instructions If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. 1040 ez instructions In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. 1040 ez instructions Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. 1040 ez instructions For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. 1040 ez instructions Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. 1040 ez instructions Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. 1040 ez instructions Dividends, interest, annuities and other investment income. 1040 ez instructions   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. 1040 ez instructions Exception for insurance activity income of a controlled foreign corporation. 1040 ez instructions   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. 1040 ez instructions The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. 1040 ez instructions Certain exceptions to this rule apply. 1040 ez instructions For more information, see section 512(b)(17). 1040 ez instructions Other exceptions. 1040 ez instructions   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). 1040 ez instructions Income from lending securities. 1040 ez instructions   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. 1040 ez instructions   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. 1040 ez instructions The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. 1040 ez instructions Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. 1040 ez instructions Royalties. 1040 ez instructions   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. 1040 ez instructions   To be considered a royalty, a payment must relate to the use of a valuable right. 1040 ez instructions Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. 1040 ez instructions Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. 1040 ez instructions However, royalties do not include payments for personal services. 1040 ez instructions Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. 1040 ez instructions   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. 1040 ez instructions   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. 1040 ez instructions However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. 1040 ez instructions To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. 1040 ez instructions To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. 1040 ez instructions Exceptions. 1040 ez instructions   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). 1040 ez instructions Rents. 1040 ez instructions   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. 1040 ez instructions Rents from personal property are not excluded. 1040 ez instructions However, special rules apply to “mixed leases” of both real and personal property. 1040 ez instructions Mixed leases. 1040 ez instructions   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. 1040 ez instructions If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. 1040 ez instructions If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. 1040 ez instructions   Property is placed in service when the lessee first may use it under the terms of a lease. 1040 ez instructions For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. 1040 ez instructions   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. 1040 ez instructions   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). 1040 ez instructions Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. 1040 ez instructions Exception for rents based on net profit. 1040 ez instructions   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. 1040 ez instructions Exception for income from personal services. 1040 ez instructions   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. 1040 ez instructions Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. 1040 ez instructions Other exceptions. 1040 ez instructions   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. 1040 ez instructions ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). 1040 ez instructions See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. 1040 ez instructions Income from research. 1040 ez instructions   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. 1040 ez instructions However, the extent of the exclusion depends on the nature of the organization and the type of research. 1040 ez instructions   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. 1040 ez instructions   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. 1040 ez instructions   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. 1040 ez instructions   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. 1040 ez instructions In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. 1040 ez instructions Gains and losses from disposition of property. 1040 ez instructions   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. 1040 ez instructions   It should be noted that the last exception relates only to cut timber. 1040 ez instructions The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. 1040 ez instructions Lapse or termination of options. 1040 ez instructions   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. 1040 ez instructions The exclusion applies only if the option is written in connection with the exempt organization's investment activities. 1040 ez instructions Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. 1040 ez instructions Exception. 1040 ez instructions   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. 1040 ez instructions Gain or loss on disposition of certain brownfield property. 1040 ez instructions   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. 1040 ez instructions See sections 512(b)(19) and 514(b)(1)(E). 1040 ez instructions Income from services provided under federal license. 1040 ez instructions   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. 1040 ez instructions   This exclusion applies only if the following requirements are met. 1040 ez instructions The trade or business must have been operated by the order or by the institution before May 27, 1959. 1040 ez instructions The trade or business must provide services under a license issued by a federal regulatory agency. 1040 ez instructions More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. 1040 ez instructions The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. 1040 ez instructions Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. 1040 ez instructions Exception. 1040 ez instructions    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). 1040 ez instructions Member income of mutual or cooperative electric companies. 1040 ez instructions   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. 1040 ez instructions Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. 1040 ez instructions For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. 1040 ez instructions Exception. 1040 ez instructions   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. 1040 ez instructions The limit on dues paid by an associate member is $148 for 2011. 1040 ez instructions   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. 1040 ez instructions Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. 1040 ez instructions They cannot be directly connected with excluded income. 1040 ez instructions For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. 1040 ez instructions Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. 1040 ez instructions For an exception, see Expenses attributable to exploitation of exempt activities, later. 1040 ez instructions Expenses attributable solely to unrelated business. 1040 ez instructions   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. 1040 ez instructions   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. 1040 ez instructions Expenses attributable to dual use of facilities or personnel. 1040 ez instructions   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. 1040 ez instructions The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. 1040 ez instructions Example 1. 1040 ez instructions A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. 1040 ez instructions The school provides the tennis courts, housing, and dining facilities. 1040 ez instructions The contracted individual hires the instructors, recruits campers, and provides supervision. 1040 ez instructions The income the school receives from this activity is from a dual use of the facilities and personnel. 1040 ez instructions The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. 1040 ez instructions Example 2. 1040 ez instructions An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. 1040 ez instructions The president devotes approximately 10% of his time to the unrelated business. 1040 ez instructions To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. 1040 ez instructions Expenses attributable to exploitation of exempt activities. 1040 ez instructions   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. 1040 ez instructions (See Exploitation of exempt functions under Not substantially related in chapter 3. 1040 ez instructions ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. 1040 ez instructions Exception. 1040 ez instructions   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. 1040 ez instructions The unrelated business exploits the exempt activity. 1040 ez instructions The unrelated business is a type normally conducted for profit by taxable organizations. 1040 ez instructions The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. 1040 ez instructions The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. 1040 ez instructions   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. 1040 ez instructions Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. 1040 ez instructions Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. 1040 ez instructions (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. 1040 ez instructions ) Figuring unrelated business taxable income (UBTI). 1040 ez instructions   The UBTI of an advertising activity is the amount shown in the following chart. 1040 ez instructions IF gross advertising income is . 1040 ez instructions . 1040 ez instructions . 1040 ez instructions THEN UBTI is . 1040 ez instructions . 1040 ez instructions . 1040 ez instructions More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. 1040 ez instructions Equal to or less than direct advertising costs Zero. 1040 ez instructions   • Circulation income and readership costs are not taken into account. 1040 ez instructions   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. 1040 ez instructions   The terms used in the chart are explained in the following discussions. 1040 ez instructions Periodical Income Gross advertising income. 1040 ez instructions   This is all the income from the unrelated advertising activities of an exempt organization periodical. 1040 ez instructions Circulation income. 1040 ez instructions   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). 1040 ez instructions It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. 1040 ez instructions It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. 1040 ez instructions Allocable membership receipts. 1040 ez instructions   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. 1040 ez instructions   The amount used to allocate membership receipts is the amount shown in the following chart. 1040 ez instructions   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. 1040 ez instructions The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. 1040 ez instructions IF . 1040 ez instructions . 1040 ez instructions . 1040 ez instructions THEN the amount used to allocate membership receipts is . 1040 ez instructions . 1040 ez instructions . 1040 ez instructions 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. 1040 ez instructions The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. 1040 ez instructions Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. 1040 ez instructions U is an exempt scientific organization with 10,000 members who pay annual dues of $15. 1040 ez instructions One of U's activities is publishing a monthly periodical distributed to all of its members. 1040 ez instructions U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. 1040 ez instructions Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. 1040 ez instructions Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). 1040 ez instructions Example 2. 1040 ez instructions Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. 1040 ez instructions Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. 1040 ez instructions U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. 1040 ez instructions Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. 1040 ez instructions Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. 1040 ez instructions Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). 1040 ez instructions U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). 1040 ez instructions Periodical Costs Direct advertising costs. 1040 ez instructions   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. 1040 ez instructions   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. 1040 ez instructions Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. 1040 ez instructions   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. 1040 ez instructions For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. 1040 ez instructions Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. 1040 ez instructions   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. 1040 ez instructions Readership costs. 1040 ez instructions   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. 1040 ez instructions Costs partly attributable to other activities. 1040 ez instructions   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. 1040 ez instructions When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. 1040 ez instructions The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. 1040 ez instructions Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. 1040 ez instructions Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. 1040 ez instructions It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. 1040 ez instructions Consolidated treatment, once adopted, must be followed consistently and is binding. 1040 ez instructions This treatment can be changed only with the consent of the Internal Revenue Service. 1040 ez instructions An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. 1040 ez instructions Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. 1040 ez instructions The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. 1040 ez instructions For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. 1040 ez instructions The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. 1040 ez instructions Example. 1040 ez instructions Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. 1040 ez instructions Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. 1040 ez instructions Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. 1040 ez instructions The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. 1040 ez instructions The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. 1040 ez instructions It is not engaged in for profit. 1040 ez instructions Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. 1040 ez instructions It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. 1040 ez instructions Modifications Net operating loss deduction. 1040 ez instructions   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. 1040 ez instructions However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. 1040 ez instructions For example, a loss from an unrelated trade or business is not diminished because dividend income was received. 1040 ez instructions   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. 1040 ez instructions This would reduce the loss that could be applied against unrelated business income of prior or future tax years. 1040 ez instructions Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. 1040 ez instructions   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. 1040 ez instructions   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. 1040 ez instructions   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. 1040 ez instructions For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. 1040 ez instructions   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040 ez instructions Charitable contributions deduction. 1040 ez instructions   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. 1040 ez instructions   To be deductible, the contribution must be paid to another qualified organization. 1040 ez instructions For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. 1040 ez instructions   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. 1040 ez instructions Deduction limits. 1040 ez instructions   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. 1040 ez instructions See the Instructions for Form 990-T for more information. 1040 ez instructions    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. 1040 ez instructions However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. 1040 ez instructions   Contributions in excess of the limits just described may be carried over to the next 5 tax years. 1040 ez instructions A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. 1040 ez instructions Suspension of deduction limits for farmers and ranchers. 1040 ez instructions   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. 1040 ez instructions See the Instructions for Form 990-T for details. 1040 ez instructions Specific deduction. 1040 ez instructions   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. 1040 ez instructions However, the specific deduction is not allowed in computing an NOL or the NOL deduction. 1040 ez instructions   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. 1040 ez instructions Exception. 1040 ez instructions   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. 1040 ez instructions In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. 1040 ez instructions   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. 1040 ez instructions The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. 1040 ez instructions The local units cannot file separate returns. 1040 ez instructions However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. 1040 ez instructions See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. 1040 ez instructions Example. 1040 ez instructions X is an association of churches and is divided into local units A, B, C, and D. 1040 ez instructions Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. 1040 ez instructions X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. 1040 ez instructions Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. 1040 ez instructions If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. 1040 ez instructions No distinction is made between limited and general partners. 1040 ez instructions The organization is required to notify the partnership of its tax-exempt status. 1040 ez instructions Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. 1040 ez instructions The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. 1040 ez instructions The partnership is required to provide the organization this information on Schedule K-1. 1040 ez instructions Example. 1040 ez instructions An exempt educational organization is a partner in a partnership that operates a factory. 1040 ez instructions The partnership also holds stock in a corporation. 1040 ez instructions The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. 1040 ez instructions Different tax years. 1040 ez instructions   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. 1040 ez instructions S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. 1040 ez instructions For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. 1040 ez instructions The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. 1040 ez instructions Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. 1040 ez instructions To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. 1040 ez instructions Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). 1040 ez instructions These organizations must figure unrelated business taxable income under special rules. 1040 ez instructions Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. 1040 ez instructions ). 1040 ez instructions (See Exclusions under Income, earlier. 1040 ez instructions ) Therefore, they are generally subject to unrelated business income tax on this income. 1040 ez instructions The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. 1040 ez instructions The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. 1040 ez instructions Losses from nonexempt activities. 1040 ez instructions   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. 1040 ez instructions Example. 1040 ez instructions A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. 1040 ez instructions The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. 1040 ez instructions Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. 1040 ez instructions Modifications. 1040 ez instructions   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). 1040 ez instructions Exempt function income. 1040 ez instructions   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. 1040 ez instructions Exempt function income also includes income set aside for qualified purposes. 1040 ez instructions Income that is set aside. 1040 ez instructions   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. 1040 ez instructions In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. 1040 ez instructions   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. 1040 ez instructions Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. 1040 ez instructions These rules are explained in section 512(a)(3)(E)(ii). 1040 ez instructions   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. 1040 ez instructions In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. 1040 ez instructions   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. 1040 ez instructions However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. 1040 ez instructions The income set aside must have been includible in gross income for that earlier year. 1040 ez instructions Nonrecognition of gain. 1040 ez instructions   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. 1040 ez instructions The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. 1040 ez instructions   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. 1040 ez instructions Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. 1040 ez instructions The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. 1040 ez instructions For details, see section 512(a)(4) and the regulations under that section. 1040 ez instructions Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. 1040 ez instructions The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. 1040 ez instructions All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. 1040 ez instructions Excess qualifying specified payments. 1040 ez instructions   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. 1040 ez instructions Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. 1040 ez instructions   If a controlled participant is not required to file a U. 1040 ez instructions S. 1040 ez instructions income tax return, the participant must ensure that the copy or copies of the Regulations section 1. 1040 ez instructions 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. 1040 ez instructions S. 1040 ez instructions Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. 1040 ez instructions S. 1040 ez instructions Corporation or a Foreign Corporation Engaged in a U. 1040 ez instructions S. 1040 ez instructions Trade or Business, or any Form 8865, Return of U. 1040 ez instructions S. 1040 ez instructions Persons With Respect to Certain Foreign Partnerships, filed for that participant. 1040 ez instructions Addition to tax for valuation misstatements. 1040 ez instructions   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. 1040 ez instructions See section 512(b)(13)(E)(ii) for more information. 1040 ez instructions Net unrelated income. 1040 ez instructions   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. 1040 ez instructions Net unrelated loss. 1040 ez instructions   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. 1040 ez instructions Control. 1040 ez instructions   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. 1040 ez instructions For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. 1040 ez instructions   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). 1040 ez instructions Income from property financed with qualified 501(c)(3) bonds. 1040 ez instructions If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. 1040 ez instructions No deduction is allowed for interest on the private activity bond. 1040 ez instructions See sections 150(b)(3) and (c) for more information. 1040 ez instructions Disposition of property received from taxable subsidiary and used in unrelated business. 1040 ez instructions A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). 1040 ez instructions The assets are treated as if sold at fair market value. 1040 ez instructions Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. 1040 ez instructions S. 1040 ez instructions and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. 1040 ez instructions A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. 1040 ez instructions However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. 1040 ez instructions In such a case the built-in appreciation is preserved in the replacement property received in the transaction. 1040 ez instructions A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). 1040 ez instructions This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. 1040 ez instructions In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. 1040 ez instructions If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. 1040 ez instructions If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. 1040 ez instructions Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. 1040 ez instructions Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. 1040 ez instructions Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. 1040 ez instructions The amount of income included is proportionate to the debt on the property. 1040 ez instructions Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). 1040 ez instructions It includes rental real estate, tangible personal property, and corporate stock. 1040 ez instructions Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. 1040 ez instructions The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. 1040 ez instructions That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. 1040 ez instructions Example 1. 1040 ez instructions Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. 1040 ez instructions The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. 1040 ez instructions Example 2. 1040 ez instructions X, an exempt organization, forms a partnership with A and B. 1040 ez instructions The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. 1040 ez instructions X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. 1040 ez instructions The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. 1040 ez instructions The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. 1040 ez instructions The loan is secured by a mortgage on the entire office building. 1040 ez instructions By agreement with Y bank, X is not personally liable for payment of the mortgage. 1040 ez instructions X has acquisition indebtedness of $7 million. 1040 ez instructions This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). 1040 ez instructions Example 3. 1040 ez instructions A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. 1040 ez instructions The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. 1040 ez instructions Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. 1040 ez instructions The union has no outstanding debt on the property. 1040 ez instructions The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. 1040 ez instructions The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. 1040 ez instructions Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. 1040 ez instructions In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. 1040 ez instructions Accordingly, the debt is not acquisition indebtedness. 1040 ez instructions Change in use of property. 1040 ez instructions   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. 1040 ez instructions Example. 1040 ez instructions Four years ago a university borrowed funds to acquire an apartment building as housing for married students. 1040 ez instructions Last year, the university rented the apartment building to the public for nonexempt purposes. 1040 ez instructions The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. 1040 ez instructions Continued debt. 1040 ez instructions   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. 1040 ez instructions This is true even if the original property was not debt-financed property. 1040 ez instructions Example. 1040 ez instructions To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. 1040 ez instructions The office building was not debt-financed property. 1040 ez instructions The organization later sold the building for $1 million without repaying the $400,000 loan. 1040 ez instructions It used the sale proceeds to buy an apartment building it rents to the general public. 1040 ez instructions The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. 1040 ez instructions Property acquired subject to mortgage or lien. 1040 ez instructions   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. 1040 ez instructions Example. 1040 ez instructions An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. 1040 ez instructions The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. 1040 ez instructions Liens similar to a mortgage. 1040 ez instructions   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. 1040 ez instructions A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. 1040 ez instructions However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. 1040 ez instructions Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). 1040 ez instructions Exception for property acquired by gift, bequest, or devise. 1040 ez instructions   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. 1040 ez instructions However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. 1040 ez instructions   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). 1040 ez instructions   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. 1040 ez instructions Modifying existing debt. 1040 ez instructions   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. 1040 ez instructions When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. 1040 ez instructions Extension or renewal. 1040 ez instructions   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. 1040 ez instructions   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. 1040 ez instructions Debt increase. 1040 ez instructions   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. 1040 ez instructions Example. 1040 ez instructions An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. 1040 ez instructions The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. 1040 ez instructions A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. 1040 ez instructions Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. 1040 ez instructions These include the following. 1040 ez instructions Debts incurred in performing an exempt purpose. 1040 ez instructions Annuity obligations. 1040 ez instructions Securities loans. 1040 ez instructions Real property debts of qualified organizations. 1040 ez instructions Certain Federal financing. 1040 ez instructions Debt incurred in performing exempt purpose. 1040 ez instructions   A debt incurred in performing an exempt purpose is not acquisition indebtedness. 1040 ez instructions For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. 1040 ez instructions Annuity obligation. 1040 ez instructions   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. 1040 ez instructions It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. 1040 ez instructions Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. 1040 ez instructions It must be payable over the lives of either one or two individuals living when issued. 1040 ez instructions It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. 1040 ez instructions Example. 1040 ez instructions X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. 1040 ez instructions In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. 1040 ez instructions The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. 1040 ez instructions The present value of this annuity is $81,156, determined from IRS valuation tables. 1040 ez instructions Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. 1040 ez instructions Securities loans. 1040 ez instructions   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). 1040 ez instructions This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. 1040 ez instructions   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from