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File 1040 Ez Online

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File 1040 Ez Online

File 1040 ez online 3. File 1040 ez online   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. File 1040 ez online They are the American opportunity credit and the lifetime learning credit. File 1040 ez online This chapter discusses the lifetime learning credit. File 1040 ez online The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . File 1040 ez online This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. File 1040 ez online What is the tax benefit of the lifetime learning credit. File 1040 ez online   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. File 1040 ez online There is no limit on the number of years the lifetime learning credit can be claimed for each student. File 1040 ez online   A tax credit reduces the amount of income tax you may have to pay. File 1040 ez online Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. File 1040 ez online The lifetime learning credit is a nonrefundable credit. File 1040 ez online This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. File 1040 ez online   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. File 1040 ez online Can you claim more than one education credit this year. File 1040 ez online   For each student, you can elect for any year only one of the credits. File 1040 ez online For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. File 1040 ez online   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. File 1040 ez online   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. File 1040 ez online This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. File 1040 ez online Differences between the American opportunity and lifetime learning credits. File 1040 ez online   There are several differences between these two credits. File 1040 ez online For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. File 1040 ez online However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. File 1040 ez online The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. File 1040 ez online Overview of the lifetime learning credit. File 1040 ez online   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. File 1040 ez online The details are discussed in this chapter. File 1040 ez online Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. File 1040 ez online Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. File 1040 ez online You pay qualified education expenses of higher education. File 1040 ez online You pay the education expenses for an eligible student. File 1040 ez online The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. File 1040 ez online Table 3-1. File 1040 ez online Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. File 1040 ez online Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. File 1040 ez online “Qualified education expenses” are defined later under Qualified Education Expenses . File 1040 ez online “Eligible students” are defined later under Who Is an Eligible Student . File 1040 ez online A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . File 1040 ez online You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. File 1040 ez online Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. File 1040 ez online Your filing status is married filing separately. File 1040 ez online You are listed as a dependent on another person's tax return (such as your parents'). File 1040 ez online See Who Can Claim a Dependent's Expenses , later. File 1040 ez online Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). File 1040 ez online MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . File 1040 ez online You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. File 1040 ez online More information on nonresident aliens can be found in Publication 519. File 1040 ez online You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. File 1040 ez online What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. File 1040 ez online Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. File 1040 ez online For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. File 1040 ez online Academic period. File 1040 ez online   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. File 1040 ez online In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. File 1040 ez online Paid with borrowed funds. File 1040 ez online   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. File 1040 ez online You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. File 1040 ez online Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. File 1040 ez online Student withdraws from class(es). File 1040 ez online   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. File 1040 ez online Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. File 1040 ez online The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. File 1040 ez online Eligible educational institution. File 1040 ez online   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. File 1040 ez online S. File 1040 ez online Department of Education. File 1040 ez online It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. File 1040 ez online The educational institution should be able to tell you if it is an eligible educational institution. File 1040 ez online   Certain educational institutions located outside the United States also participate in the U. File 1040 ez online S. File 1040 ez online Department of Education's Federal Student Aid (FSA) programs. File 1040 ez online Related expenses. File 1040 ez online   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. File 1040 ez online Prepaid expenses. File 1040 ez online   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. File 1040 ez online See Academic period , earlier. File 1040 ez online For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). File 1040 ez online You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). File 1040 ez online In the following examples, assume that each student is an eligible student at an eligible educational institution. File 1040 ez online Example 1. File 1040 ez online   Jackson is a sophomore in University V's degree program in dentistry. File 1040 ez online This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. File 1040 ez online Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. File 1040 ez online Example 2. File 1040 ez online   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. File 1040 ez online The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. File 1040 ez online Charles bought his books from a friend, so what he paid for them is not a qualified education expense. File 1040 ez online Donna bought hers at College W's bookstore. File 1040 ez online Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. File 1040 ez online Example 3. File 1040 ez online   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. File 1040 ez online This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. File 1040 ez online No portion of the fee covers personal expenses. File 1040 ez online Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. File 1040 ez online Therefore, it is a qualified expense. File 1040 ez online No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. File 1040 ez online Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. File 1040 ez online Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. File 1040 ez online Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). File 1040 ez online See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. File 1040 ez online Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. File 1040 ez online See Adjustments to Qualified Education Expenses, next. File 1040 ez online This image is too large to be displayed in the current screen. File 1040 ez online Please click the link to view the image. File 1040 ez online Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. File 1040 ez online The result is the amount of adjusted qualified education expenses for each student. File 1040 ez online Tax-free educational assistance. File 1040 ez online   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. File 1040 ez online See Academic period , earlier. File 1040 ez online   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. File 1040 ez online This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). File 1040 ez online   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. File 1040 ez online If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. File 1040 ez online   Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. File 1040 ez online Generally, any scholarship or fellowship is treated as tax free. File 1040 ez online However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. File 1040 ez online The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. File 1040 ez online The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. File 1040 ez online You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. File 1040 ez online For examples, see Coordination with Pell grants and other scholarships, later. File 1040 ez online Refunds. File 1040 ez online   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. File 1040 ez online Some tax-free educational assistance received after 2013 may be treated as a refund. File 1040 ez online See Tax-free educational assistance , earlier. File 1040 ez online Refunds received in 2013. File 1040 ez online   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. File 1040 ez online Refunds received after 2013 but before your income tax return is filed. File 1040 ez online   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. File 1040 ez online Refunds received after 2013 and after your income tax return is filed. File 1040 ez online   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. File 1040 ez online See Credit recapture, next. File 1040 ez online Credit recapture. File 1040 ez online    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. File 1040 ez online You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. File 1040 ez online You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). File 1040 ez online Include that amount as an additional tax for the year the refund or tax-free assistance was received. File 1040 ez online Example. File 1040 ez online   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. File 1040 ez online You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. File 1040 ez online You claimed no other tax credits. File 1040 ez online After you filed your return, your child withdrew from two courses and you received a refund of $2,900. File 1040 ez online You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. File 1040 ez online The refigured credit is $1,280 and your tax liability increased by $580. File 1040 ez online See instructions for your 2014 income tax return to determine where to include this tax. File 1040 ez online If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. File 1040 ez online Amounts that do not reduce qualified education expenses. File 1040 ez online   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. File 1040 ez online   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. File 1040 ez online The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. File 1040 ez online The use of the money is not restricted. File 1040 ez online For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. File 1040 ez online Coordination with Pell grants and other scholarships. File 1040 ez online   In some cases, you may be able to reduce your tax liability by including scholarships in income. File 1040 ez online If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. File 1040 ez online The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. File 1040 ez online Example 1—No scholarship. File 1040 ez online Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. File 1040 ez online Her AGI and her MAGI, for purposes of the credit, are $27,000. File 1040 ez online Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. File 1040 ez online She claims no credits other than the lifetime learning credit. File 1040 ez online In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. File 1040 ez online Judy and the college meet all requirements for the lifetime learning tax credit. File 1040 ez online She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. File 1040 ez online She claims a $900 lifetime learning credit and her tax after credits is $1,256. File 1040 ez online Example 2—Scholarship excluded from income. File 1040 ez online The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. File 1040 ez online Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. File 1040 ez online If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. File 1040 ez online Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. File 1040 ez online Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. File 1040 ez online Example 3—Scholarship included in income. File 1040 ez online The facts are the same as in Example 2—Scholarship excluded from income. File 1040 ez online If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. File 1040 ez online Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. File 1040 ez online She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. File 1040 ez online Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. File 1040 ez online Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. File 1040 ez online This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. File 1040 ez online Sports, games, hobbies, and noncredit courses. File 1040 ez online   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. File 1040 ez online However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. File 1040 ez online Comprehensive or bundled fees. File 1040 ez online   Some eligible educational institutions combine all of their fees for an academic period into one amount. File 1040 ez online If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. File 1040 ez online The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. File 1040 ez online See Figuring the Credit , later, for more information about Form 1098-T. File 1040 ez online Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). File 1040 ez online Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. File 1040 ez online For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. File 1040 ez online You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. File 1040 ez online IF you. File 1040 ez online . File 1040 ez online . File 1040 ez online THEN only. File 1040 ez online . File 1040 ez online . File 1040 ez online claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. File 1040 ez online The dependent cannot claim the credit. File 1040 ez online do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. File 1040 ez online You cannot claim the credit based on this dependent's expenses. File 1040 ez online Expenses paid by dependent. File 1040 ez online   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. File 1040 ez online Include these expenses when figuring the amount of your lifetime learning credit. File 1040 ez online    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. File 1040 ez online Expenses paid by you. File 1040 ez online   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. File 1040 ez online If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. File 1040 ez online Expenses paid by others. File 1040 ez online   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. File 1040 ez online In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. File 1040 ez online If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. File 1040 ez online Example. File 1040 ez online In 2013, Ms. File 1040 ez online Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. File 1040 ez online For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. File 1040 ez online Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. File 1040 ez online If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. File 1040 ez online If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. File 1040 ez online Tuition reduction. File 1040 ez online   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. File 1040 ez online If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. File 1040 ez online For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. File 1040 ez online Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. File 1040 ez online The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). File 1040 ez online However, that amount may be reduced based on your MAGI. File 1040 ez online See Effect of the Amount of Your Income on the Amount of Your Credit , later. File 1040 ez online Example. File 1040 ez online Bruce and Toni Harper are married and file a joint tax return. File 1040 ez online For 2013, their MAGI is $75,000. File 1040 ez online Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. File 1040 ez online She already has a bachelor's degree in history and wants to become a nurse. File 1040 ez online In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. File 1040 ez online Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. File 1040 ez online Form 1098-T. File 1040 ez online   To help you figure your lifetime learning credit, the student should receive Form 1098-T. File 1040 ez online Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. File 1040 ez online An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. File 1040 ez online However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. File 1040 ez online When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. File 1040 ez online   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. File 1040 ez online    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. File 1040 ez online Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). File 1040 ez online You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). File 1040 ez online Modified adjusted gross income (MAGI). File 1040 ez online   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. File 1040 ez online MAGI when using Form 1040A. File 1040 ez online   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. File 1040 ez online MAGI when using Form 1040. File 1040 ez online   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. File 1040 ez online You can use Worksheet 3-1 to figure your MAGI. File 1040 ez online Worksheet 3-1. File 1040 ez online MAGI for the Lifetime Learning Credit 1. File 1040 ez online Enter your adjusted gross income  (Form 1040, line 38)   1. File 1040 ez online   2. File 1040 ez online Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. File 1040 ez online       3. File 1040 ez online Enter your foreign housing deduction (Form 2555, line 50)   3. File 1040 ez online       4. File 1040 ez online Enter the amount of income from Puerto Rico you are excluding   4. File 1040 ez online       5. File 1040 ez online Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. File 1040 ez online       6. File 1040 ez online Add the amounts on lines 2, 3, 4, and 5   6. File 1040 ez online   7. File 1040 ez online Add the amounts on lines 1 and 6. File 1040 ez online  This is your modified adjusted  gross income. File 1040 ez online Enter this amount  on Form 8863, line 14   7. File 1040 ez online   Phaseout. File 1040 ez online   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. File 1040 ez online The same method is shown in the following example. File 1040 ez online Example. File 1040 ez online You are filing a joint return with a MAGI of $112,000. File 1040 ez online In 2013, you paid $6,600 of qualified education expenses. File 1040 ez online You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). File 1040 ez online The result is a $1,320 (20% x $6,600) tentative credit. File 1040 ez online Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. File 1040 ez online The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. File 1040 ez online The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). File 1040 ez online The result is the amount of your phased out (reduced) lifetime learning credit ($990). File 1040 ez online   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. File 1040 ez online Enter the credit on Form 1040, line 49, or Form 1040A, line 31. File 1040 ez online Note. File 1040 ez online In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. File 1040 ez online Prev  Up  Next   Home   More Online Publications
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The File 1040 Ez Online

File 1040 ez online 4. File 1040 ez online   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. File 1040 ez online Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. File 1040 ez online Net unrelated income. File 1040 ez online Net unrelated loss. File 1040 ez online Control. File 1040 ez online Income from property financed with qualified 501(c)(3) bonds. File 1040 ez online Disposition of property received from taxable subsidiary and used in unrelated business. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. File 1040 ez online Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. File 1040 ez online Dividends, interest, annuities and other investment income. File 1040 ez online   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. File 1040 ez online Exception for insurance activity income of a controlled foreign corporation. File 1040 ez online   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. File 1040 ez online 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. File 1040 ez online Certain exceptions to this rule apply. File 1040 ez online For more information, see section 512(b)(17). File 1040 ez online Other exceptions. File 1040 ez online   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). File 1040 ez online Income from lending securities. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. File 1040 ez online 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. File 1040 ez online Royalties. File 1040 ez online   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. File 1040 ez online   To be considered a royalty, a payment must relate to the use of a valuable right. File 1040 ez online Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. File 1040 ez online Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. File 1040 ez online However, royalties do not include payments for personal services. File 1040 ez online Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. File 1040 ez online   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. File 1040 ez online   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Exceptions. File 1040 ez online   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). File 1040 ez online Rents. File 1040 ez online   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. File 1040 ez online Rents from personal property are not excluded. File 1040 ez online However, special rules apply to “mixed leases” of both real and personal property. File 1040 ez online Mixed leases. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. File 1040 ez online   Property is placed in service when the lessee first may use it under the terms of a lease. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online   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). File 1040 ez online 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. File 1040 ez online Exception for rents based on net profit. File 1040 ez online   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. File 1040 ez online Exception for income from personal services. File 1040 ez online   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. File 1040 ez online 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. File 1040 ez online Other exceptions. File 1040 ez online   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. File 1040 ez online ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). File 1040 ez online See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. File 1040 ez online Income from research. File 1040 ez online   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. File 1040 ez online However, the extent of the exclusion depends on the nature of the organization and the type of research. File 1040 ez online   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. File 1040 ez online   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. File 1040 ez online Gains and losses from disposition of property. File 1040 ez online   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. File 1040 ez online   It should be noted that the last exception relates only to cut timber. File 1040 ez online 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. File 1040 ez online Lapse or termination of options. File 1040 ez online   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. File 1040 ez online The exclusion applies only if the option is written in connection with the exempt organization's investment activities. File 1040 ez online 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. File 1040 ez online Exception. File 1040 ez online   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. File 1040 ez online Gain or loss on disposition of certain brownfield property. File 1040 ez online   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. File 1040 ez online See sections 512(b)(19) and 514(b)(1)(E). File 1040 ez online Income from services provided under federal license. File 1040 ez online   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. File 1040 ez online   This exclusion applies only if the following requirements are met. File 1040 ez online The trade or business must have been operated by the order or by the institution before May 27, 1959. File 1040 ez online The trade or business must provide services under a license issued by a federal regulatory agency. File 1040 ez online 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. File 1040 ez online The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. File 1040 ez online 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. File 1040 ez online Exception. File 1040 ez online    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). File 1040 ez online Member income of mutual or cooperative electric companies. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Exception. File 1040 ez online   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. File 1040 ez online The limit on dues paid by an associate member is $148 for 2011. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online They cannot be directly connected with excluded income. File 1040 ez online For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. File 1040 ez online 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. File 1040 ez online For an exception, see Expenses attributable to exploitation of exempt activities, later. File 1040 ez online Expenses attributable solely to unrelated business. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online Expenses attributable to dual use of facilities or personnel. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online Example 1. File 1040 ez online A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. File 1040 ez online The school provides the tennis courts, housing, and dining facilities. File 1040 ez online The contracted individual hires the instructors, recruits campers, and provides supervision. File 1040 ez online The income the school receives from this activity is from a dual use of the facilities and personnel. File 1040 ez online The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. File 1040 ez online Example 2. File 1040 ez online An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. File 1040 ez online The president devotes approximately 10% of his time to the unrelated business. File 1040 ez online 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. File 1040 ez online Expenses attributable to exploitation of exempt activities. File 1040 ez online   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. File 1040 ez online (See Exploitation of exempt functions under Not substantially related in chapter 3. File 1040 ez online ) 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. File 1040 ez online Exception. File 1040 ez online   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. File 1040 ez online The unrelated business exploits the exempt activity. File 1040 ez online The unrelated business is a type normally conducted for profit by taxable organizations. File 1040 ez online The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. File 1040 ez online 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. File 1040 ez online   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. File 1040 ez online ) Figuring unrelated business taxable income (UBTI). File 1040 ez online   The UBTI of an advertising activity is the amount shown in the following chart. File 1040 ez online IF gross advertising income is . File 1040 ez online . File 1040 ez online . File 1040 ez online THEN UBTI is . File 1040 ez online . File 1040 ez online . File 1040 ez online 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. File 1040 ez online Equal to or less than direct advertising costs Zero. File 1040 ez online   • Circulation income and readership costs are not taken into account. File 1040 ez online   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. File 1040 ez online   The terms used in the chart are explained in the following discussions. File 1040 ez online Periodical Income Gross advertising income. File 1040 ez online   This is all the income from the unrelated advertising activities of an exempt organization periodical. File 1040 ez online Circulation income. File 1040 ez online   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). File 1040 ez online It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. File 1040 ez online It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. File 1040 ez online Allocable membership receipts. File 1040 ez online   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. File 1040 ez online   The amount used to allocate membership receipts is the amount shown in the following chart. File 1040 ez online   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. File 1040 ez online 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. File 1040 ez online IF . File 1040 ez online . File 1040 ez online . File 1040 ez online THEN the amount used to allocate membership receipts is . File 1040 ez online . File 1040 ez online . File 1040 ez online 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online U is an exempt scientific organization with 10,000 members who pay annual dues of $15. File 1040 ez online One of U's activities is publishing a monthly periodical distributed to all of its members. File 1040 ez online U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. File 1040 ez online 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. File 1040 ez online 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). File 1040 ez online Example 2. File 1040 ez online Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). File 1040 ez online U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). File 1040 ez online Periodical Costs Direct advertising costs. File 1040 ez online   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online Readership costs. File 1040 ez online   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. File 1040 ez online Costs partly attributable to other activities. File 1040 ez online   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. File 1040 ez online When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. File 1040 ez online The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. File 1040 ez online Consolidated treatment, once adopted, must be followed consistently and is binding. File 1040 ez online This treatment can be changed only with the consent of the Internal Revenue Service. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Example. File 1040 ez online Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. File 1040 ez online 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. File 1040 ez online It is not engaged in for profit. File 1040 ez online Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. File 1040 ez online 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. File 1040 ez online Modifications Net operating loss deduction. File 1040 ez online   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. File 1040 ez online 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. File 1040 ez online For example, a loss from an unrelated trade or business is not diminished because dividend income was received. File 1040 ez online   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. File 1040 ez online This would reduce the loss that could be applied against unrelated business income of prior or future tax years. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online Charitable contributions deduction. File 1040 ez online   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. File 1040 ez online   To be deductible, the contribution must be paid to another qualified organization. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online Deduction limits. File 1040 ez online   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. File 1040 ez online See the Instructions for Form 990-T for more information. File 1040 ez online    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. File 1040 ez online 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. File 1040 ez online   Contributions in excess of the limits just described may be carried over to the next 5 tax years. File 1040 ez online A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. File 1040 ez online Suspension of deduction limits for farmers and ranchers. File 1040 ez online   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. File 1040 ez online See the Instructions for Form 990-T for details. File 1040 ez online Specific deduction. File 1040 ez online   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. File 1040 ez online However, the specific deduction is not allowed in computing an NOL or the NOL deduction. File 1040 ez online   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. File 1040 ez online Exception. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online The local units cannot file separate returns. File 1040 ez online However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. File 1040 ez online 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. File 1040 ez online Example. File 1040 ez online X is an association of churches and is divided into local units A, B, C, and D. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online No distinction is made between limited and general partners. File 1040 ez online The organization is required to notify the partnership of its tax-exempt status. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online The partnership is required to provide the organization this information on Schedule K-1. File 1040 ez online Example. File 1040 ez online An exempt educational organization is a partner in a partnership that operates a factory. File 1040 ez online The partnership also holds stock in a corporation. File 1040 ez online 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. File 1040 ez online Different tax years. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online 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). File 1040 ez online These organizations must figure unrelated business taxable income under special rules. File 1040 ez online Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. File 1040 ez online ). File 1040 ez online (See Exclusions under Income, earlier. File 1040 ez online ) Therefore, they are generally subject to unrelated business income tax on this income. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Losses from nonexempt activities. File 1040 ez online   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. File 1040 ez online Example. File 1040 ez online 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. File 1040 ez online The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. File 1040 ez online Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. File 1040 ez online Modifications. File 1040 ez online   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). File 1040 ez online Exempt function income. File 1040 ez online   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. File 1040 ez online Exempt function income also includes income set aside for qualified purposes. File 1040 ez online Income that is set aside. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. File 1040 ez online These rules are explained in section 512(a)(3)(E)(ii). File 1040 ez online   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. File 1040 ez online In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online The income set aside must have been includible in gross income for that earlier year. File 1040 ez online Nonrecognition of gain. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online For details, see section 512(a)(4) and the regulations under that section. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. File 1040 ez online Excess qualifying specified payments. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   If a controlled participant is not required to file a U. File 1040 ez online S. File 1040 ez online income tax return, the participant must ensure that the copy or copies of the Regulations section 1. File 1040 ez online 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. File 1040 ez online S. File 1040 ez online Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. File 1040 ez online S. File 1040 ez online Corporation or a Foreign Corporation Engaged in a U. File 1040 ez online S. File 1040 ez online Trade or Business, or any Form 8865, Return of U. File 1040 ez online S. File 1040 ez online Persons With Respect to Certain Foreign Partnerships, filed for that participant. File 1040 ez online Addition to tax for valuation misstatements. File 1040 ez online   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. File 1040 ez online See section 512(b)(13)(E)(ii) for more information. File 1040 ez online Net unrelated income. File 1040 ez online   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. File 1040 ez online Net unrelated loss. File 1040 ez online   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. File 1040 ez online Control. File 1040 ez online   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. File 1040 ez online For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. File 1040 ez online   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). File 1040 ez online Income from property financed with qualified 501(c)(3) bonds. File 1040 ez online 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. File 1040 ez online No deduction is allowed for interest on the private activity bond. File 1040 ez online See sections 150(b)(3) and (c) for more information. File 1040 ez online Disposition of property received from taxable subsidiary and used in unrelated business. File 1040 ez online 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). File 1040 ez online The assets are treated as if sold at fair market value. File 1040 ez online Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. File 1040 ez online S. File 1040 ez online and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online In such a case the built-in appreciation is preserved in the replacement property received in the transaction. File 1040 ez online 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). File 1040 ez online 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. File 1040 ez online In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. File 1040 ez online 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. File 1040 ez online If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. File 1040 ez online Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online The amount of income included is proportionate to the debt on the property. File 1040 ez online 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). File 1040 ez online It includes rental real estate, tangible personal property, and corporate stock. File 1040 ez online 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. File 1040 ez online The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. File 1040 ez online 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. File 1040 ez online Example 1. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Example 2. File 1040 ez online X, an exempt organization, forms a partnership with A and B. File 1040 ez online 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. File 1040 ez online X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. File 1040 ez online The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. File 1040 ez online The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. File 1040 ez online The loan is secured by a mortgage on the entire office building. File 1040 ez online By agreement with Y bank, X is not personally liable for payment of the mortgage. File 1040 ez online X has acquisition indebtedness of $7 million. File 1040 ez online 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). File 1040 ez online Example 3. File 1040 ez online A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. File 1040 ez online 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. File 1040 ez online Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. File 1040 ez online The union has no outstanding debt on the property. File 1040 ez online 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. File 1040 ez online The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. File 1040 ez online Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. File 1040 ez online 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. File 1040 ez online Accordingly, the debt is not acquisition indebtedness. File 1040 ez online Change in use of property. File 1040 ez online   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. File 1040 ez online Example. File 1040 ez online Four years ago a university borrowed funds to acquire an apartment building as housing for married students. File 1040 ez online Last year, the university rented the apartment building to the public for nonexempt purposes. File 1040 ez online The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. File 1040 ez online Continued debt. File 1040 ez online   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. File 1040 ez online This is true even if the original property was not debt-financed property. File 1040 ez online Example. File 1040 ez online 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. File 1040 ez online The office building was not debt-financed property. File 1040 ez online The organization later sold the building for $1 million without repaying the $400,000 loan. File 1040 ez online It used the sale proceeds to buy an apartment building it rents to the general public. File 1040 ez online The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. File 1040 ez online Property acquired subject to mortgage or lien. File 1040 ez online   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. File 1040 ez online Example. File 1040 ez online An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. File 1040 ez online The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. File 1040 ez online Liens similar to a mortgage. File 1040 ez online   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. File 1040 ez online A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. File 1040 ez online 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. File 1040 ez online 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). File 1040 ez online Exception for property acquired by gift, bequest, or devise. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   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). File 1040 ez online   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. File 1040 ez online Modifying existing debt. File 1040 ez online   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. File 1040 ez online 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. File 1040 ez online Extension or renewal. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online Debt increase. File 1040 ez online   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. File 1040 ez online Example. File 1040 ez online An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. File 1040 ez online These include the following. File 1040 ez online Debts incurred in performing an exempt purpose. File 1040 ez online Annuity obligations. File 1040 ez online Securities loans. File 1040 ez online Real property debts of qualified organizations. File 1040 ez online Certain Federal financing. File 1040 ez online Debt incurred in performing exempt purpose. File 1040 ez online   A debt incurred in performing an exempt purpose is not acquisition indebtedness. File 1040 ez online 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. File 1040 ez online Annuity obligation. File 1040 ez online   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online It must be payable over the lives of either one or two individuals living when issued. File 1040 ez online 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. File 1040 ez online Example. File 1040 ez online X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. File 1040 ez online 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. File 1040 ez online The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. File 1040 ez online The present value of this annuity is $81,156, determined from IRS valuation tables. File 1040 ez online 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. File 1040 ez online Securities loans. File 1040 ez online   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). File 1040 ez online 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. File 1040 ez online   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from