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Form 1040 Ez 2013 Instructions

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Form 1040 Ez 2013 Instructions

Form 1040 ez 2013 instructions 4. Form 1040 ez 2013 instructions   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Form 1040 ez 2013 instructions Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Form 1040 ez 2013 instructions Net unrelated income. Form 1040 ez 2013 instructions Net unrelated loss. Form 1040 ez 2013 instructions Control. Form 1040 ez 2013 instructions Income from property financed with qualified 501(c)(3) bonds. Form 1040 ez 2013 instructions Disposition of property received from taxable subsidiary and used in unrelated business. Form 1040 ez 2013 instructions Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Form 1040 ez 2013 instructions If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Form 1040 ez 2013 instructions In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Form 1040 ez 2013 instructions Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Form 1040 ez 2013 instructions For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Form 1040 ez 2013 instructions Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Form 1040 ez 2013 instructions Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Form 1040 ez 2013 instructions Dividends, interest, annuities and other investment income. Form 1040 ez 2013 instructions   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Form 1040 ez 2013 instructions Exception for insurance activity income of a controlled foreign corporation. Form 1040 ez 2013 instructions   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Form 1040 ez 2013 instructions The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Form 1040 ez 2013 instructions Certain exceptions to this rule apply. Form 1040 ez 2013 instructions For more information, see section 512(b)(17). Form 1040 ez 2013 instructions Other exceptions. Form 1040 ez 2013 instructions   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Form 1040 ez 2013 instructions Income from lending securities. Form 1040 ez 2013 instructions   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Form 1040 ez 2013 instructions   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Form 1040 ez 2013 instructions The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Form 1040 ez 2013 instructions Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Form 1040 ez 2013 instructions Royalties. Form 1040 ez 2013 instructions   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Form 1040 ez 2013 instructions   To be considered a royalty, a payment must relate to the use of a valuable right. Form 1040 ez 2013 instructions Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Form 1040 ez 2013 instructions Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Form 1040 ez 2013 instructions However, royalties do not include payments for personal services. Form 1040 ez 2013 instructions Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Form 1040 ez 2013 instructions   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Form 1040 ez 2013 instructions   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Form 1040 ez 2013 instructions However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Form 1040 ez 2013 instructions To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Form 1040 ez 2013 instructions To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Form 1040 ez 2013 instructions Exceptions. Form 1040 ez 2013 instructions   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Form 1040 ez 2013 instructions Rents. Form 1040 ez 2013 instructions   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Form 1040 ez 2013 instructions Rents from personal property are not excluded. Form 1040 ez 2013 instructions However, special rules apply to “mixed leases” of both real and personal property. Form 1040 ez 2013 instructions Mixed leases. Form 1040 ez 2013 instructions   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Form 1040 ez 2013 instructions If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Form 1040 ez 2013 instructions If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Form 1040 ez 2013 instructions   Property is placed in service when the lessee first may use it under the terms of a lease. Form 1040 ez 2013 instructions For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Form 1040 ez 2013 instructions   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Form 1040 ez 2013 instructions   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Form 1040 ez 2013 instructions Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Form 1040 ez 2013 instructions Exception for rents based on net profit. Form 1040 ez 2013 instructions   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Form 1040 ez 2013 instructions Exception for income from personal services. Form 1040 ez 2013 instructions   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Form 1040 ez 2013 instructions Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Form 1040 ez 2013 instructions Other exceptions. Form 1040 ez 2013 instructions   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Form 1040 ez 2013 instructions ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Form 1040 ez 2013 instructions See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Form 1040 ez 2013 instructions Income from research. Form 1040 ez 2013 instructions   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Form 1040 ez 2013 instructions However, the extent of the exclusion depends on the nature of the organization and the type of research. Form 1040 ez 2013 instructions   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Form 1040 ez 2013 instructions   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Form 1040 ez 2013 instructions   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Form 1040 ez 2013 instructions   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Form 1040 ez 2013 instructions In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Form 1040 ez 2013 instructions Gains and losses from disposition of property. Form 1040 ez 2013 instructions   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Form 1040 ez 2013 instructions   It should be noted that the last exception relates only to cut timber. Form 1040 ez 2013 instructions The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Form 1040 ez 2013 instructions Lapse or termination of options. Form 1040 ez 2013 instructions   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Form 1040 ez 2013 instructions The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Form 1040 ez 2013 instructions Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Form 1040 ez 2013 instructions Exception. Form 1040 ez 2013 instructions   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Form 1040 ez 2013 instructions Gain or loss on disposition of certain brownfield property. Form 1040 ez 2013 instructions   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Form 1040 ez 2013 instructions See sections 512(b)(19) and 514(b)(1)(E). Form 1040 ez 2013 instructions Income from services provided under federal license. Form 1040 ez 2013 instructions   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Form 1040 ez 2013 instructions   This exclusion applies only if the following requirements are met. Form 1040 ez 2013 instructions The trade or business must have been operated by the order or by the institution before May 27, 1959. Form 1040 ez 2013 instructions The trade or business must provide services under a license issued by a federal regulatory agency. Form 1040 ez 2013 instructions More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Form 1040 ez 2013 instructions The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Form 1040 ez 2013 instructions Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Form 1040 ez 2013 instructions Exception. Form 1040 ez 2013 instructions    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Form 1040 ez 2013 instructions Member income of mutual or cooperative electric companies. Form 1040 ez 2013 instructions   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Form 1040 ez 2013 instructions Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Form 1040 ez 2013 instructions For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Form 1040 ez 2013 instructions Exception. Form 1040 ez 2013 instructions   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Form 1040 ez 2013 instructions The limit on dues paid by an associate member is $148 for 2011. Form 1040 ez 2013 instructions   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Form 1040 ez 2013 instructions Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Form 1040 ez 2013 instructions They cannot be directly connected with excluded income. Form 1040 ez 2013 instructions For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Form 1040 ez 2013 instructions Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Form 1040 ez 2013 instructions For an exception, see Expenses attributable to exploitation of exempt activities, later. Form 1040 ez 2013 instructions Expenses attributable solely to unrelated business. Form 1040 ez 2013 instructions   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Form 1040 ez 2013 instructions   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Form 1040 ez 2013 instructions Expenses attributable to dual use of facilities or personnel. Form 1040 ez 2013 instructions   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Form 1040 ez 2013 instructions The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Form 1040 ez 2013 instructions Example 1. Form 1040 ez 2013 instructions A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Form 1040 ez 2013 instructions The school provides the tennis courts, housing, and dining facilities. Form 1040 ez 2013 instructions The contracted individual hires the instructors, recruits campers, and provides supervision. Form 1040 ez 2013 instructions The income the school receives from this activity is from a dual use of the facilities and personnel. Form 1040 ez 2013 instructions The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Form 1040 ez 2013 instructions Example 2. Form 1040 ez 2013 instructions An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Form 1040 ez 2013 instructions The president devotes approximately 10% of his time to the unrelated business. Form 1040 ez 2013 instructions To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Form 1040 ez 2013 instructions Expenses attributable to exploitation of exempt activities. Form 1040 ez 2013 instructions   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Form 1040 ez 2013 instructions (See Exploitation of exempt functions under Not substantially related in chapter 3. Form 1040 ez 2013 instructions ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Form 1040 ez 2013 instructions Exception. Form 1040 ez 2013 instructions   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Form 1040 ez 2013 instructions The unrelated business exploits the exempt activity. Form 1040 ez 2013 instructions The unrelated business is a type normally conducted for profit by taxable organizations. Form 1040 ez 2013 instructions The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Form 1040 ez 2013 instructions The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Form 1040 ez 2013 instructions   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Form 1040 ez 2013 instructions Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Form 1040 ez 2013 instructions Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Form 1040 ez 2013 instructions (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Form 1040 ez 2013 instructions ) Figuring unrelated business taxable income (UBTI). Form 1040 ez 2013 instructions   The UBTI of an advertising activity is the amount shown in the following chart. Form 1040 ez 2013 instructions IF gross advertising income is . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions THEN UBTI is . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Form 1040 ez 2013 instructions Equal to or less than direct advertising costs Zero. Form 1040 ez 2013 instructions   • Circulation income and readership costs are not taken into account. Form 1040 ez 2013 instructions   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Form 1040 ez 2013 instructions   The terms used in the chart are explained in the following discussions. Form 1040 ez 2013 instructions Periodical Income Gross advertising income. Form 1040 ez 2013 instructions   This is all the income from the unrelated advertising activities of an exempt organization periodical. Form 1040 ez 2013 instructions Circulation income. Form 1040 ez 2013 instructions   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Form 1040 ez 2013 instructions It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Form 1040 ez 2013 instructions It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Form 1040 ez 2013 instructions Allocable membership receipts. Form 1040 ez 2013 instructions   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Form 1040 ez 2013 instructions   The amount used to allocate membership receipts is the amount shown in the following chart. Form 1040 ez 2013 instructions   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Form 1040 ez 2013 instructions The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Form 1040 ez 2013 instructions IF . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions THEN the amount used to allocate membership receipts is . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions . Form 1040 ez 2013 instructions 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Form 1040 ez 2013 instructions The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Form 1040 ez 2013 instructions Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Form 1040 ez 2013 instructions U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Form 1040 ez 2013 instructions One of U's activities is publishing a monthly periodical distributed to all of its members. Form 1040 ez 2013 instructions U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Form 1040 ez 2013 instructions Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Form 1040 ez 2013 instructions Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Form 1040 ez 2013 instructions Example 2. Form 1040 ez 2013 instructions Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Form 1040 ez 2013 instructions Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Form 1040 ez 2013 instructions U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Form 1040 ez 2013 instructions Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Form 1040 ez 2013 instructions Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Form 1040 ez 2013 instructions Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Form 1040 ez 2013 instructions U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Form 1040 ez 2013 instructions Periodical Costs Direct advertising costs. Form 1040 ez 2013 instructions   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Form 1040 ez 2013 instructions   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Form 1040 ez 2013 instructions Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Form 1040 ez 2013 instructions   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Form 1040 ez 2013 instructions For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Form 1040 ez 2013 instructions Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Form 1040 ez 2013 instructions   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Form 1040 ez 2013 instructions Readership costs. Form 1040 ez 2013 instructions   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Form 1040 ez 2013 instructions Costs partly attributable to other activities. Form 1040 ez 2013 instructions   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Form 1040 ez 2013 instructions When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Form 1040 ez 2013 instructions The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Form 1040 ez 2013 instructions Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Form 1040 ez 2013 instructions Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Form 1040 ez 2013 instructions It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Form 1040 ez 2013 instructions Consolidated treatment, once adopted, must be followed consistently and is binding. Form 1040 ez 2013 instructions This treatment can be changed only with the consent of the Internal Revenue Service. Form 1040 ez 2013 instructions An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Form 1040 ez 2013 instructions Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Form 1040 ez 2013 instructions The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Form 1040 ez 2013 instructions For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Form 1040 ez 2013 instructions The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Form 1040 ez 2013 instructions Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Form 1040 ez 2013 instructions Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Form 1040 ez 2013 instructions The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Form 1040 ez 2013 instructions The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Form 1040 ez 2013 instructions It is not engaged in for profit. Form 1040 ez 2013 instructions Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Form 1040 ez 2013 instructions It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Form 1040 ez 2013 instructions Modifications Net operating loss deduction. Form 1040 ez 2013 instructions   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Form 1040 ez 2013 instructions However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Form 1040 ez 2013 instructions For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Form 1040 ez 2013 instructions   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Form 1040 ez 2013 instructions This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Form 1040 ez 2013 instructions Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Form 1040 ez 2013 instructions   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Form 1040 ez 2013 instructions   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Form 1040 ez 2013 instructions   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Form 1040 ez 2013 instructions For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Form 1040 ez 2013 instructions   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Form 1040 ez 2013 instructions Charitable contributions deduction. Form 1040 ez 2013 instructions   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Form 1040 ez 2013 instructions   To be deductible, the contribution must be paid to another qualified organization. Form 1040 ez 2013 instructions For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Form 1040 ez 2013 instructions   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Form 1040 ez 2013 instructions Deduction limits. Form 1040 ez 2013 instructions   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Form 1040 ez 2013 instructions See the Instructions for Form 990-T for more information. Form 1040 ez 2013 instructions    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Form 1040 ez 2013 instructions However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Form 1040 ez 2013 instructions   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Form 1040 ez 2013 instructions A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Form 1040 ez 2013 instructions Suspension of deduction limits for farmers and ranchers. Form 1040 ez 2013 instructions   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Form 1040 ez 2013 instructions See the Instructions for Form 990-T for details. Form 1040 ez 2013 instructions Specific deduction. Form 1040 ez 2013 instructions   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Form 1040 ez 2013 instructions However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Form 1040 ez 2013 instructions   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Form 1040 ez 2013 instructions Exception. Form 1040 ez 2013 instructions   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Form 1040 ez 2013 instructions In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Form 1040 ez 2013 instructions   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Form 1040 ez 2013 instructions The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Form 1040 ez 2013 instructions The local units cannot file separate returns. Form 1040 ez 2013 instructions However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Form 1040 ez 2013 instructions See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions X is an association of churches and is divided into local units A, B, C, and D. Form 1040 ez 2013 instructions Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Form 1040 ez 2013 instructions X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Form 1040 ez 2013 instructions Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Form 1040 ez 2013 instructions If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Form 1040 ez 2013 instructions No distinction is made between limited and general partners. Form 1040 ez 2013 instructions The organization is required to notify the partnership of its tax-exempt status. Form 1040 ez 2013 instructions Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Form 1040 ez 2013 instructions The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Form 1040 ez 2013 instructions The partnership is required to provide the organization this information on Schedule K-1. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions An exempt educational organization is a partner in a partnership that operates a factory. Form 1040 ez 2013 instructions The partnership also holds stock in a corporation. Form 1040 ez 2013 instructions The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Form 1040 ez 2013 instructions Different tax years. Form 1040 ez 2013 instructions   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Form 1040 ez 2013 instructions S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Form 1040 ez 2013 instructions For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Form 1040 ez 2013 instructions The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Form 1040 ez 2013 instructions Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Form 1040 ez 2013 instructions To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Form 1040 ez 2013 instructions Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Form 1040 ez 2013 instructions These organizations must figure unrelated business taxable income under special rules. Form 1040 ez 2013 instructions Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Form 1040 ez 2013 instructions ). Form 1040 ez 2013 instructions (See Exclusions under Income, earlier. Form 1040 ez 2013 instructions ) Therefore, they are generally subject to unrelated business income tax on this income. Form 1040 ez 2013 instructions The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Form 1040 ez 2013 instructions The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Form 1040 ez 2013 instructions Losses from nonexempt activities. Form 1040 ez 2013 instructions   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Form 1040 ez 2013 instructions The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Form 1040 ez 2013 instructions Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Form 1040 ez 2013 instructions Modifications. Form 1040 ez 2013 instructions   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Form 1040 ez 2013 instructions Exempt function income. Form 1040 ez 2013 instructions   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Form 1040 ez 2013 instructions Exempt function income also includes income set aside for qualified purposes. Form 1040 ez 2013 instructions Income that is set aside. Form 1040 ez 2013 instructions   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Form 1040 ez 2013 instructions In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Form 1040 ez 2013 instructions   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Form 1040 ez 2013 instructions Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Form 1040 ez 2013 instructions These rules are explained in section 512(a)(3)(E)(ii). Form 1040 ez 2013 instructions   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Form 1040 ez 2013 instructions In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Form 1040 ez 2013 instructions   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Form 1040 ez 2013 instructions However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Form 1040 ez 2013 instructions The income set aside must have been includible in gross income for that earlier year. Form 1040 ez 2013 instructions Nonrecognition of gain. Form 1040 ez 2013 instructions   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Form 1040 ez 2013 instructions The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Form 1040 ez 2013 instructions   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Form 1040 ez 2013 instructions Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Form 1040 ez 2013 instructions The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Form 1040 ez 2013 instructions For details, see section 512(a)(4) and the regulations under that section. Form 1040 ez 2013 instructions Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Form 1040 ez 2013 instructions The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Form 1040 ez 2013 instructions All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Form 1040 ez 2013 instructions Excess qualifying specified payments. Form 1040 ez 2013 instructions   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Form 1040 ez 2013 instructions Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Form 1040 ez 2013 instructions   If a controlled participant is not required to file a U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Form 1040 ez 2013 instructions 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions Corporation or a Foreign Corporation Engaged in a U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions Trade or Business, or any Form 8865, Return of U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions Persons With Respect to Certain Foreign Partnerships, filed for that participant. Form 1040 ez 2013 instructions Addition to tax for valuation misstatements. Form 1040 ez 2013 instructions   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Form 1040 ez 2013 instructions See section 512(b)(13)(E)(ii) for more information. Form 1040 ez 2013 instructions Net unrelated income. Form 1040 ez 2013 instructions   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Form 1040 ez 2013 instructions Net unrelated loss. Form 1040 ez 2013 instructions   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Form 1040 ez 2013 instructions Control. Form 1040 ez 2013 instructions   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Form 1040 ez 2013 instructions For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Form 1040 ez 2013 instructions   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Form 1040 ez 2013 instructions Income from property financed with qualified 501(c)(3) bonds. Form 1040 ez 2013 instructions If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Form 1040 ez 2013 instructions No deduction is allowed for interest on the private activity bond. Form 1040 ez 2013 instructions See sections 150(b)(3) and (c) for more information. Form 1040 ez 2013 instructions Disposition of property received from taxable subsidiary and used in unrelated business. Form 1040 ez 2013 instructions A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Form 1040 ez 2013 instructions The assets are treated as if sold at fair market value. Form 1040 ez 2013 instructions Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Form 1040 ez 2013 instructions A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Form 1040 ez 2013 instructions However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Form 1040 ez 2013 instructions In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Form 1040 ez 2013 instructions A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Form 1040 ez 2013 instructions This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Form 1040 ez 2013 instructions In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Form 1040 ez 2013 instructions If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Form 1040 ez 2013 instructions If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Form 1040 ez 2013 instructions Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Form 1040 ez 2013 instructions Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Form 1040 ez 2013 instructions Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Form 1040 ez 2013 instructions The amount of income included is proportionate to the debt on the property. Form 1040 ez 2013 instructions Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Form 1040 ez 2013 instructions It includes rental real estate, tangible personal property, and corporate stock. Form 1040 ez 2013 instructions Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Form 1040 ez 2013 instructions The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Form 1040 ez 2013 instructions That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Form 1040 ez 2013 instructions Example 1. Form 1040 ez 2013 instructions Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Form 1040 ez 2013 instructions The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Form 1040 ez 2013 instructions Example 2. Form 1040 ez 2013 instructions X, an exempt organization, forms a partnership with A and B. Form 1040 ez 2013 instructions The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Form 1040 ez 2013 instructions X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Form 1040 ez 2013 instructions The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Form 1040 ez 2013 instructions The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Form 1040 ez 2013 instructions The loan is secured by a mortgage on the entire office building. Form 1040 ez 2013 instructions By agreement with Y bank, X is not personally liable for payment of the mortgage. Form 1040 ez 2013 instructions X has acquisition indebtedness of $7 million. Form 1040 ez 2013 instructions This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Form 1040 ez 2013 instructions Example 3. Form 1040 ez 2013 instructions A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Form 1040 ez 2013 instructions The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Form 1040 ez 2013 instructions Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Form 1040 ez 2013 instructions The union has no outstanding debt on the property. Form 1040 ez 2013 instructions The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Form 1040 ez 2013 instructions The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Form 1040 ez 2013 instructions Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Form 1040 ez 2013 instructions In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Form 1040 ez 2013 instructions Accordingly, the debt is not acquisition indebtedness. Form 1040 ez 2013 instructions Change in use of property. Form 1040 ez 2013 instructions   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Form 1040 ez 2013 instructions Last year, the university rented the apartment building to the public for nonexempt purposes. Form 1040 ez 2013 instructions The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Form 1040 ez 2013 instructions Continued debt. Form 1040 ez 2013 instructions   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Form 1040 ez 2013 instructions This is true even if the original property was not debt-financed property. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Form 1040 ez 2013 instructions The office building was not debt-financed property. Form 1040 ez 2013 instructions The organization later sold the building for $1 million without repaying the $400,000 loan. Form 1040 ez 2013 instructions It used the sale proceeds to buy an apartment building it rents to the general public. Form 1040 ez 2013 instructions The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Form 1040 ez 2013 instructions Property acquired subject to mortgage or lien. Form 1040 ez 2013 instructions   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Form 1040 ez 2013 instructions The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Form 1040 ez 2013 instructions Liens similar to a mortgage. Form 1040 ez 2013 instructions   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Form 1040 ez 2013 instructions A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Form 1040 ez 2013 instructions However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Form 1040 ez 2013 instructions Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Form 1040 ez 2013 instructions Exception for property acquired by gift, bequest, or devise. Form 1040 ez 2013 instructions   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Form 1040 ez 2013 instructions However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Form 1040 ez 2013 instructions   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Form 1040 ez 2013 instructions   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Form 1040 ez 2013 instructions Modifying existing debt. Form 1040 ez 2013 instructions   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Form 1040 ez 2013 instructions When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Form 1040 ez 2013 instructions Extension or renewal. Form 1040 ez 2013 instructions   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Form 1040 ez 2013 instructions   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Form 1040 ez 2013 instructions Debt increase. Form 1040 ez 2013 instructions   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Form 1040 ez 2013 instructions The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Form 1040 ez 2013 instructions A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Form 1040 ez 2013 instructions Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Form 1040 ez 2013 instructions These include the following. Form 1040 ez 2013 instructions Debts incurred in performing an exempt purpose. Form 1040 ez 2013 instructions Annuity obligations. Form 1040 ez 2013 instructions Securities loans. Form 1040 ez 2013 instructions Real property debts of qualified organizations. Form 1040 ez 2013 instructions Certain Federal financing. Form 1040 ez 2013 instructions Debt incurred in performing exempt purpose. Form 1040 ez 2013 instructions   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Form 1040 ez 2013 instructions For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Form 1040 ez 2013 instructions Annuity obligation. Form 1040 ez 2013 instructions   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Form 1040 ez 2013 instructions It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Form 1040 ez 2013 instructions Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Form 1040 ez 2013 instructions It must be payable over the lives of either one or two individuals living when issued. Form 1040 ez 2013 instructions It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Form 1040 ez 2013 instructions Example. Form 1040 ez 2013 instructions X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Form 1040 ez 2013 instructions In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Form 1040 ez 2013 instructions The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Form 1040 ez 2013 instructions The present value of this annuity is $81,156, determined from IRS valuation tables. Form 1040 ez 2013 instructions Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Form 1040 ez 2013 instructions Securities loans. Form 1040 ez 2013 instructions   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Form 1040 ez 2013 instructions This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Form 1040 ez 2013 instructions   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from
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The Form 1040 Ez 2013 Instructions

Form 1040 ez 2013 instructions 4. Form 1040 ez 2013 instructions   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Form 1040 ez 2013 instructions However, the information shown on the filled-in forms is not from any actual person or scenario. Form 1040 ez 2013 instructions Example 1—Mortgage loan modification. Form 1040 ez 2013 instructions    In 2007, Nancy Oak bought a main home for $435,000. Form 1040 ez 2013 instructions Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Form 1040 ez 2013 instructions The loan was secured by the home. Form 1040 ez 2013 instructions The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Form 1040 ez 2013 instructions In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Form 1040 ez 2013 instructions    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Form 1040 ez 2013 instructions The FMV of Nancy's home at the time of the refinancing was $500,000. Form 1040 ez 2013 instructions Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Form 1040 ez 2013 instructions After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Form 1040 ez 2013 instructions   In 2013, Nancy was unable to make her mortgage loan payments. Form 1040 ez 2013 instructions On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Form 1040 ez 2013 instructions Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Form 1040 ez 2013 instructions   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Form 1040 ez 2013 instructions Identifiable event code "F" appears in box 6. Form 1040 ez 2013 instructions This box shows the reason the creditor has filed Form 1099-C. Form 1040 ez 2013 instructions To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Form 1040 ez 2013 instructions Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Form 1040 ez 2013 instructions   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Form 1040 ez 2013 instructions Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Form 1040 ez 2013 instructions Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Form 1040 ez 2013 instructions Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Form 1040 ez 2013 instructions   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Form 1040 ez 2013 instructions Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Form 1040 ez 2013 instructions Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Form 1040 ez 2013 instructions You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Form 1040 ez 2013 instructions Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 1040, U. Form 1040 ez 2013 instructions S. Form 1040 ez 2013 instructions Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Form 1040 ez 2013 instructions    In 2005, John and Mary Elm bought a main home for $335,000. Form 1040 ez 2013 instructions John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Form 1040 ez 2013 instructions The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Form 1040 ez 2013 instructions   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Form 1040 ez 2013 instructions Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Form 1040 ez 2013 instructions   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Form 1040 ez 2013 instructions Identifiable event code "D" appears in box 6. Form 1040 ez 2013 instructions This box shows the reason the creditor has filed Form 1099-C. Form 1040 ez 2013 instructions In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Form 1040 ez 2013 instructions In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Form 1040 ez 2013 instructions Their sample Form 1099-C is shown on this page. Form 1040 ez 2013 instructions   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Form 1040 ez 2013 instructions However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Form 1040 ez 2013 instructions   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Form 1040 ez 2013 instructions Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Form 1040 ez 2013 instructions Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Form 1040 ez 2013 instructions As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Form 1040 ez 2013 instructions Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Form 1040 ez 2013 instructions Thus, John and Mary leave line 10b of Form 982 blank. Form 1040 ez 2013 instructions   John and Mary must also determine whether they have a gain or loss from the foreclosure. Form 1040 ez 2013 instructions John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Form 1040 ez 2013 instructions Because this loss relates to their home, it is a nondeductible loss. Form 1040 ez 2013 instructions   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Form 1040 ez 2013 instructions John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 1099-C, Cancellation of Debt Table 1-1. Form 1040 ez 2013 instructions Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Form 1040 ez 2013 instructions Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Form 1040 ez 2013 instructions Otherwise, go to Part 2. Form 1040 ez 2013 instructions 1. Form 1040 ez 2013 instructions Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Form 1040 ez 2013 instructions 00 2. Form 1040 ez 2013 instructions Enter the fair market value of the transferred property $290,000. Form 1040 ez 2013 instructions 00 3. Form 1040 ez 2013 instructions Ordinary income from the cancellation of debt upon foreclosure or repossession. Form 1040 ez 2013 instructions * Subtract line 2 from line 1. Form 1040 ez 2013 instructions If less than zero, enter zero. Form 1040 ez 2013 instructions Next, go to Part 2 $ 25,000. Form 1040 ez 2013 instructions 00 Part 2. Form 1040 ez 2013 instructions Gain or loss from foreclosure or repossession. Form 1040 ez 2013 instructions   4. Form 1040 ez 2013 instructions Enter the smaller of line 1 or line 2. Form 1040 ez 2013 instructions If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Form 1040 ez 2013 instructions 00 5. Form 1040 ez 2013 instructions Enter any proceeds you received from the foreclosure sale   6. Form 1040 ez 2013 instructions Add line 4 and line 5 $290,000. Form 1040 ez 2013 instructions 00 7. Form 1040 ez 2013 instructions Enter the adjusted basis of the transferred property $335,000. Form 1040 ez 2013 instructions 00 8. Form 1040 ez 2013 instructions Gain or loss from foreclosure or repossession. Form 1040 ez 2013 instructions Subtract line 7 from line 6 ($ 45,000. Form 1040 ez 2013 instructions 00) * The income may not be taxable. Form 1040 ez 2013 instructions See chapter 1 for more details. Form 1040 ez 2013 instructions Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Form 1040 ez 2013 instructions Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Form 1040 ez 2013 instructions Credit card debt $ 5,500 2. Form 1040 ez 2013 instructions Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Form 1040 ez 2013 instructions Car and other vehicle loans $ 4. Form 1040 ez 2013 instructions Medical bills owed $ 5. Form 1040 ez 2013 instructions Student loans $ 6. Form 1040 ez 2013 instructions Accrued or past-due mortgage interest $ 7. Form 1040 ez 2013 instructions Accrued or past-due real estate taxes $ 8. Form 1040 ez 2013 instructions Accrued or past-due utilities (water, gas, electric) $ 9. Form 1040 ez 2013 instructions Accrued or past-due child care costs $ 10. Form 1040 ez 2013 instructions Federal or state income taxes remaining due (for prior tax years) $ 11. Form 1040 ez 2013 instructions Judgments $ 12. Form 1040 ez 2013 instructions Business debts (including those owed as a sole proprietor or partner) $ 13. Form 1040 ez 2013 instructions Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Form 1040 ez 2013 instructions Other liabilities (debts) not included above $ 15. Form 1040 ez 2013 instructions Total liabilities immediately before the cancellation. Form 1040 ez 2013 instructions Add lines 1 through 14. Form 1040 ez 2013 instructions $ 320,500 Part II. Form 1040 ez 2013 instructions Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Form 1040 ez 2013 instructions Cash and bank account balances $ 6,000 17. Form 1040 ez 2013 instructions Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Form 1040 ez 2013 instructions Cars and other vehicles $ 19. Form 1040 ez 2013 instructions Computers $ 20. Form 1040 ez 2013 instructions Household goods and furnishings (for example, appliances, electronics, furniture, etc. Form 1040 ez 2013 instructions ) $ 21. Form 1040 ez 2013 instructions Tools $ 22. Form 1040 ez 2013 instructions Jewelry $ 23. Form 1040 ez 2013 instructions Clothing $ 24. Form 1040 ez 2013 instructions Books $ 25. Form 1040 ez 2013 instructions Stocks and bonds $ 26. Form 1040 ez 2013 instructions Investments in coins, stamps, paintings, or other collectibles $ 27. Form 1040 ez 2013 instructions Firearms, sports, photographic, and other hobby equipment $ 28. Form 1040 ez 2013 instructions Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Form 1040 ez 2013 instructions Interest in a pension plan $ 30. Form 1040 ez 2013 instructions Interest in education accounts $ 31. Form 1040 ez 2013 instructions Cash value of life insurance $ 32. Form 1040 ez 2013 instructions Security deposits with landlords, utilities, and others $ 33. Form 1040 ez 2013 instructions Interests in partnerships $ 34. Form 1040 ez 2013 instructions Value of investment in a business $ 35. Form 1040 ez 2013 instructions Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Form 1040 ez 2013 instructions Other assets not included above $ 37. Form 1040 ez 2013 instructions FMV of total assets immediately before the cancellation. Form 1040 ez 2013 instructions Add lines 16 through 36. Form 1040 ez 2013 instructions $ 309,000 Part III. Form 1040 ez 2013 instructions Insolvency 38. Form 1040 ez 2013 instructions Amount of Insolvency. Form 1040 ez 2013 instructions Subtract line 37 from line 15. Form 1040 ez 2013 instructions If zero or less, you are not insolvent. Form 1040 ez 2013 instructions $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Form 1040 ez 2013 instructions    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Form 1040 ez 2013 instructions Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Form 1040 ez 2013 instructions Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Form 1040 ez 2013 instructions   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Form 1040 ez 2013 instructions The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Form 1040 ez 2013 instructions On December 26, 2013, the lender canceled the remaining debt. Form 1040 ez 2013 instructions Kathy and Frank have no tax attributes other than basis of personal-use property. Form 1040 ez 2013 instructions   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Form 1040 ez 2013 instructions Identifiable event code "D" appears in box 6. Form 1040 ez 2013 instructions This box shows the reason the creditor has filed Form 1099-C. Form 1040 ez 2013 instructions Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Form 1040 ez 2013 instructions Kathy and Frank are filing a joint return for 2013. Form 1040 ez 2013 instructions   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Form 1040 ez 2013 instructions Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Form 1040 ez 2013 instructions Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Form 1040 ez 2013 instructions Because this loss relates to their home, it is a nondeductible loss. Form 1040 ez 2013 instructions   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Form 1040 ez 2013 instructions Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Form 1040 ez 2013 instructions Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Form 1040 ez 2013 instructions The household furnishings originally cost $30,000. Form 1040 ez 2013 instructions The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Form 1040 ez 2013 instructions Kathy and Frank had no adjustments to the cost basis of the car. Form 1040 ez 2013 instructions Kathy and Frank had no other assets or liabilities at the time of the cancellation. Form 1040 ez 2013 instructions Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Form 1040 ez 2013 instructions   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Form 1040 ez 2013 instructions Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Form 1040 ez 2013 instructions Kathy and Frank had no other assets or liabilities at that time. Form 1040 ez 2013 instructions Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Form 1040 ez 2013 instructions   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Form 1040 ez 2013 instructions The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Form 1040 ez 2013 instructions The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Form 1040 ez 2013 instructions Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Form 1040 ez 2013 instructions Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Form 1040 ez 2013 instructions This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Form 1040 ez 2013 instructions   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Form 1040 ez 2013 instructions Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Form 1040 ez 2013 instructions Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Form 1040 ez 2013 instructions Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Form 1040 ez 2013 instructions   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Form 1040 ez 2013 instructions Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Form 1040 ez 2013 instructions Thus, Kathy and Frank leave line 10b of Form 982 blank. Form 1040 ez 2013 instructions However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Form 1040 ez 2013 instructions As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Form 1040 ez 2013 instructions Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Form 1040 ez 2013 instructions Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Form 1040 ez 2013 instructions Kathy and Frank reduce the basis in the car by $14,956. Form 1040 ez 2013 instructions 52 ($43,000 x $16,000/$46,000). Form 1040 ez 2013 instructions And they reduce the basis in the household furnishings by $28,043. Form 1040 ez 2013 instructions 48 ($43,000 x $30,000/$46,000). Form 1040 ez 2013 instructions   Following are Kathy and Frank's sample forms and worksheets. Form 1040 ez 2013 instructions Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 1099-C, Cancellation of Debt Table 1-1. Form 1040 ez 2013 instructions Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Form 1040 ez 2013 instructions Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Form 1040 ez 2013 instructions Otherwise, go to Part 2. Form 1040 ez 2013 instructions 1. Form 1040 ez 2013 instructions Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Form 1040 ez 2013 instructions 00 2. Form 1040 ez 2013 instructions Enter the fair market value of the transferred property $1,750,000. Form 1040 ez 2013 instructions 00 3. Form 1040 ez 2013 instructions Ordinary income from the cancellation of debt upon foreclosure or repossession. Form 1040 ez 2013 instructions * Subtract line 2 from line 1. Form 1040 ez 2013 instructions If less than zero, enter zero. Form 1040 ez 2013 instructions Next, go to Part 2 $0. Form 1040 ez 2013 instructions 00 Part 2. Form 1040 ez 2013 instructions Gain or loss from foreclosure or repossession. Form 1040 ez 2013 instructions   4. Form 1040 ez 2013 instructions Enter the smaller of line 1 or line 2. Form 1040 ez 2013 instructions If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Form 1040 ez 2013 instructions $1,750,000. Form 1040 ez 2013 instructions 00 5. Form 1040 ez 2013 instructions Enter any proceeds you received from the foreclosure sale   6. Form 1040 ez 2013 instructions Add line 4 and line 5 $1,750,000. Form 1040 ez 2013 instructions 00 7. Form 1040 ez 2013 instructions Enter the adjusted basis of the transferred property $3,000,000. Form 1040 ez 2013 instructions 00 8. Form 1040 ez 2013 instructions Gain or loss from foreclosure or repossession. Form 1040 ez 2013 instructions Subtract line 7 from line 6 ($1,250,000. Form 1040 ez 2013 instructions 00) * The income may not be taxable. Form 1040 ez 2013 instructions See chapter 1 for more details. Form 1040 ez 2013 instructions    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Form 1040 ez 2013 instructions Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Form 1040 ez 2013 instructions Credit card debt $ 18,000 2. Form 1040 ez 2013 instructions Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Form 1040 ez 2013 instructions Car and other vehicle loans $ 4. Form 1040 ez 2013 instructions Medical bills owed $ 5. Form 1040 ez 2013 instructions Student loans $ 6. Form 1040 ez 2013 instructions Accrued or past-due mortgage interest $ 7. Form 1040 ez 2013 instructions Accrued or past-due real estate taxes $ 8. Form 1040 ez 2013 instructions Accrued or past-due utilities (water, gas, electric) $ 9. Form 1040 ez 2013 instructions Accrued or past-due child care costs $ 10. Form 1040 ez 2013 instructions Federal or state income taxes remaining due (for prior tax years) $ 11. Form 1040 ez 2013 instructions Judgments $ 12. Form 1040 ez 2013 instructions Business debts (including those owed as a sole proprietor or partner) $ 13. Form 1040 ez 2013 instructions Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Form 1040 ez 2013 instructions Other liabilities (debts) not included above $ 15. Form 1040 ez 2013 instructions Total liabilities immediately before the cancellation. Form 1040 ez 2013 instructions Add lines 1 through 14. Form 1040 ez 2013 instructions $ 768,000 Part II. Form 1040 ez 2013 instructions Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Form 1040 ez 2013 instructions Cash and bank account balances $ 15,000 17. Form 1040 ez 2013 instructions Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Form 1040 ez 2013 instructions Cars and other vehicles $ 10,000 19. Form 1040 ez 2013 instructions Computers $ 20. Form 1040 ez 2013 instructions Household goods and furnishings (for example, appliances, electronics, furniture, etc. Form 1040 ez 2013 instructions ) $ 17,000 21. Form 1040 ez 2013 instructions Tools $ 22. Form 1040 ez 2013 instructions Jewelry $ 23. Form 1040 ez 2013 instructions Clothing $ 24. Form 1040 ez 2013 instructions Books $ 25. Form 1040 ez 2013 instructions Stocks and bonds $ 26. Form 1040 ez 2013 instructions Investments in coins, stamps, paintings, or other collectibles $ 27. Form 1040 ez 2013 instructions Firearms, sports, photographic, and other hobby equipment $ 28. Form 1040 ez 2013 instructions Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Form 1040 ez 2013 instructions Interest in a pension plan $ 30. Form 1040 ez 2013 instructions Interest in education accounts $ 31. Form 1040 ez 2013 instructions Cash value of life insurance $ 32. Form 1040 ez 2013 instructions Security deposits with landlords, utilities, and others $ 33. Form 1040 ez 2013 instructions Interests in partnerships $ 34. Form 1040 ez 2013 instructions Value of investment in a business $ 35. Form 1040 ez 2013 instructions Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Form 1040 ez 2013 instructions Other assets not included above $ 37. Form 1040 ez 2013 instructions FMV of total assets immediately before the cancellation. Form 1040 ez 2013 instructions Add lines 16 through 36. Form 1040 ez 2013 instructions $ 42,000 Part III. Form 1040 ez 2013 instructions Insolvency 38. Form 1040 ez 2013 instructions Amount of Insolvency. Form 1040 ez 2013 instructions Subtract line 37 from line 15. Form 1040 ez 2013 instructions If zero or less, you are not insolvent. Form 1040 ez 2013 instructions $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Form 1040 ez 2013 instructions Please click the link to view the image. Form 1040 ez 2013 instructions Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications