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Filing 1040 Online

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Filing 1040 Online

Filing 1040 online 4. Filing 1040 online   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Filing 1040 online Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Filing 1040 online Net unrelated income. Filing 1040 online Net unrelated loss. Filing 1040 online Control. Filing 1040 online Income from property financed with qualified 501(c)(3) bonds. Filing 1040 online Disposition of property received from taxable subsidiary and used in unrelated business. Filing 1040 online Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Filing 1040 online If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Filing 1040 online In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Filing 1040 online Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Filing 1040 online For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Filing 1040 online Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Filing 1040 online Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Filing 1040 online Dividends, interest, annuities and other investment income. Filing 1040 online   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Filing 1040 online Exception for insurance activity income of a controlled foreign corporation. Filing 1040 online   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Filing 1040 online The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Filing 1040 online Certain exceptions to this rule apply. Filing 1040 online For more information, see section 512(b)(17). Filing 1040 online Other exceptions. Filing 1040 online   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Filing 1040 online Income from lending securities. Filing 1040 online   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Filing 1040 online   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Filing 1040 online The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Filing 1040 online Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Filing 1040 online Royalties. Filing 1040 online   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Filing 1040 online   To be considered a royalty, a payment must relate to the use of a valuable right. Filing 1040 online Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Filing 1040 online Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Filing 1040 online However, royalties do not include payments for personal services. Filing 1040 online Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Filing 1040 online   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Filing 1040 online   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Filing 1040 online However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Filing 1040 online To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Filing 1040 online To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Filing 1040 online Exceptions. Filing 1040 online   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Filing 1040 online Rents. Filing 1040 online   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Filing 1040 online Rents from personal property are not excluded. Filing 1040 online However, special rules apply to “mixed leases” of both real and personal property. Filing 1040 online Mixed leases. Filing 1040 online   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Filing 1040 online If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Filing 1040 online If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Filing 1040 online   Property is placed in service when the lessee first may use it under the terms of a lease. Filing 1040 online For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Filing 1040 online   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Filing 1040 online   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Filing 1040 online Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Filing 1040 online Exception for rents based on net profit. Filing 1040 online   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Filing 1040 online Exception for income from personal services. Filing 1040 online   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Filing 1040 online Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Filing 1040 online Other exceptions. Filing 1040 online   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Filing 1040 online ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Filing 1040 online See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Filing 1040 online Income from research. Filing 1040 online   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Filing 1040 online However, the extent of the exclusion depends on the nature of the organization and the type of research. Filing 1040 online   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Filing 1040 online   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Filing 1040 online   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Filing 1040 online   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Filing 1040 online In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Filing 1040 online Gains and losses from disposition of property. Filing 1040 online   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Filing 1040 online   It should be noted that the last exception relates only to cut timber. Filing 1040 online The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Filing 1040 online Lapse or termination of options. Filing 1040 online   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Filing 1040 online The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Filing 1040 online Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Filing 1040 online Exception. Filing 1040 online   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Filing 1040 online Gain or loss on disposition of certain brownfield property. Filing 1040 online   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Filing 1040 online See sections 512(b)(19) and 514(b)(1)(E). Filing 1040 online Income from services provided under federal license. Filing 1040 online   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Filing 1040 online   This exclusion applies only if the following requirements are met. Filing 1040 online The trade or business must have been operated by the order or by the institution before May 27, 1959. Filing 1040 online The trade or business must provide services under a license issued by a federal regulatory agency. Filing 1040 online More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Filing 1040 online The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Filing 1040 online Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Filing 1040 online Exception. Filing 1040 online    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Filing 1040 online Member income of mutual or cooperative electric companies. Filing 1040 online   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Filing 1040 online Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Filing 1040 online For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Filing 1040 online Exception. Filing 1040 online   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Filing 1040 online The limit on dues paid by an associate member is $148 for 2011. Filing 1040 online   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Filing 1040 online Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Filing 1040 online They cannot be directly connected with excluded income. Filing 1040 online For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Filing 1040 online Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Filing 1040 online For an exception, see Expenses attributable to exploitation of exempt activities, later. Filing 1040 online Expenses attributable solely to unrelated business. Filing 1040 online   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Filing 1040 online   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Filing 1040 online Expenses attributable to dual use of facilities or personnel. Filing 1040 online   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Filing 1040 online The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Filing 1040 online Example 1. Filing 1040 online A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Filing 1040 online The school provides the tennis courts, housing, and dining facilities. Filing 1040 online The contracted individual hires the instructors, recruits campers, and provides supervision. Filing 1040 online The income the school receives from this activity is from a dual use of the facilities and personnel. Filing 1040 online The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Filing 1040 online Example 2. Filing 1040 online An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Filing 1040 online The president devotes approximately 10% of his time to the unrelated business. Filing 1040 online To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Filing 1040 online Expenses attributable to exploitation of exempt activities. Filing 1040 online   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Filing 1040 online (See Exploitation of exempt functions under Not substantially related in chapter 3. Filing 1040 online ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Filing 1040 online Exception. Filing 1040 online   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Filing 1040 online The unrelated business exploits the exempt activity. Filing 1040 online The unrelated business is a type normally conducted for profit by taxable organizations. Filing 1040 online The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Filing 1040 online The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Filing 1040 online   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Filing 1040 online Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Filing 1040 online Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Filing 1040 online (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Filing 1040 online ) Figuring unrelated business taxable income (UBTI). Filing 1040 online   The UBTI of an advertising activity is the amount shown in the following chart. Filing 1040 online IF gross advertising income is . Filing 1040 online . Filing 1040 online . Filing 1040 online THEN UBTI is . Filing 1040 online . Filing 1040 online . Filing 1040 online More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Filing 1040 online Equal to or less than direct advertising costs Zero. Filing 1040 online   • Circulation income and readership costs are not taken into account. Filing 1040 online   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Filing 1040 online   The terms used in the chart are explained in the following discussions. Filing 1040 online Periodical Income Gross advertising income. Filing 1040 online   This is all the income from the unrelated advertising activities of an exempt organization periodical. Filing 1040 online Circulation income. Filing 1040 online   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Filing 1040 online It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Filing 1040 online It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Filing 1040 online Allocable membership receipts. Filing 1040 online   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Filing 1040 online   The amount used to allocate membership receipts is the amount shown in the following chart. Filing 1040 online   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Filing 1040 online The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Filing 1040 online IF . Filing 1040 online . Filing 1040 online . Filing 1040 online THEN the amount used to allocate membership receipts is . Filing 1040 online . Filing 1040 online . Filing 1040 online 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Filing 1040 online The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Filing 1040 online Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Filing 1040 online U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Filing 1040 online One of U's activities is publishing a monthly periodical distributed to all of its members. Filing 1040 online U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Filing 1040 online Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Filing 1040 online Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Filing 1040 online Example 2. Filing 1040 online Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Filing 1040 online Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Filing 1040 online U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Filing 1040 online Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Filing 1040 online Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Filing 1040 online Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Filing 1040 online U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Filing 1040 online Periodical Costs Direct advertising costs. Filing 1040 online   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Filing 1040 online   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Filing 1040 online Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Filing 1040 online   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Filing 1040 online For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Filing 1040 online Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Filing 1040 online   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Filing 1040 online Readership costs. Filing 1040 online   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Filing 1040 online Costs partly attributable to other activities. Filing 1040 online   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Filing 1040 online When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Filing 1040 online The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Filing 1040 online Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Filing 1040 online Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Filing 1040 online It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Filing 1040 online Consolidated treatment, once adopted, must be followed consistently and is binding. Filing 1040 online This treatment can be changed only with the consent of the Internal Revenue Service. Filing 1040 online An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Filing 1040 online Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Filing 1040 online The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Filing 1040 online For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Filing 1040 online The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Filing 1040 online Example. Filing 1040 online Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Filing 1040 online Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Filing 1040 online Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Filing 1040 online The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Filing 1040 online The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Filing 1040 online It is not engaged in for profit. Filing 1040 online Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Filing 1040 online It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Filing 1040 online Modifications Net operating loss deduction. Filing 1040 online   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Filing 1040 online However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Filing 1040 online For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Filing 1040 online   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Filing 1040 online This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Filing 1040 online Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Filing 1040 online   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Filing 1040 online   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Filing 1040 online   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Filing 1040 online For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Filing 1040 online   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Filing 1040 online Charitable contributions deduction. Filing 1040 online   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Filing 1040 online   To be deductible, the contribution must be paid to another qualified organization. Filing 1040 online For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Filing 1040 online   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Filing 1040 online Deduction limits. Filing 1040 online   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Filing 1040 online See the Instructions for Form 990-T for more information. Filing 1040 online    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Filing 1040 online However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Filing 1040 online   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Filing 1040 online A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Filing 1040 online Suspension of deduction limits for farmers and ranchers. Filing 1040 online   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Filing 1040 online See the Instructions for Form 990-T for details. Filing 1040 online Specific deduction. Filing 1040 online   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Filing 1040 online However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Filing 1040 online   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Filing 1040 online Exception. Filing 1040 online   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Filing 1040 online In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Filing 1040 online   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Filing 1040 online The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Filing 1040 online The local units cannot file separate returns. Filing 1040 online However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Filing 1040 online See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Filing 1040 online Example. Filing 1040 online X is an association of churches and is divided into local units A, B, C, and D. Filing 1040 online Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Filing 1040 online X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Filing 1040 online Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Filing 1040 online If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Filing 1040 online No distinction is made between limited and general partners. Filing 1040 online The organization is required to notify the partnership of its tax-exempt status. Filing 1040 online Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Filing 1040 online The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Filing 1040 online The partnership is required to provide the organization this information on Schedule K-1. Filing 1040 online Example. Filing 1040 online An exempt educational organization is a partner in a partnership that operates a factory. Filing 1040 online The partnership also holds stock in a corporation. Filing 1040 online The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Filing 1040 online Different tax years. Filing 1040 online   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Filing 1040 online S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Filing 1040 online For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Filing 1040 online The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Filing 1040 online Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Filing 1040 online To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Filing 1040 online Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Filing 1040 online These organizations must figure unrelated business taxable income under special rules. Filing 1040 online Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Filing 1040 online ). Filing 1040 online (See Exclusions under Income, earlier. Filing 1040 online ) Therefore, they are generally subject to unrelated business income tax on this income. Filing 1040 online The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Filing 1040 online The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Filing 1040 online Losses from nonexempt activities. Filing 1040 online   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Filing 1040 online Example. Filing 1040 online A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Filing 1040 online The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Filing 1040 online Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Filing 1040 online Modifications. Filing 1040 online   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Filing 1040 online Exempt function income. Filing 1040 online   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Filing 1040 online Exempt function income also includes income set aside for qualified purposes. Filing 1040 online Income that is set aside. Filing 1040 online   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Filing 1040 online In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Filing 1040 online   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Filing 1040 online Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Filing 1040 online These rules are explained in section 512(a)(3)(E)(ii). Filing 1040 online   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Filing 1040 online In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Filing 1040 online   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Filing 1040 online However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Filing 1040 online The income set aside must have been includible in gross income for that earlier year. Filing 1040 online Nonrecognition of gain. Filing 1040 online   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Filing 1040 online The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Filing 1040 online   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Filing 1040 online Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Filing 1040 online The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Filing 1040 online For details, see section 512(a)(4) and the regulations under that section. Filing 1040 online Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Filing 1040 online The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Filing 1040 online All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Filing 1040 online Excess qualifying specified payments. Filing 1040 online   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Filing 1040 online Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Filing 1040 online   If a controlled participant is not required to file a U. Filing 1040 online S. Filing 1040 online income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Filing 1040 online 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Filing 1040 online S. Filing 1040 online Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Filing 1040 online S. Filing 1040 online Corporation or a Foreign Corporation Engaged in a U. Filing 1040 online S. Filing 1040 online Trade or Business, or any Form 8865, Return of U. Filing 1040 online S. Filing 1040 online Persons With Respect to Certain Foreign Partnerships, filed for that participant. Filing 1040 online Addition to tax for valuation misstatements. Filing 1040 online   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Filing 1040 online See section 512(b)(13)(E)(ii) for more information. Filing 1040 online Net unrelated income. Filing 1040 online   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Filing 1040 online Net unrelated loss. Filing 1040 online   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Filing 1040 online Control. Filing 1040 online   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Filing 1040 online For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Filing 1040 online   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Filing 1040 online Income from property financed with qualified 501(c)(3) bonds. Filing 1040 online If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Filing 1040 online No deduction is allowed for interest on the private activity bond. Filing 1040 online See sections 150(b)(3) and (c) for more information. Filing 1040 online Disposition of property received from taxable subsidiary and used in unrelated business. Filing 1040 online A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Filing 1040 online The assets are treated as if sold at fair market value. Filing 1040 online Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Filing 1040 online S. Filing 1040 online and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Filing 1040 online A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Filing 1040 online However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Filing 1040 online In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Filing 1040 online A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Filing 1040 online This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Filing 1040 online In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Filing 1040 online If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Filing 1040 online If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Filing 1040 online Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Filing 1040 online Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Filing 1040 online Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Filing 1040 online The amount of income included is proportionate to the debt on the property. Filing 1040 online Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Filing 1040 online It includes rental real estate, tangible personal property, and corporate stock. Filing 1040 online Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Filing 1040 online The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Filing 1040 online That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Filing 1040 online Example 1. Filing 1040 online Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Filing 1040 online The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Filing 1040 online Example 2. Filing 1040 online X, an exempt organization, forms a partnership with A and B. Filing 1040 online The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Filing 1040 online X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Filing 1040 online The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Filing 1040 online The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Filing 1040 online The loan is secured by a mortgage on the entire office building. Filing 1040 online By agreement with Y bank, X is not personally liable for payment of the mortgage. Filing 1040 online X has acquisition indebtedness of $7 million. Filing 1040 online This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Filing 1040 online Example 3. Filing 1040 online A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Filing 1040 online The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Filing 1040 online Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Filing 1040 online The union has no outstanding debt on the property. Filing 1040 online The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Filing 1040 online The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Filing 1040 online Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Filing 1040 online In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Filing 1040 online Accordingly, the debt is not acquisition indebtedness. Filing 1040 online Change in use of property. Filing 1040 online   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Filing 1040 online Example. Filing 1040 online Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Filing 1040 online Last year, the university rented the apartment building to the public for nonexempt purposes. Filing 1040 online The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Filing 1040 online Continued debt. Filing 1040 online   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Filing 1040 online This is true even if the original property was not debt-financed property. Filing 1040 online Example. Filing 1040 online To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Filing 1040 online The office building was not debt-financed property. Filing 1040 online The organization later sold the building for $1 million without repaying the $400,000 loan. Filing 1040 online It used the sale proceeds to buy an apartment building it rents to the general public. Filing 1040 online The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Filing 1040 online Property acquired subject to mortgage or lien. Filing 1040 online   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Filing 1040 online Example. Filing 1040 online An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Filing 1040 online The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Filing 1040 online Liens similar to a mortgage. Filing 1040 online   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Filing 1040 online A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Filing 1040 online However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Filing 1040 online Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Filing 1040 online Exception for property acquired by gift, bequest, or devise. Filing 1040 online   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Filing 1040 online However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Filing 1040 online   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Filing 1040 online   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Filing 1040 online Modifying existing debt. Filing 1040 online   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Filing 1040 online When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Filing 1040 online Extension or renewal. Filing 1040 online   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Filing 1040 online   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Filing 1040 online Debt increase. Filing 1040 online   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Filing 1040 online Example. Filing 1040 online An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Filing 1040 online The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Filing 1040 online A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Filing 1040 online Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Filing 1040 online These include the following. Filing 1040 online Debts incurred in performing an exempt purpose. Filing 1040 online Annuity obligations. Filing 1040 online Securities loans. Filing 1040 online Real property debts of qualified organizations. Filing 1040 online Certain Federal financing. Filing 1040 online Debt incurred in performing exempt purpose. Filing 1040 online   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Filing 1040 online For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Filing 1040 online Annuity obligation. Filing 1040 online   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Filing 1040 online It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Filing 1040 online Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Filing 1040 online It must be payable over the lives of either one or two individuals living when issued. Filing 1040 online It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Filing 1040 online Example. Filing 1040 online X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Filing 1040 online In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Filing 1040 online The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Filing 1040 online The present value of this annuity is $81,156, determined from IRS valuation tables. Filing 1040 online Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Filing 1040 online Securities loans. Filing 1040 online   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Filing 1040 online This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Filing 1040 online   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from
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IRS Gives Tax Relief To Oklahoma Tornado Victims; Return Filing and Tax Payment Deadlines Extended to Sept. 30

Updated 7/02/2013 to include LeFlore, Okfuskee and Okmulgee counties.
Updated 6/13/2013 to include Canadian County.

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IR-2013-53, May 21, 2013

WASHINGTON –– After Monday’s devastating tornado in Moore and Oklahoma City,   the Internal Revenue Service today provided tax relief to individuals and businesses affected by this and other severe storms occurring in parts of Oklahoma.

Following Monday’s disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Canadian, Cleveland, LeFlore, Lincoln, McClain, Okfuskee, Oklahoma, Okmulgee and Pottawatomie counties will receive special tax relief. Other locations may be added in coming days based on additional damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting on May 18, 2013. As a result, affected individuals and businesses will have until Sept. 30, 2013 to file these returns and pay any taxes due. This includes the June 17 and Sept. 16 deadlines for making estimated tax payments. A variety of business tax deadlines are also affected including the July 31 deadline for second quarter payroll and excise tax returns and the Sept. 3 deadline for truckers filing highway use tax returns.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The agency automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief.

Beyond the relief provided to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who lives outside the disaster area but whose books, records or tax professional are located in the areas affected by these storms. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either last year’s or this year’s return. Claiming these casualty loss deductions on either an original or amended 2012 return will get the taxpayer an earlier refund but waiting to claim them on a 2013 return could result in greater tax savings depending upon other income factors.

In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after May 18 and before June 3 if the deposits are made by June 3, 2013. Details on available relief can be found on the disaster relief page on IRS.gov.

The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

The IRS is actively monitoring the situation and will provide additional relief if needed.

See also: 

Tax Relief for Victims of Severe Storms and Tornadoes in Oklahoma

Extra Time Granted for Tax-Exempt Bond Issuers Affected by Severe Storms and Tornados in Oklahoma

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Page Last Reviewed or Updated: 04-Sep-2013

The Filing 1040 Online

Filing 1040 online 4. Filing 1040 online   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. Filing 1040 online Loan secured by benefits. Filing 1040 online Waiver of survivor benefits. Filing 1040 online Waiver of 30-day waiting period before annuity starting date. Filing 1040 online Involuntary cash-out of benefits not more than dollar limit. Filing 1040 online Exception for certain loans. Filing 1040 online Exception for QDRO. Filing 1040 online SIMPLE and safe harbor 401(k) plan exception. Filing 1040 online Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. Filing 1040 online Installment percentage. Filing 1040 online Extended period for making contributions. Filing 1040 online ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. Filing 1040 online Caution: Form 5500-EZ not required. Filing 1040 online Form 5500. Filing 1040 online Electronic filing of Forms 5500 and 5500-SF. Filing 1040 online Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. Filing 1040 online dol. Filing 1040 online gov/ebsa/pdf/2013-5500. Filing 1040 online pdf www. Filing 1040 online dol. Filing 1040 online gov/ebsa/pdf/2013-5500-SF. Filing 1040 online pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Filing 1040 online 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Filing 1040 online 1040 U. Filing 1040 online S. Filing 1040 online Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. Filing 1040 online For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. Filing 1040 online For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. Filing 1040 online R. Filing 1040 online 10 plans. Filing 1040 online A sole proprietor or a partnership can set up one of these plans. Filing 1040 online A common-law employee or a partner cannot set up one of these plans. Filing 1040 online The plans described here can also be set up and maintained by employers that are corporations. Filing 1040 online All the rules discussed here apply to corporations except where specifically limited to the self-employed. Filing 1040 online The plan must be for the exclusive benefit of employees or their beneficiaries. Filing 1040 online These qualified plans can include coverage for a self-employed individual. Filing 1040 online As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Filing 1040 online The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Filing 1040 online Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. Filing 1040 online You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later. Filing 1040 online Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. Filing 1040 online It provides benefits to a participant largely based on the amount contributed to that participant's account. Filing 1040 online Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. Filing 1040 online A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. Filing 1040 online Profit-sharing plan. Filing 1040 online   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). Filing 1040 online A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. Filing 1040 online An employer may even make no contribution to the plan for a given year. Filing 1040 online   The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. Filing 1040 online   In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). Filing 1040 online Money purchase pension plan. Filing 1040 online   Contributions to a money purchase pension plan are fixed and are not based on your business profits. Filing 1040 online For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. Filing 1040 online This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. Filing 1040 online Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. Filing 1040 online Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Filing 1040 online Actuarial assumptions and computations are required to figure these contributions. Filing 1040 online Generally, you will need continuing professional help to have a defined benefit plan. Filing 1040 online Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Filing 1040 online Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. Filing 1040 online The following is a brief overview of important qualification rules that generally have not yet been discussed. Filing 1040 online It is not intended to be all-inclusive. Filing 1040 online See Setting Up a Qualified Plan , later. Filing 1040 online Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. Filing 1040 online A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. Filing 1040 online Plan assets must not be diverted. Filing 1040 online   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. Filing 1040 online As a general rule, the assets cannot be diverted to the employer. Filing 1040 online Minimum coverage requirement must be met. Filing 1040 online   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. Filing 1040 online 50 employees, or The greater of: 40% of all employees, or Two employees. Filing 1040 online If there is only one employee, the plan must benefit that employee. Filing 1040 online Contributions or benefits must not discriminate. Filing 1040 online   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. Filing 1040 online Contributions and benefits must not be more than certain limits. Filing 1040 online   Your plan must not provide for contributions or benefits that are more than certain limits. Filing 1040 online The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. Filing 1040 online These limits are discussed later in this chapter under Contributions. Filing 1040 online Minimum vesting standard must be met. Filing 1040 online   Your plan must satisfy certain requirements regarding when benefits vest. Filing 1040 online A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. Filing 1040 online A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. Filing 1040 online Special rules apply to forfeited benefit amounts. Filing 1040 online In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. Filing 1040 online   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Filing 1040 online Forfeitures must be used instead to reduce employer contributions. Filing 1040 online Participation. Filing 1040 online   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. Filing 1040 online Has reached age 21. Filing 1040 online Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). Filing 1040 online A plan cannot exclude an employee because he or she has reached a specified age. Filing 1040 online Leased employee. Filing 1040 online   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. Filing 1040 online These rules include those in all the following areas. Filing 1040 online Nondiscrimination in coverage, contributions, and benefits. Filing 1040 online Minimum age and service requirements. Filing 1040 online Vesting. Filing 1040 online Limits on contributions and benefits. Filing 1040 online Top-heavy plan requirements. Filing 1040 online Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. Filing 1040 online Benefit payment must begin when required. Filing 1040 online   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. Filing 1040 online The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. Filing 1040 online The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. Filing 1040 online The plan year in which the participant separates from service. Filing 1040 online Early retirement. Filing 1040 online   Your plan can provide for payment of retirement benefits before the normal retirement age. Filing 1040 online If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. Filing 1040 online Satisfies the service requirement for the early retirement benefit. Filing 1040 online Separates from service with a nonforfeitable right to an accrued benefit. Filing 1040 online The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. Filing 1040 online Required minimum distributions. Filing 1040 online   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. Filing 1040 online See Required Distributions , under Distributions, later. Filing 1040 online Survivor benefits. Filing 1040 online   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. Filing 1040 online A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. Filing 1040 online A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. Filing 1040 online   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. Filing 1040 online The participant does not choose benefits in the form of a life annuity. Filing 1040 online The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. Filing 1040 online The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. Filing 1040 online Loan secured by benefits. Filing 1040 online   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. Filing 1040 online Waiver of survivor benefits. Filing 1040 online   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. Filing 1040 online The plan also must allow the participant to withdraw the waiver. Filing 1040 online The spouse's consent must be witnessed by a plan representative or notary public. Filing 1040 online Waiver of 30-day waiting period before annuity starting date. Filing 1040 online    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. Filing 1040 online   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. Filing 1040 online Involuntary cash-out of benefits not more than dollar limit. Filing 1040 online   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. Filing 1040 online   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. Filing 1040 online If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. Filing 1040 online   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. Filing 1040 online   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. Filing 1040 online A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. Filing 1040 online See Section 402(f) Notice under Distributions, later, for more details. Filing 1040 online Consolidation, merger, or transfer of assets or liabilities. Filing 1040 online   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. Filing 1040 online (if the plan had then terminated). Filing 1040 online Benefits must not be assigned or alienated. Filing 1040 online   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. Filing 1040 online Exception for certain loans. Filing 1040 online   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. Filing 1040 online A disqualified person is defined later in this chapter under Prohibited Transactions. Filing 1040 online Exception for QDRO. Filing 1040 online   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. Filing 1040 online   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. Filing 1040 online Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. Filing 1040 online No benefit reduction for social security increases. Filing 1040 online   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. Filing 1040 online This rule also applies to plans supplementing the benefits provided by other federal or state laws. Filing 1040 online Elective deferrals must be limited. Filing 1040 online   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. Filing 1040 online See Limit on Elective Deferrals later in this chapter. Filing 1040 online Top-heavy plan requirements. Filing 1040 online   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. Filing 1040 online   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Filing 1040 online Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. Filing 1040 online   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. Filing 1040 online These qualification requirements for top-heavy plans are explained in section 416 and its regulations. Filing 1040 online SIMPLE and safe harbor 401(k) plan exception. Filing 1040 online   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. Filing 1040 online QACAs (discussed later) also are not subject to top-heavy requirements. Filing 1040 online Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. Filing 1040 online First you adopt a written plan. Filing 1040 online Then you invest the plan assets. Filing 1040 online You, the employer, are responsible for setting up and maintaining the plan. Filing 1040 online If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. Filing 1040 online If you have employees, see Participation, under Qualification Rules, earlier. Filing 1040 online Set-up deadline. Filing 1040 online   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). Filing 1040 online Credit for startup costs. Filing 1040 online   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. Filing 1040 online For more information, see Credit for startup costs under Reminders, earlier. Filing 1040 online Adopting a Written Plan You must adopt a written plan. Filing 1040 online The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Filing 1040 online Or it can be an individually designed plan. Filing 1040 online Written plan requirement. Filing 1040 online   To qualify, the plan you set up must be in writing and must be communicated to your employees. Filing 1040 online The plan's provisions must be stated in the plan. Filing 1040 online It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. Filing 1040 online Master or prototype plans. Filing 1040 online   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Filing 1040 online Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). Filing 1040 online Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. Filing 1040 online Under a prototype plan, a separate trust or custodial account is established for each employer. Filing 1040 online Plan providers. Filing 1040 online   The following organizations generally can provide IRS-approved master or prototype plans. Filing 1040 online Banks (including some savings and loan associations and federally insured credit unions). Filing 1040 online Trade or professional organizations. Filing 1040 online Insurance companies. Filing 1040 online Mutual funds. Filing 1040 online Individually designed plan. Filing 1040 online   If you prefer, you can set up an individually designed plan to meet specific needs. Filing 1040 online Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. Filing 1040 online You may need professional help for this. Filing 1040 online See Rev. Filing 1040 online Proc. Filing 1040 online 2014-6, 2014-1 I. Filing 1040 online R. Filing 1040 online B. Filing 1040 online 198, available at www. Filing 1040 online irs. Filing 1040 online gov/irb/2014-1_IRB/ar10. Filing 1040 online html, as annually updated, that may help you decide whether to apply for approval. Filing 1040 online Internal Revenue Bulletins are available on the IRS website at IRS. Filing 1040 online gov They are also available at most IRS offices and at certain libraries. Filing 1040 online User fee. Filing 1040 online   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. Filing 1040 online At least one of them must be a non-highly compensated employee participating in the plan. Filing 1040 online The fee does not apply to requests made by the later of the following dates. Filing 1040 online The end of the 5th plan year the plan is in effect. Filing 1040 online The end of any remedial amendment period for the plan that begins within the first 5 plan years. Filing 1040 online The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. Filing 1040 online   For more information about whether the user fee applies, see Rev. Filing 1040 online Proc. Filing 1040 online 2014-8, 2014-1 I. Filing 1040 online R. Filing 1040 online B. Filing 1040 online 242, available at www. Filing 1040 online irs. Filing 1040 online gov/irb/2014-1_IRB/ar12. Filing 1040 online html, as may be annually updated; Notice 2003-49, 2003-32 I. Filing 1040 online R. Filing 1040 online B. Filing 1040 online 294, available at www. Filing 1040 online irs. Filing 1040 online gov/irb/2003-32_IRB/ar13. Filing 1040 online html; and Notice 2011-86, 2011-45 I. Filing 1040 online R. Filing 1040 online B. Filing 1040 online 698, available at www. Filing 1040 online irs. Filing 1040 online gov/irb/2011-45_IRB/ar11. Filing 1040 online html. Filing 1040 online Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. Filing 1040 online You can establish a trust or custodial account to invest the funds. Filing 1040 online You, the trust, or the custodial account can buy an annuity contract from an insurance company. Filing 1040 online Life insurance can be included only if it is incidental to the retirement benefits. Filing 1040 online You set up a trust by a legal instrument (written document). Filing 1040 online You may need professional help to do this. Filing 1040 online You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. Filing 1040 online You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. Filing 1040 online If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. Filing 1040 online Other plan requirements. Filing 1040 online   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. Filing 1040 online Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Filing 1040 online Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. Filing 1040 online For information on this funding requirement, see section 412 and its regulations. Filing 1040 online Quarterly installments of required contributions. Filing 1040 online   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. Filing 1040 online If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. Filing 1040 online Due dates. Filing 1040 online   The due dates for the installments are 15 days after the end of each quarter. Filing 1040 online For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). Filing 1040 online Installment percentage. Filing 1040 online   Each quarterly installment must be 25% of the required annual payment. Filing 1040 online Extended period for making contributions. Filing 1040 online   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. Filing 1040 online Contributions A qualified plan is generally funded by your contributions. Filing 1040 online However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. Filing 1040 online See Employee Contributions and Elective Deferrals later. Filing 1040 online Contributions deadline. Filing 1040 online   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. Filing 1040 online Self-employed individual. Filing 1040 online   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Filing 1040 online Your net earnings must be from your personal services, not from your investments. Filing 1040 online If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. Filing 1040 online Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. Filing 1040 online There are also limits on the amount you can deduct. Filing 1040 online See Deduction Limits , later. Filing 1040 online Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. Filing 1040 online The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. Filing 1040 online Defined benefit plan. Filing 1040 online   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. Filing 1040 online 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. Filing 1040 online $205,000 ($210,000 for 2014). Filing 1040 online Defined contribution plan. Filing 1040 online   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. Filing 1040 online 100% of the participant's compensation. Filing 1040 online $51,000 ($52,000 for 2014). Filing 1040 online   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. Filing 1040 online Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Filing 1040 online Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. Filing 1040 online Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. Filing 1040 online See Regulations sections 1. Filing 1040 online 401(k)-2 and 1. Filing 1040 online 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Filing 1040 online When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. Filing 1040 online But you can apply them to the previous year if all the following requirements are met. Filing 1040 online You make them by the due date of your tax return for the previous year (plus extensions). Filing 1040 online The plan was established by the end of the previous year. Filing 1040 online The plan treats the contributions as though it had received them on the last day of the previous year. Filing 1040 online You do either of the following. Filing 1040 online You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. Filing 1040 online You deduct the contributions on your tax return for the previous year. Filing 1040 online A partnership shows contributions for partners on Form 1065. Filing 1040 online Employer's promissory note. Filing 1040 online   Your promissory note made out to the plan is not a payment that qualifies for the deduction. Filing 1040 online Also, issuing this note is a prohibited transaction subject to tax. Filing 1040 online See Prohibited Transactions , later. Filing 1040 online Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Filing 1040 online The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Filing 1040 online Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. Filing 1040 online Defined contribution plans. Filing 1040 online   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. Filing 1040 online If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. Filing 1040 online See Deduction Limit for Self-Employed Individuals , later. Filing 1040 online   When figuring the deduction limit, the following rules apply. Filing 1040 online Elective deferrals (discussed later) are not subject to the limit. Filing 1040 online Compensation includes elective deferrals. Filing 1040 online The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). Filing 1040 online Defined benefit plans. Filing 1040 online   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Filing 1040 online Consequently, an actuary must figure your deduction limit. Filing 1040 online    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. Filing 1040 online Table 4–1. Filing 1040 online Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. Filing 1040 online Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Filing 1040 online Compensation is your net earnings from self-employment, defined in chapter 1. Filing 1040 online This definition takes into account both the following items. Filing 1040 online The deduction for the deductible part of your self-employment tax. Filing 1040 online The deduction for contributions on your behalf to the plan. Filing 1040 online The deduction for your own contributions and your net earnings depend on each other. Filing 1040 online For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. Filing 1040 online To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Filing 1040 online Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Filing 1040 online Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Filing 1040 online For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. Filing 1040 online Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Filing 1040 online (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. Filing 1040 online ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Filing 1040 online Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. Filing 1040 online For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. Filing 1040 online However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. Filing 1040 online See Deduction Limit for Self-Employed Individuals, earlier. Filing 1040 online The amount you carry over and deduct may be subject to the excise tax discussed next. Filing 1040 online Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. Filing 1040 online Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. Filing 1040 online In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. Filing 1040 online Special rule for self-employed individuals. Filing 1040 online   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Filing 1040 online Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. Filing 1040 online See Minimum Funding Requirement , earlier. Filing 1040 online Reporting the tax. Filing 1040 online   You must report the tax on your nondeductible contributions on Form 5330. Filing 1040 online Form 5330 includes a computation of the tax. Filing 1040 online See the separate instructions for completing the form. Filing 1040 online Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. Filing 1040 online A plan with this type of arrangement is popularly known as a “401(k) plan. Filing 1040 online ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. Filing 1040 online ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. Filing 1040 online In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. Filing 1040 online A profit-sharing plan. Filing 1040 online A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. Filing 1040 online Partnership. Filing 1040 online   A partnership can have a 401(k) plan. Filing 1040 online Restriction on conditions of participation. Filing 1040 online   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. Filing 1040 online Matching contributions. Filing 1040 online   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. Filing 1040 online For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Filing 1040 online Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. Filing 1040 online Nonelective contributions. Filing 1040 online   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. Filing 1040 online These are called nonelective contributions. Filing 1040 online Employee compensation limit. Filing 1040 online   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. Filing 1040 online This limit is $260,000 in 2014. Filing 1040 online SIMPLE 401(k) plan. Filing 1040 online   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. Filing 1040 online A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. Filing 1040 online For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. Filing 1040 online Distributions. Filing 1040 online   Certain rules apply to distributions from 401(k) plans. Filing 1040 online See Distributions From 401(k) Plans , later. Filing 1040 online Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. Filing 1040 online This limit applies without regard to community property laws. Filing 1040 online Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. Filing 1040 online For 2013 and 2014, the basic limit on elective deferrals is $17,500. Filing 1040 online This limit applies to all salary reduction contributions and elective deferrals. Filing 1040 online If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. Filing 1040 online Catch-up contributions. Filing 1040 online   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Filing 1040 online The catch-up contribution limit for 2013 and 2014 is $5,500. Filing 1040 online Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). Filing 1040 online However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Filing 1040 online The catch-up contribution limit. Filing 1040 online The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Filing 1040 online Treatment of contributions. Filing 1040 online   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Filing 1040 online Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Filing 1040 online Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Filing 1040 online Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Filing 1040 online Forfeiture. Filing 1040 online   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. Filing 1040 online Reporting on Form W-2. Filing 1040 online   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Filing 1040 online You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Filing 1040 online You must also include them in box 12. Filing 1040 online Mark the “Retirement plan” checkbox in box 13. Filing 1040 online For more information, see the Form W-2 instructions. Filing 1040 online Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. Filing 1040 online Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. Filing 1040 online These contributions are elective deferrals. Filing 1040 online An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). Filing 1040 online For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. Filing 1040 online Eligible automatic contribution arrangement. Filing 1040 online   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. Filing 1040 online This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). Filing 1040 online There is no required deferral percentage. Filing 1040 online Withdrawals. Filing 1040 online   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. Filing 1040 online The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. Filing 1040 online The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. Filing 1040 online   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. Filing 1040 online The additional 10% tax on early distributions will not apply to the distribution. Filing 1040 online Notice requirement. Filing 1040 online   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. Filing 1040 online The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. Filing 1040 online The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. Filing 1040 online The notice also must explain how contributions will be invested in the absence of an investment election by the employee. Filing 1040 online Qualified automatic contribution arrangement. Filing 1040 online    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. Filing 1040 online It contains an automatic enrollment feature, and mandatory employer contributions are required. Filing 1040 online If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Filing 1040 online Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. Filing 1040 online Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. Filing 1040 online In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). Filing 1040 online If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. Filing 1040 online It must be applied uniformly. Filing 1040 online It must not exceed 10%. Filing 1040 online It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. Filing 1040 online It must increase to at least 4% in the following plan year. Filing 1040 online It must increase to at least 5% in the following plan year. Filing 1040 online It must increase to at least 6% in subsequent plan years. Filing 1040 online Matching or nonelective contributions. Filing 1040 online   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. Filing 1040 online Matching contributions. Filing 1040 online You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. Filing 1040 online An amount equal to 100% of elective deferrals, up to 1% of compensation. Filing 1040 online An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. Filing 1040 online Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. Filing 1040 online The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Filing 1040 online Nonelective contributions. Filing 1040 online You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. Filing 1040 online Vesting requirements. Filing 1040 online   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. Filing 1040 online These contributions are subject to special withdrawal restrictions, discussed later. Filing 1040 online Notice requirements. Filing 1040 online   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. Filing 1040 online The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. Filing 1040 online The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Filing 1040 online Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. Filing 1040 online The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. Filing 1040 online Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. Filing 1040 online He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. Filing 1040 online The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. Filing 1040 online Excess withdrawn by April 15. Filing 1040 online   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. Filing 1040 online However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. Filing 1040 online The distribution is not subject to the additional 10% tax on early distributions. Filing 1040 online   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. Filing 1040 online   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. Filing 1040 online Excess not withdrawn by April 15. Filing 1040 online   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. Filing 1040 online In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Filing 1040 online Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. Filing 1040 online Reporting corrective distributions on Form 1099-R. Filing 1040 online   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. Filing 1040 online For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. Filing 1040 online Tax on excess contributions of highly compensated employees. Filing 1040 online   The law provides tests to detect discrimination in a plan. Filing 1040 online If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Filing 1040 online Report the tax on Form 5330. Filing 1040 online The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Filing 1040 online Also, the ACP test does not apply to these plans if certain additional requirements are met. Filing 1040 online   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Filing 1040 online Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. Filing 1040 online   See Regulations sections 1. Filing 1040 online 401(k)-2 and 1. Filing 1040 online 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Filing 1040 online    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. Filing 1040 online Safe harbor 401(k) plan. Filing 1040 online If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. Filing 1040 online For your plan to be a safe harbor plan, you must meet the following conditions. Filing 1040 online Matching or nonelective contributions. Filing 1040 online You must make matching or nonelective contributions according to one of the following formulas. Filing 1040 online Matching contributions. Filing 1040 online You must make matching contributions according to the following rules. Filing 1040 online You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. Filing 1040 online You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. Filing 1040 online The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Filing 1040 online Nonelective contributions. Filing 1040 online You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. Filing 1040 online These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. Filing 1040 online Notice requirement. Filing 1040 online You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. Filing 1040 online The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. Filing 1040 online Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. Filing 1040 online Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. Filing 1040 online However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. Filing 1040 online Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. Filing 1040 online Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. Filing 1040 online Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. Filing 1040 online An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. Filing 1040 online The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. Filing 1040 online Rollover. Filing 1040 online   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. Filing 1040 online For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. Filing 1040 online R. Filing 1040 online B. Filing 1040 online 872, available at www. Filing 1040 online irs. Filing 1040 online gov/irb/2010-51_IRB/ar11. Filing 1040 online html, and Notice 2013-74. Filing 1040 online A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Filing 1040 online Rollover amounts do not apply toward the annual deferral limit. Filing 1040 online Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. Filing 1040 online See the Form W-2 and 1099-R instructions for detailed information. Filing 1040 online Distributions Amounts paid to plan participants from a qualified plan are called distributions. Filing 1040 online Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Filing 1040 online Also, certain loans may be treated as distributions. Filing 1040 online See Loans Treated as Distributions in Publication 575. Filing 1040 online Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). Filing 1040 online These distribution rules apply individually to each qualified plan. Filing 1040 online You cannot satisfy the requirement for one plan by taking a distribution from another. Filing 1040 online The plan must provide that these rules override any inconsistent distribution options previously offered. Filing 1040 online Minimum distribution. Filing 1040 online   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. Filing 1040 online This minimum is figured by dividing the account balance by the applicable life expectancy. Filing 1040 online The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. Filing 1040 online For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. Filing 1040 online Required beginning date. Filing 1040 online   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. Filing 1040 online   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. Filing 1040 online Calendar year in which he or she reaches age 70½. Filing 1040 online Calendar year in which he or she retires from employment with the employer maintaining the plan. Filing 1040 online However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. Filing 1040 online   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. Filing 1040 online For more information, see Tax on Excess Accumulation in Publication 575. Filing 1040 online Distributions after the starting year. Filing 1040 online   The distribution required to be made by April 1 is treated as a distribution for the starting year. Filing 1040 online (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. Filing 1040 online ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. Filing 1040 online If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). Filing 1040 online Distributions after participant's death. Filing 1040 online   See Publication 575 for the special rules covering distributions made after the death of a participant. Filing 1040 online Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. Filing 1040 online The employee retires, dies, becomes disabled, or otherwise severs employment. Filing 1040 online The plan ends and no other defined contribution plan is established or continued. Filing 1040 online In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. Filing 1040 online For the rules on hardship distributions, including the limits on them, see Regulations section 1. Filing 1040 online 401(k)-1(d). Filing 1040 online The employee becomes eligible for a qualified reservist distribution (defined next). Filing 1040 online Certain distributions listed above may be subject to the tax on early distributions discussed later. Filing 1040 online Qualified reservist distributions. Filing 1040 online   A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. Filing 1040 online All or part of a qualified reservist distribution can be recontributed to an IRA. Filing 1040 online The additional 10% tax on early distributions does not apply to a qualified reservist distribution. Filing 1040 online Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Filing 1040 online Since most recipients have no cost basis, a distribution is generally fully taxable. Filing 1040 online An exception is a distribution that is properly rolled over as discussed under Rollover, next. Filing 1040 online The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. Filing 1040 online See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. Filing 1040 online Note. Filing 1040 online A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. Filing 1040 online Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. Filing 1040 online See Qualified distributions under Qualified Roth Contribution Program, earlier. Filing 1040 online Rollover. Filing 1040 online   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. Filing 1040 online However, it may be subject to withholding as discussed under Withholding requirement, later. Filing 1040 online A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. Filing 1040 online Eligible rollover distribution. Filing 1040 online   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. Filing 1040 online A required minimum distribution. Filing 1040 online See Required Distributions , earlier. Filing 1040 online Any of a series of substantially equal payments made at least once a year over any of the following periods. Filing 1040 online The employee's life or life expectancy. Filing 1040 online The joint lives or life expectancies of the employee and beneficiary. Filing 1040 online A period of 10 years or longer. Filing 1040 online A hardship distribution. Filing 1040 online The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. Filing 1040 online See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. Filing 1040 online Loans treated as distributions. Filing 1040 online Dividends on employer securities. Filing 1040 online The cost of any life insurance coverage provided under a qualified retirement plan. Filing 1040 online Similar items designated by the IRS in published guidance. Filing 1040 online See, for example, the Instructions for Forms 1099-R and 5498. Filing 1040 online Rollover of nontaxable amounts. Filing 1040 online   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. Filing 1040 online If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. Filing 1040 online If the rollover is to an IRA, the transfer can be made by any rollover method. Filing 1040 online Note. Filing 1040 online A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. Filing 1040 online If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). Filing 1040 online More information. Filing 1040 online   For more information about rollovers, see Rollovers in Pubs. Filing 1040 online 575 and 590. Filing 1040 online Withholding requirement. Filing 1040 online   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. Filing 1040 online Exceptions. Filing 1040 online   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. Filing 1040 online   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. Filing 1040 online Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). Filing 1040 online However, the participant can choose not to have tax withheld from these distributions. Filing 1040 online If the participant does not make this choice, the following withholding rules apply. Filing 1040 online For periodic distributions, withholding is based on their treatment as wages. Filing 1040 online For nonperiodic distributions, 10% of the taxable part is withheld. Filing 1040 online Estimated tax payments. Filing 1040 online   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. Filing 1040 online For more information, see Withholding Tax and Estimated Tax in Publication 575. Filing 1040 online Section 402(f) Notice. Filing 1040 online   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. Filing 1040 online That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. Filing 1040 online That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. Filing 1040 online That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. Filing 1040 online Certain other rules that may be applicable. Filing 1040 online   Notice 2009-68, 2009-39 I. Filing 1040 online R. Filing 1040 online B. Filing 1040 online 423, available at www. Filing 1040 online irs. Filing 1040 online gov/irb/2009-39_IRB/ar14. Filing 1040 online html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. Filing 1040 online If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. Filing 1040 online Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. Filing 1040 online Timing of notice. Filing 1040 online   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. Filing 1040 online Method of notice. Filing 1040 online   The written notice must be provided individually to each distributee of an eligible rollover distribution. Filing 1040 online Posting of the notice is not sufficient. Filing 1040 online However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. Filing 1040 online See Regulations section 1. Filing 1040 online 401(a)-21. Filing 1040 online Tax on failure to give notice. Filing 1040 online   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. Filing 1040 online The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. Filing 1040 online Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. Filing 1040 online This tax applies to the amount received that the employee must include in income. Filing 1040 online Exceptions. Filing 1040 online   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. Filing 1040 online Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Filing 1040 online Made due to the employee having a qualifying disability. Filing 1040 online Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. Filing 1040 online (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. Filing 1040 online ) Made to an employee after separation from service if the separation occurred during o