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File My 2012 Taxes For Free

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File my 2012 taxes for free Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. File my 2012 taxes for free Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. File my 2012 taxes for free For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. File my 2012 taxes for free Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. File my 2012 taxes for free See Passive Activity Deductions, later. File my 2012 taxes for free Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. File my 2012 taxes for free However, there is a special allowance under which some or all of your passive activity loss may be allowed. File my 2012 taxes for free See Special $25,000 allowance , later. File my 2012 taxes for free Definition of passive activity loss. File my 2012 taxes for free    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. File my 2012 taxes for free See Passive Activity Income and Deductions , later. File my 2012 taxes for free   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. File my 2012 taxes for free For details on net active income, see the Instructions for Form 8810. File my 2012 taxes for free For the definition of passive activity gross income, see Passive Activity Income , later. File my 2012 taxes for free For the definition of passive activity deductions, see Passive Activity Deductions , later. File my 2012 taxes for free Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. File my 2012 taxes for free Allocation of disallowed passive activity loss among activities. File my 2012 taxes for free   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. File my 2012 taxes for free The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. File my 2012 taxes for free Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. File my 2012 taxes for free Loss from an activity. File my 2012 taxes for free   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. File my 2012 taxes for free   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. File my 2012 taxes for free See Significant Participation Passive Activities , later. File my 2012 taxes for free Example. File my 2012 taxes for free John Pine holds interests in three passive activities, A, B, and C. File my 2012 taxes for free The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. File my 2012 taxes for free Therefore, a ratable portion of the losses from activities A and B is disallowed. File my 2012 taxes for free He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. File my 2012 taxes for free   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. File my 2012 taxes for free The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. File my 2012 taxes for free Excluded deductions. File my 2012 taxes for free    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. File my 2012 taxes for free See Recharacterization of Passive Income , later. File my 2012 taxes for free Separately identified deductions. File my 2012 taxes for free   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. File my 2012 taxes for free   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. File my 2012 taxes for free   Deductions that must be accounted for separately include (but are not limited to) the following deductions. File my 2012 taxes for free Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. File my 2012 taxes for free See Active participation , later. File my 2012 taxes for free Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. File my 2012 taxes for free See Active participation , later. File my 2012 taxes for free Losses from sales or exchanges of capital assets. File my 2012 taxes for free Section 1231 losses. File my 2012 taxes for free See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. File my 2012 taxes for free Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. File my 2012 taxes for free The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. File my 2012 taxes for free For more information, see Regulations section 1. File my 2012 taxes for free 469-1(f)(4). File my 2012 taxes for free Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. File my 2012 taxes for free The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. File my 2012 taxes for free Credits that are included in figuring the general business credit are subject to the passive activity rules. File my 2012 taxes for free See the Instructions for Form 8582-CR for more information. File my 2012 taxes for free Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). File my 2012 taxes for free You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. File my 2012 taxes for free You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. File my 2012 taxes for free Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. File my 2012 taxes for free This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. File my 2012 taxes for free For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. File my 2012 taxes for free Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. File my 2012 taxes for free These rules do not apply to C corporations. File my 2012 taxes for free For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. File my 2012 taxes for free Passive Activities There are two kinds of passive activities. File my 2012 taxes for free Trade or business activities in which you do not materially participate during the year. File my 2012 taxes for free Rental activities, even if you do materially participate in them, unless you are a real estate professional. File my 2012 taxes for free Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . File my 2012 taxes for free Treatment of former passive activities. File my 2012 taxes for free   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. File my 2012 taxes for free You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. File my 2012 taxes for free Treat any remaining prior year unallowed loss like you treat any other passive loss. File my 2012 taxes for free   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. File my 2012 taxes for free The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. File my 2012 taxes for free You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). File my 2012 taxes for free Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). File my 2012 taxes for free A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. File my 2012 taxes for free You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. File my 2012 taxes for free Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. File my 2012 taxes for free See Real Estate Professional under Activities That Are Not Passive Activities, later. File my 2012 taxes for free An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. File my 2012 taxes for free It does not matter whether the use is under a lease, a service contract, or some other arrangement. File my 2012 taxes for free Exceptions. File my 2012 taxes for free   Your activity is not a rental activity if any of the following apply. File my 2012 taxes for free The average period of customer use of the property is 7 days or less. File my 2012 taxes for free You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. File my 2012 taxes for free If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. File my 2012 taxes for free The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. File my 2012 taxes for free The activity's average period of customer use will equal the sum of the amounts for each class. File my 2012 taxes for free The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. File my 2012 taxes for free Significant personal services include only services performed by individuals. File my 2012 taxes for free To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. File my 2012 taxes for free Significant personal services do not include the following. File my 2012 taxes for free Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. File my 2012 taxes for free You provide extraordinary personal services in making the rental property available for customer use. File my 2012 taxes for free Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. File my 2012 taxes for free The rental is incidental to a nonrental activity. File my 2012 taxes for free The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. File my 2012 taxes for free The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. File my 2012 taxes for free The rental of property is incidental to a trade or business activity if all of the following apply. File my 2012 taxes for free You own an interest in the trade or business activity during the year. File my 2012 taxes for free The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. File my 2012 taxes for free Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. File my 2012 taxes for free Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. File my 2012 taxes for free You customarily make the rental property available during defined business hours for nonexclusive use by various customers. File my 2012 taxes for free You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. File my 2012 taxes for free    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. File my 2012 taxes for free Special $25,000 allowance. File my 2012 taxes for free   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. File my 2012 taxes for free This special allowance is an exception to the general rule disallowing the passive activity loss. File my 2012 taxes for free Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. File my 2012 taxes for free   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. File my 2012 taxes for free If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. File my 2012 taxes for free   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. File my 2012 taxes for free See Phaseout rule , later. File my 2012 taxes for free Example. File my 2012 taxes for free Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. File my 2012 taxes for free She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. File my 2012 taxes for free She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). File my 2012 taxes for free Commercial revitalization deduction (CRD). File my 2012 taxes for free   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. File my 2012 taxes for free Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. File my 2012 taxes for free You cannot claim a CRD for a building placed in service after December 31, 2009. File my 2012 taxes for free Active participation. File my 2012 taxes for free   Active participation is not the same as material participation (defined later). File my 2012 taxes for free Active participation is a less stringent standard than material participation. File my 2012 taxes for free For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. File my 2012 taxes for free Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. File my 2012 taxes for free   Only individuals can actively participate in rental real estate activities. File my 2012 taxes for free However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. File my 2012 taxes for free   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. File my 2012 taxes for free The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. File my 2012 taxes for free   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). File my 2012 taxes for free   Limited partners are not treated as actively participating in a partnership's rental real estate activities. File my 2012 taxes for free   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. File my 2012 taxes for free   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. File my 2012 taxes for free Example. File my 2012 taxes for free Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. File my 2012 taxes for free He advertised and rented the house to the current tenant himself. File my 2012 taxes for free He also collected the rents and did the repairs or hired someone to do them. File my 2012 taxes for free Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. File my 2012 taxes for free Phaseout rule. File my 2012 taxes for free   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). File my 2012 taxes for free If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. File my 2012 taxes for free    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. File my 2012 taxes for free Taxable social security and tier 1 railroad retirement benefits. File my 2012 taxes for free Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. File my 2012 taxes for free The exclusion from income of interest from qualified U. File my 2012 taxes for free S. File my 2012 taxes for free savings bonds used to pay qualified higher education expenses. File my 2012 taxes for free The exclusion from income of amounts received from an employer's adoption assistance program. File my 2012 taxes for free Passive activity income or loss included on Form 8582. File my 2012 taxes for free Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). File my 2012 taxes for free Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). File my 2012 taxes for free The deduction for the employer-equivalent portion of self-employment tax. File my 2012 taxes for free The deduction for domestic production activities. File my 2012 taxes for free The deduction allowed for interest on student loans. File my 2012 taxes for free The deduction for qualified tuition and related expenses. File my 2012 taxes for free Example. File my 2012 taxes for free During 2013, John was unmarried and was not a real estate professional. File my 2012 taxes for free For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. File my 2012 taxes for free His modified adjusted gross income is $120,000. File my 2012 taxes for free When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. File my 2012 taxes for free He must carry over the remaining $16,000 passive activity loss to 2014. File my 2012 taxes for free He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. File my 2012 taxes for free   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. File my 2012 taxes for free For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). File my 2012 taxes for free   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. File my 2012 taxes for free Ordering rules. File my 2012 taxes for free   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. File my 2012 taxes for free The portion of passive activity losses not attributable to the CRD. File my 2012 taxes for free The portion of passive activity losses attributable to the CRD. File my 2012 taxes for free The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. File my 2012 taxes for free The portion of passive activity credits attributable to the rehabilitation credit. File my 2012 taxes for free The portion of passive activity credits attributable to the low-income housing credit. File my 2012 taxes for free Activities That Are Not Passive Activities The following are not passive activities. File my 2012 taxes for free Trade or business activities in which you materially participated for the tax year. File my 2012 taxes for free A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). File my 2012 taxes for free It does not matter whether you materially participated in the activity for the tax year. File my 2012 taxes for free However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. File my 2012 taxes for free  See Temporary Regulations section 1. File my 2012 taxes for free 469-1T(e)(4)(ii). File my 2012 taxes for free The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. File my 2012 taxes for free An activity of trading personal property for the account of those who own interests in the activity. File my 2012 taxes for free See Temporary Regulations section 1. File my 2012 taxes for free 469-1T(e)(6). File my 2012 taxes for free Rental real estate activities in which you materially participated as a real estate professional. File my 2012 taxes for free See Real Estate Professional , later. File my 2012 taxes for free You should not enter income and losses from these activities on Form 8582. File my 2012 taxes for free Instead, enter them on the forms or schedules you would normally use. File my 2012 taxes for free Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. File my 2012 taxes for free Material participation tests. File my 2012 taxes for free    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. File my 2012 taxes for free You participated in the activity for more than 500 hours. File my 2012 taxes for free Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. File my 2012 taxes for free You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. File my 2012 taxes for free The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. File my 2012 taxes for free A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. File my 2012 taxes for free See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. File my 2012 taxes for free You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. File my 2012 taxes for free The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. File my 2012 taxes for free An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. File my 2012 taxes for free Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. File my 2012 taxes for free   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. File my 2012 taxes for free Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). File my 2012 taxes for free Participation. File my 2012 taxes for free   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. File my 2012 taxes for free Work not usually performed by owners. File my 2012 taxes for free   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. File my 2012 taxes for free The work is not work that is customarily done by the owner of that type of activity. File my 2012 taxes for free One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. File my 2012 taxes for free Participation as an investor. File my 2012 taxes for free   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. File my 2012 taxes for free Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. File my 2012 taxes for free Spouse's participation. File my 2012 taxes for free   Your participation in an activity includes your spouse's participation. File my 2012 taxes for free This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. File my 2012 taxes for free Proof of participation. File my 2012 taxes for free You can use any reasonable method to prove your participation in an activity for the year. File my 2012 taxes for free You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. File my 2012 taxes for free For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. File my 2012 taxes for free Limited partners. File my 2012 taxes for free   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. File my 2012 taxes for free However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. File my 2012 taxes for free   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). File my 2012 taxes for free Retired or disabled farmer and surviving spouse of a farmer. File my 2012 taxes for free   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. File my 2012 taxes for free Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. File my 2012 taxes for free Corporations. File my 2012 taxes for free   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. File my 2012 taxes for free   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. File my 2012 taxes for free See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. File my 2012 taxes for free Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. File my 2012 taxes for free However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. File my 2012 taxes for free For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. File my 2012 taxes for free See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. File my 2012 taxes for free If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). File my 2012 taxes for free If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. File my 2012 taxes for free Qualifications. File my 2012 taxes for free   You qualified as a real estate professional for the year if you met both of the following requirements. File my 2012 taxes for free More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. File my 2012 taxes for free You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. File my 2012 taxes for free   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. File my 2012 taxes for free You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. File my 2012 taxes for free   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. File my 2012 taxes for free However, you can count your spouse's participation in an activity in determining if you materially participated. File my 2012 taxes for free Real property trades or businesses. File my 2012 taxes for free   A real property trade or business is a trade or business that does any of the following with real property. File my 2012 taxes for free Develops or redevelops it. File my 2012 taxes for free Constructs or reconstructs it. File my 2012 taxes for free Acquires it. File my 2012 taxes for free Converts it. File my 2012 taxes for free Rents or leases it. File my 2012 taxes for free Operates or manages it. File my 2012 taxes for free Brokers it. File my 2012 taxes for free Closely held corporations. File my 2012 taxes for free   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. File my 2012 taxes for free Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. File my 2012 taxes for free Self-charged interest. File my 2012 taxes for free   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. File my 2012 taxes for free   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. File my 2012 taxes for free This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. File my 2012 taxes for free   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. File my 2012 taxes for free    Exception. File my 2012 taxes for free The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. File my 2012 taxes for free 469-7(g) to avoid the application of these rules. File my 2012 taxes for free For more details on the self-charged interest rules, see Regulations section 1. File my 2012 taxes for free 469-7. File my 2012 taxes for free Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. File my 2012 taxes for free Passive activity income does not include the following items. File my 2012 taxes for free Income from an activity that is not a passive activity. File my 2012 taxes for free These activities are discussed under Activities That Are Not Passive Activities , earlier. File my 2012 taxes for free Portfolio income. File my 2012 taxes for free This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. File my 2012 taxes for free It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. File my 2012 taxes for free The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. File my 2012 taxes for free For more information on self-charged interest, see Self-charged interest , earlier. File my 2012 taxes for free Personal service income. File my 2012 taxes for free This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. File my 2012 taxes for free Income from positive section 481 adjustments allocated to activities other than passive activities. File my 2012 taxes for free (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. File my 2012 taxes for free ) Income or gain from investments of working capital. File my 2012 taxes for free Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. File my 2012 taxes for free This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. File my 2012 taxes for free Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. File my 2012 taxes for free Any other income that must be treated as nonpassive income. File my 2012 taxes for free See Recharacterization of Passive Income , later. File my 2012 taxes for free Overall gain from any interest in a publicly traded partnership. File my 2012 taxes for free See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. File my 2012 taxes for free State, local, and foreign income tax refunds. File my 2012 taxes for free Income from a covenant not to compete. File my 2012 taxes for free Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. File my 2012 taxes for free Alaska Permanent Fund dividends. File my 2012 taxes for free Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. File my 2012 taxes for free See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. File my 2012 taxes for free Disposition of property interests. File my 2012 taxes for free   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. File my 2012 taxes for free The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. File my 2012 taxes for free An exception to this general rule may apply if you previously used the property in a different activity. File my 2012 taxes for free Exception for more than one use in the preceding 12 months. File my 2012 taxes for free   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. File my 2012 taxes for free Any gain allocated to a passive activity is passive activity income. File my 2012 taxes for free   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. File my 2012 taxes for free Exception for substantially appreciated property. File my 2012 taxes for free   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. File my 2012 taxes for free You used the property in a passive activity for 20% of the time you held your interest in the property. File my 2012 taxes for free You used the property in a passive activity for the entire 24-month period before its disposition. File my 2012 taxes for free If neither condition applies, the gain is not passive activity income. File my 2012 taxes for free However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. File my 2012 taxes for free   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. File my 2012 taxes for free Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. File my 2012 taxes for free   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. File my 2012 taxes for free Disposition of property converted to inventory. File my 2012 taxes for free   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. File my 2012 taxes for free Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. File my 2012 taxes for free This rule applies only if you meet all of the following conditions. File my 2012 taxes for free At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). File my 2012 taxes for free Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. File my 2012 taxes for free You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. File my 2012 taxes for free Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. File my 2012 taxes for free For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. File my 2012 taxes for free See Coordination with other limitations on deductions that apply before the passive activity rules , later. File my 2012 taxes for free Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. File my 2012 taxes for free Exceptions. File my 2012 taxes for free   Passive activity deductions do not include the following items. File my 2012 taxes for free Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. File my 2012 taxes for free Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. File my 2012 taxes for free For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. File my 2012 taxes for free Losses from dispositions of property that produce portfolio income or property held for investment. File my 2012 taxes for free State, local, and foreign income taxes. File my 2012 taxes for free Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. File my 2012 taxes for free Charitable contribution deductions. File my 2012 taxes for free Net operating loss deductions. File my 2012 taxes for free Percentage depletion carryovers for oil and gas wells. File my 2012 taxes for free Capital loss carrybacks and carryovers. File my 2012 taxes for free Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. File my 2012 taxes for free See Coordination with other limitations on deductions that apply before the passive activity rules , later. File my 2012 taxes for free Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. File my 2012 taxes for free Net negative section 481 adjustments allocated to activities other than passive activities. File my 2012 taxes for free (Section 481 adjustments are adjustments required due to changes in accounting methods. File my 2012 taxes for free ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. File my 2012 taxes for free The deduction for the employer-equivalent portion of self-employment tax. File my 2012 taxes for free Coordination with other limitations on deductions that apply before the passive activity rules. File my 2012 taxes for free   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. File my 2012 taxes for free The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. File my 2012 taxes for free Proration of deductions disallowed under basis limitations. File my 2012 taxes for free   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. File my 2012 taxes for free For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. File my 2012 taxes for free   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. File my 2012 taxes for free For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. File my 2012 taxes for free Proration of deductions disallowed under at-risk limitation. File my 2012 taxes for free   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. File my 2012 taxes for free For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. File my 2012 taxes for free Coordination of basis and at-risk limitations. File my 2012 taxes for free   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. File my 2012 taxes for free Separately identified items of deduction and loss. File my 2012 taxes for free   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. File my 2012 taxes for free   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. File my 2012 taxes for free See Grouping Your Activities , later. File my 2012 taxes for free Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). File my 2012 taxes for free See Section 1231 Gains and Losses in Publication 544 for more information. File my 2012 taxes for free Are attributable to pre-enactment interests in activities. File my 2012 taxes for free See Regulations section 1. File my 2012 taxes for free 469-11T(c). File my 2012 taxes for free Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. File my 2012 taxes for free Grouping is important for a number of reasons. File my 2012 taxes for free If you group two activities into one larger activity, you need only show material participation in the activity as a whole. File my 2012 taxes for free But if the two activities are separate, you must show material participation in each one. File my 2012 taxes for free On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. File my 2012 taxes for free But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. File my 2012 taxes for free Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. File my 2012 taxes for free Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. File my 2012 taxes for free You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. File my 2012 taxes for free The following factors have the greatest weight in determining whether activities form an appropriate economic unit. File my 2012 taxes for free All of the factors do not have to apply to treat more than one activity as a single activity. File my 2012 taxes for free The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. File my 2012 taxes for free Example 1. File my 2012 taxes for free John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. File my 2012 taxes for free Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. File my 2012 taxes for free For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. File my 2012 taxes for free Example 2. File my 2012 taxes for free Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. File my 2012 taxes for free Betty is also a partner in DEF (a trucking business). File my 2012 taxes for free ABC and DEF are under common control. File my 2012 taxes for free The main part of DEF's business is transporting goods for ABC. File my 2012 taxes for free DEF is the only trucking business in which Betty is involved. File my 2012 taxes for free Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. File my 2012 taxes for free Consistency and disclosure requirement. File my 2012 taxes for free   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. File my 2012 taxes for free You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. File my 2012 taxes for free   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. File my 2012 taxes for free   See Disclosure Requirement , later. File my 2012 taxes for free Regrouping by the IRS. File my 2012 taxes for free   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. File my 2012 taxes for free Rental activities. File my 2012 taxes for free   In general, you cannot group a rental activity with a trade or business activity. File my 2012 taxes for free However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. File my 2012 taxes for free Example. File my 2012 taxes for free Herbert and Wilma are married and file a joint return. File my 2012 taxes for free Healthy Food, an S corporation, is a grocery store business. File my 2012 taxes for free Herbert is Healthy Food's only shareholder. File my 2012 taxes for free Plum Tower, an S corporation, owns and rents out the building. File my 2012 taxes for free Wilma is Plum Tower's only shareholder. File my 2012 taxes for free Plum Tower rents part of its building to Healthy Food. File my 2012 taxes for free Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. File my 2012 taxes for free Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. File my 2012 taxes for free The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). File my 2012 taxes for free If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. File my 2012 taxes for free Grouping of real and personal property rentals. File my 2012 taxes for free   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. File my 2012 taxes for free However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. File my 2012 taxes for free Certain activities may not be grouped. File my 2012 taxes for free   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. File my 2012 taxes for free Holding, producing, or distributing motion picture films or video tapes. File my 2012 taxes for free Farming. File my 2012 taxes for free Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). File my 2012 taxes for free For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. File my 2012 taxes for free Exploring for, or exploiting, oil and gas resources. File my 2012 taxes for free Exploring for, or exploiting, geothermal deposits. File my 2012 taxes for free   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. File my 2012 taxes for free Limited entrepreneur. File my 2012 taxes for free   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. File my 2012 taxes for free Activities conducted through another entity. File my 2012 taxes for free   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. File my 2012 taxes for free Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. File my 2012 taxes for free    You may not treat activities grouped together by the entity as separate activities. File my 2012 taxes for free Personal service and closely held corporations. File my 2012 taxes for free   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. File my 2012 taxes for free See Material Participation , earlier, and Significant Participation Passive Activities , later. File my 2012 taxes for free Publicly traded partnership (PTP). File my 2012 taxes for free   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. File my 2012 taxes for free Partial dispositions. File my 2012 taxes for free   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. File my 2012 taxes for free However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. File my 2012 taxes for free Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. File my 2012 taxes for free You are required to report certain changes to your groupings that occur during the tax year to the IRS. File my 2012 taxes for free If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. File my 2012 taxes for free You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. File my 2012 taxes for free If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. File my 2012 taxes for free New grouping. File my 2012 taxes for free   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. File my 2012 taxes for free The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. File my 2012 taxes for free In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. File my 2012 taxes for free Addition to an existing grouping. File my 2012 taxes for free   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. File my 2012 taxes for free The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. File my 2012 taxes for free In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. File my 2012 taxes for free Regrouping. File my 2012 taxes for free   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. File my 2012 taxes for free The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. File my 2012 taxes for free If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. File my 2012 taxes for free In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. File my 2012 taxes for free Groupings by partnerships and S corporations. File my 2012 taxes for free   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. File my 2012 taxes for free Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. File my 2012 taxes for free S. File my 2012 taxes for free Return of Partnership Income, or Form 1120S, U. File my 2012 taxes for free S. File my 2012 taxes for free Income Tax Return for an S Corporation, whichever is applicable. File my 2012 taxes for free   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. File my 2012 taxes for free   A partner or shareholder may not treat activities grouped together by the entity as separate activities. File my 2012 taxes for free Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. File my 2012 taxes for free Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. File my 2012 taxes for free If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. File my 2012 taxes for free If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). File my 2012 taxes for free If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. File my 2012 taxes for free Instead, enter income or losses on the form and schedules you normally use. File my 2012 taxes for free However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. File my 2012 taxes for free Limit on recharacterized passive income. File my 2012 taxes for free   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. File my 2012 taxes for free Investment income and investment expense. File my 2012 taxes for free   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. File my 2012 taxes for free Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. File my 2012 taxes for free If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. File my 2012 taxes for free Corporations. File my 2012 taxes for free   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. File my 2012 taxes for free The corporation is not treated as materially participating in the activity for the year. File my 2012 taxes for free One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. File my 2012 taxes for free Worksheet A. File my 2012 taxes for free   Complete Worksheet A. File my 2012 taxes for free Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. File my 2012 taxes for free Begin by entering the name of each activity in the left column. File my 2012 taxes for free Column (a). File my 2012 taxes for free   Enter the number of hours you participated in each activity and total the column. File my 2012 taxes for free   If the total is more than 500, do not complete Worksheet A or B. File my 2012 taxes for free None of the activities are passive activities because you satisfy test 4 for material participation. File my 2012 taxes for free (See Material participation tests , earlier. File my 2012 taxes for free ) Report all the income and losses from these activities on the forms and schedules you normally use. File my 2012 taxes for free Do not include the income and losses on Form 8582. File my 2012 taxes for free Column (b). File my 2012 taxes for free   Enter the net loss, if any, from the activity. File my 2012 taxes for free Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). File my 2012 taxes for free Enter -0- here if the prior year unallowed loss is the same as the current year net income. File my 2012 taxes for free Column (c). File my 2012 taxes for free   Enter net income (if any) from the activity. File my 2012 taxes for free Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. File my 2012 taxes for free Column (d). File my 2012 taxes for free   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). File my 2012 taxes for free If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. File my 2012 taxes for free Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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The File My 2012 Taxes For Free

File my 2012 taxes for free 4. File my 2012 taxes for free   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 my 2012 taxes for free Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. File my 2012 taxes for free Net unrelated income. File my 2012 taxes for free Net unrelated loss. File my 2012 taxes for free Control. File my 2012 taxes for free Income from property financed with qualified 501(c)(3) bonds. File my 2012 taxes for free Disposition of property received from taxable subsidiary and used in unrelated business. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. File my 2012 taxes for free Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. File my 2012 taxes for free Dividends, interest, annuities and other investment income. File my 2012 taxes for free   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 my 2012 taxes for free Exception for insurance activity income of a controlled foreign corporation. File my 2012 taxes for free   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. File my 2012 taxes for free 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 my 2012 taxes for free Certain exceptions to this rule apply. File my 2012 taxes for free For more information, see section 512(b)(17). File my 2012 taxes for free Other exceptions. File my 2012 taxes for free   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 my 2012 taxes for free Income from lending securities. File my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Royalties. File my 2012 taxes for free   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. File my 2012 taxes for free   To be considered a royalty, a payment must relate to the use of a valuable right. File my 2012 taxes for free Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. File my 2012 taxes for free Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. File my 2012 taxes for free However, royalties do not include payments for personal services. File my 2012 taxes for free Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. File my 2012 taxes for free   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 my 2012 taxes for free   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Exceptions. File my 2012 taxes for free   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 my 2012 taxes for free Rents. File my 2012 taxes for free   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. File my 2012 taxes for free Rents from personal property are not excluded. File my 2012 taxes for free However, special rules apply to “mixed leases” of both real and personal property. File my 2012 taxes for free Mixed leases. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. File my 2012 taxes for free   Property is placed in service when the lessee first may use it under the terms of a lease. File my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free Exception for rents based on net profit. File my 2012 taxes for free   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 my 2012 taxes for free Exception for income from personal services. File my 2012 taxes for free   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. File my 2012 taxes for free 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 my 2012 taxes for free Other exceptions. File my 2012 taxes for free   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 my 2012 taxes for free ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). File my 2012 taxes for free See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. File my 2012 taxes for free Income from research. File my 2012 taxes for free   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. File my 2012 taxes for free However, the extent of the exclusion depends on the nature of the organization and the type of research. File my 2012 taxes for free   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 my 2012 taxes for free   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. File my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. File my 2012 taxes for free Gains and losses from disposition of property. File my 2012 taxes for free   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 my 2012 taxes for free   It should be noted that the last exception relates only to cut timber. File my 2012 taxes for free 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 my 2012 taxes for free Lapse or termination of options. File my 2012 taxes for free   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. File my 2012 taxes for free The exclusion applies only if the option is written in connection with the exempt organization's investment activities. File my 2012 taxes for free 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 my 2012 taxes for free Exception. File my 2012 taxes for free   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. File my 2012 taxes for free Gain or loss on disposition of certain brownfield property. File my 2012 taxes for free   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 my 2012 taxes for free See sections 512(b)(19) and 514(b)(1)(E). File my 2012 taxes for free Income from services provided under federal license. File my 2012 taxes for free   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 my 2012 taxes for free   This exclusion applies only if the following requirements are met. File my 2012 taxes for free The trade or business must have been operated by the order or by the institution before May 27, 1959. File my 2012 taxes for free The trade or business must provide services under a license issued by a federal regulatory agency. File my 2012 taxes for free 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 my 2012 taxes for free The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. File my 2012 taxes for free 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 my 2012 taxes for free Exception. File my 2012 taxes for free    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). File my 2012 taxes for free Member income of mutual or cooperative electric companies. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Exception. File my 2012 taxes for free   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 my 2012 taxes for free The limit on dues paid by an associate member is $148 for 2011. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free They cannot be directly connected with excluded income. File my 2012 taxes for free For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. File my 2012 taxes for free 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 my 2012 taxes for free For an exception, see Expenses attributable to exploitation of exempt activities, later. File my 2012 taxes for free Expenses attributable solely to unrelated business. File my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free Expenses attributable to dual use of facilities or personnel. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free Example 1. File my 2012 taxes for free A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. File my 2012 taxes for free The school provides the tennis courts, housing, and dining facilities. File my 2012 taxes for free The contracted individual hires the instructors, recruits campers, and provides supervision. File my 2012 taxes for free The income the school receives from this activity is from a dual use of the facilities and personnel. File my 2012 taxes for free The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. File my 2012 taxes for free Example 2. File my 2012 taxes for free An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. File my 2012 taxes for free The president devotes approximately 10% of his time to the unrelated business. File my 2012 taxes for free 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 my 2012 taxes for free Expenses attributable to exploitation of exempt activities. File my 2012 taxes for free   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 my 2012 taxes for free (See Exploitation of exempt functions under Not substantially related in chapter 3. File my 2012 taxes for free ) 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 my 2012 taxes for free Exception. File my 2012 taxes for free   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 my 2012 taxes for free The unrelated business exploits the exempt activity. File my 2012 taxes for free The unrelated business is a type normally conducted for profit by taxable organizations. File my 2012 taxes for free The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. File my 2012 taxes for free 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 my 2012 taxes for free   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. File my 2012 taxes for free ) Figuring unrelated business taxable income (UBTI). File my 2012 taxes for free   The UBTI of an advertising activity is the amount shown in the following chart. File my 2012 taxes for free IF gross advertising income is . File my 2012 taxes for free . File my 2012 taxes for free . File my 2012 taxes for free THEN UBTI is . File my 2012 taxes for free . File my 2012 taxes for free . File my 2012 taxes for free 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 my 2012 taxes for free Equal to or less than direct advertising costs Zero. File my 2012 taxes for free   • Circulation income and readership costs are not taken into account. File my 2012 taxes for free   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. File my 2012 taxes for free   The terms used in the chart are explained in the following discussions. File my 2012 taxes for free Periodical Income Gross advertising income. File my 2012 taxes for free   This is all the income from the unrelated advertising activities of an exempt organization periodical. File my 2012 taxes for free Circulation income. File my 2012 taxes for free   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). File my 2012 taxes for free It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. File my 2012 taxes for free 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 my 2012 taxes for free Allocable membership receipts. File my 2012 taxes for free   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 my 2012 taxes for free   The amount used to allocate membership receipts is the amount shown in the following chart. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free IF . File my 2012 taxes for free . File my 2012 taxes for free . File my 2012 taxes for free THEN the amount used to allocate membership receipts is . File my 2012 taxes for free . File my 2012 taxes for free . File my 2012 taxes for free 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free U is an exempt scientific organization with 10,000 members who pay annual dues of $15. File my 2012 taxes for free One of U's activities is publishing a monthly periodical distributed to all of its members. File my 2012 taxes for free U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Example 2. File my 2012 taxes for free Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). File my 2012 taxes for free U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). File my 2012 taxes for free Periodical Costs Direct advertising costs. File my 2012 taxes for free   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free Readership costs. File my 2012 taxes for free   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 my 2012 taxes for free Costs partly attributable to other activities. File my 2012 taxes for free   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. File my 2012 taxes for free 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 my 2012 taxes for free The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. File my 2012 taxes for free Consolidated treatment, once adopted, must be followed consistently and is binding. File my 2012 taxes for free This treatment can be changed only with the consent of the Internal Revenue Service. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Example. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. File my 2012 taxes for free 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 my 2012 taxes for free It is not engaged in for profit. File my 2012 taxes for free Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. File my 2012 taxes for free 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 my 2012 taxes for free Modifications Net operating loss deduction. File my 2012 taxes for free   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. File my 2012 taxes for free 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 my 2012 taxes for free For example, a loss from an unrelated trade or business is not diminished because dividend income was received. File my 2012 taxes for free   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 my 2012 taxes for free This would reduce the loss that could be applied against unrelated business income of prior or future tax years. File my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free Charitable contributions deduction. File my 2012 taxes for free   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 my 2012 taxes for free   To be deductible, the contribution must be paid to another qualified organization. File my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free Deduction limits. File my 2012 taxes for free   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 my 2012 taxes for free See the Instructions for Form 990-T for more information. File my 2012 taxes for free    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 my 2012 taxes for free 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 my 2012 taxes for free   Contributions in excess of the limits just described may be carried over to the next 5 tax years. File my 2012 taxes for free A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. File my 2012 taxes for free Suspension of deduction limits for farmers and ranchers. File my 2012 taxes for free   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. File my 2012 taxes for free See the Instructions for Form 990-T for details. File my 2012 taxes for free Specific deduction. File my 2012 taxes for free   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. File my 2012 taxes for free However, the specific deduction is not allowed in computing an NOL or the NOL deduction. File my 2012 taxes for free   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. File my 2012 taxes for free Exception. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free The local units cannot file separate returns. File my 2012 taxes for free However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. File my 2012 taxes for free 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 my 2012 taxes for free Example. File my 2012 taxes for free X is an association of churches and is divided into local units A, B, C, and D. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free No distinction is made between limited and general partners. File my 2012 taxes for free The organization is required to notify the partnership of its tax-exempt status. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free The partnership is required to provide the organization this information on Schedule K-1. File my 2012 taxes for free Example. File my 2012 taxes for free An exempt educational organization is a partner in a partnership that operates a factory. File my 2012 taxes for free The partnership also holds stock in a corporation. File my 2012 taxes for free 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 my 2012 taxes for free Different tax years. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free These organizations must figure unrelated business taxable income under special rules. File my 2012 taxes for free Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. File my 2012 taxes for free ). File my 2012 taxes for free (See Exclusions under Income, earlier. File my 2012 taxes for free ) Therefore, they are generally subject to unrelated business income tax on this income. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Losses from nonexempt activities. File my 2012 taxes for free   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 my 2012 taxes for free Example. File my 2012 taxes for free 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 my 2012 taxes for free The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. File my 2012 taxes for free Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. File my 2012 taxes for free Modifications. File my 2012 taxes for free   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). File my 2012 taxes for free Exempt function income. File my 2012 taxes for free   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 my 2012 taxes for free Exempt function income also includes income set aside for qualified purposes. File my 2012 taxes for free Income that is set aside. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. File my 2012 taxes for free These rules are explained in section 512(a)(3)(E)(ii). File my 2012 taxes for free   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. File my 2012 taxes for free In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free The income set aside must have been includible in gross income for that earlier year. File my 2012 taxes for free Nonrecognition of gain. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free For details, see section 512(a)(4) and the regulations under that section. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. File my 2012 taxes for free Excess qualifying specified payments. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   If a controlled participant is not required to file a U. File my 2012 taxes for free S. File my 2012 taxes for free income tax return, the participant must ensure that the copy or copies of the Regulations section 1. File my 2012 taxes for free 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. File my 2012 taxes for free S. File my 2012 taxes for free Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. File my 2012 taxes for free S. File my 2012 taxes for free Corporation or a Foreign Corporation Engaged in a U. File my 2012 taxes for free S. File my 2012 taxes for free Trade or Business, or any Form 8865, Return of U. File my 2012 taxes for free S. File my 2012 taxes for free Persons With Respect to Certain Foreign Partnerships, filed for that participant. File my 2012 taxes for free Addition to tax for valuation misstatements. File my 2012 taxes for free   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 my 2012 taxes for free See section 512(b)(13)(E)(ii) for more information. File my 2012 taxes for free Net unrelated income. File my 2012 taxes for free   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 my 2012 taxes for free Net unrelated loss. File my 2012 taxes for free   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 my 2012 taxes for free Control. File my 2012 taxes for free   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 my 2012 taxes for free For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. File my 2012 taxes for free   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 my 2012 taxes for free Income from property financed with qualified 501(c)(3) bonds. File my 2012 taxes for free 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 my 2012 taxes for free No deduction is allowed for interest on the private activity bond. File my 2012 taxes for free See sections 150(b)(3) and (c) for more information. File my 2012 taxes for free Disposition of property received from taxable subsidiary and used in unrelated business. File my 2012 taxes for free 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 my 2012 taxes for free The assets are treated as if sold at fair market value. File my 2012 taxes for free Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. File my 2012 taxes for free S. File my 2012 taxes for free and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free In such a case the built-in appreciation is preserved in the replacement property received in the transaction. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. File my 2012 taxes for free 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 my 2012 taxes for free If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. File my 2012 taxes for free Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free The amount of income included is proportionate to the debt on the property. File my 2012 taxes for free 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 my 2012 taxes for free It includes rental real estate, tangible personal property, and corporate stock. File my 2012 taxes for free 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 my 2012 taxes for free The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. File my 2012 taxes for free 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 my 2012 taxes for free Example 1. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Example 2. File my 2012 taxes for free X, an exempt organization, forms a partnership with A and B. File my 2012 taxes for free 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 my 2012 taxes for free X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. File my 2012 taxes for free The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. File my 2012 taxes for free The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. File my 2012 taxes for free The loan is secured by a mortgage on the entire office building. File my 2012 taxes for free By agreement with Y bank, X is not personally liable for payment of the mortgage. File my 2012 taxes for free X has acquisition indebtedness of $7 million. File my 2012 taxes for free 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 my 2012 taxes for free Example 3. File my 2012 taxes for free A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. File my 2012 taxes for free 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 my 2012 taxes for free Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. File my 2012 taxes for free The union has no outstanding debt on the property. File my 2012 taxes for free 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 my 2012 taxes for free The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. File my 2012 taxes for free Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. File my 2012 taxes for free 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 my 2012 taxes for free Accordingly, the debt is not acquisition indebtedness. File my 2012 taxes for free Change in use of property. File my 2012 taxes for free   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 my 2012 taxes for free Example. File my 2012 taxes for free Four years ago a university borrowed funds to acquire an apartment building as housing for married students. File my 2012 taxes for free Last year, the university rented the apartment building to the public for nonexempt purposes. File my 2012 taxes for free The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. File my 2012 taxes for free Continued debt. File my 2012 taxes for free   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 my 2012 taxes for free This is true even if the original property was not debt-financed property. File my 2012 taxes for free Example. File my 2012 taxes for free 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 my 2012 taxes for free The office building was not debt-financed property. File my 2012 taxes for free The organization later sold the building for $1 million without repaying the $400,000 loan. File my 2012 taxes for free It used the sale proceeds to buy an apartment building it rents to the general public. File my 2012 taxes for free The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. File my 2012 taxes for free Property acquired subject to mortgage or lien. File my 2012 taxes for free   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 my 2012 taxes for free Example. File my 2012 taxes for free An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. File my 2012 taxes for free The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. File my 2012 taxes for free Liens similar to a mortgage. File my 2012 taxes for free   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. File my 2012 taxes for free A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Exception for property acquired by gift, bequest, or devise. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free Modifying existing debt. File my 2012 taxes for free   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. File my 2012 taxes for free 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 my 2012 taxes for free Extension or renewal. File my 2012 taxes for free   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 my 2012 taxes for free   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 my 2012 taxes for free Debt increase. File my 2012 taxes for free   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 my 2012 taxes for free Example. File my 2012 taxes for free An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. File my 2012 taxes for free These include the following. File my 2012 taxes for free Debts incurred in performing an exempt purpose. File my 2012 taxes for free Annuity obligations. File my 2012 taxes for free Securities loans. File my 2012 taxes for free Real property debts of qualified organizations. File my 2012 taxes for free Certain Federal financing. File my 2012 taxes for free Debt incurred in performing exempt purpose. File my 2012 taxes for free   A debt incurred in performing an exempt purpose is not acquisition indebtedness. File my 2012 taxes for free 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 my 2012 taxes for free Annuity obligation. File my 2012 taxes for free   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. File my 2012 taxes for free 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 my 2012 taxes for free 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 my 2012 taxes for free It must be payable over the lives of either one or two individuals living when issued. File my 2012 taxes for free 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 my 2012 taxes for free Example. File my 2012 taxes for free X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. File my 2012 taxes for free 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 my 2012 taxes for free The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. File my 2012 taxes for free The present value of this annuity is $81,156, determined from IRS valuation tables. File my 2012 taxes for free 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 my 2012 taxes for free Securities loans. File my 2012 taxes for free   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 my 2012 taxes for free 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 my 2012 taxes for free   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from