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Form 1040x 2010

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Form 1040x 2010

Form 1040x 2010 4. Form 1040x 2010   Other Section 501(c) Organizations Table of Contents Introduction 501(c)(4) - Civic Leagues and Social Welfare OrganizationsSpecific Organizations 501(c)(5) - Labor, Agricultural and Horticultural OrganizationsLabor Organizations Agricultural and Horticultural Organizations 501(c)(6) - Business Leagues, etc. Form 1040x 2010 Line of business. Form 1040x 2010 Examples. Form 1040x 2010 Improvement of business conditions. Form 1040x 2010 Exception for local legislation. Form 1040x 2010 De minimis exception. Form 1040x 2010 Grass roots lobbying. Form 1040x 2010 501(c)(7) - Social and Recreation ClubsLimited membership. Form 1040x 2010 Support. Form 1040x 2010 Facilities open to public. Form 1040x 2010 Gross receipts from nonmembership sources. Form 1040x 2010 Gross receipts. Form 1040x 2010 Nontraditional activities. Form 1040x 2010 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal SocietiesFraternal Beneficiary Societies (501(c)(8)) Domestic Fraternal Societies (501(c)(10)) 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' AssociationsLocal Employees' Associations (501(c)(4)) Voluntary Employees' Beneficiary Associations (501(c)(9)) Supplemental Unemployment Benefit Trusts (501(c)(17)) 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like OrganizationsMembership. Form 1040x 2010 Losses and expenses. Form 1040x 2010 Distributions of proceeds. Form 1040x 2010 The 85% Requirement Local Life Insurance Associations Mutual or Cooperative Associations 501(c)(13) - Cemetery CompaniesBuying cemetery property. Form 1040x 2010 Perpetual care organization. Form 1040x 2010 Care of individual plots. Form 1040x 2010 501(c)(14) - Credit Unions and Other Mutual Financial OrganizationsState-Chartered Credit Unions Other Mutual Financial Organizations 501(c)(19) - Veterans' Organizations 501(c)(20) - Group Legal Services Plan Organizations 501(c)(21) - Black Lung Benefit TrustsExcise taxes. Form 1040x 2010 501(c)(2) - Title-Holding Corporations for Single Parent CorporationsExpenses. Form 1040x 2010 Waiver of payment of income. Form 1040x 2010 501(c)(25) - Title-Holding Corporations or Trusts for Multiple Parent CorporationsUnrelated Business Income 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations 501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations 501(c)(29) - CO-OP Health Insurance Issuers New Guidance for IRC 501(c)(29) Qualified Nonprofit Health Insurance Issuers General Requirements for Exemption under 501(c)(29) and Annual Filing Requirement Additional Guidance for Prospective 501(c)(29) Organizations Introduction This chapter contains specific information for certain organizations described in section 501(c), other than those organizations that are described in section 501(c)(3). Form 1040x 2010 Section 501(c)(3) organizations are covered in chapter 3 of this publication. Form 1040x 2010 The Table of Contents at the beginning of this publication, as well as the Organization Reference Chart, may help you locate at a glance the type of organization discussed in this chapter. Form 1040x 2010 501(c)(4) - Civic Leagues and Social Welfare Organizations If your organization is not organized for profit and will be operated primarily to promote social welfare to benefit the community, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4). Form 1040x 2010 The discussion that follows describes the information you must provide when applying. Form 1040x 2010 For application procedures, see chapter 1. Form 1040x 2010 To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted primarily to charitable, educational, or recreational purposes. Form 1040x 2010 In addition, no part of the organization's net earnings can inure to the benefit of any private shareholder or individual. Form 1040x 2010 If the organization provides an excess benefit to certain persons, an excise tax may be imposed. Form 1040x 2010 See Excise tax on excess benefit transactions , under Excess Benefit Transactions in chapter 5 for more information about this tax. Form 1040x 2010 Examples. Form 1040x 2010   Types of organizations that are considered to be social welfare organizations are civic associations and volunteer fire companies. Form 1040x 2010 Nonprofit operation. Form 1040x 2010   You must submit evidence that your organization is organized and will be operated on a nonprofit basis. Form 1040x 2010 However, such evidence, including the fact that your organization is organized under a state law relating to nonprofit corporations, will not in itself establish a social welfare purpose. Form 1040x 2010 Social welfare. Form 1040x 2010   To establish that your organization is organized primarily to promote social welfare, you should submit evidence with your application showing that your organization will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). Form 1040x 2010   An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community. Form 1040x 2010 It therefore does not qualify as a section 501(c)(4) organization. Form 1040x 2010 Similarly, an organization formed to represent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the community. Form 1040x 2010 However, an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization. Form 1040x 2010 Political activity. Form 1040x 2010   Promoting social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Form 1040x 2010 However, if you submit proof that your organization is organized primarily to promote social welfare, it can obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for public office. Form 1040x 2010 See the discussion in chapter 2 under Political Organization Income Tax Return . Form 1040x 2010 Social or recreational activity. Form 1040x 2010   If social activities will be the primary purpose of your organization, you should not file an application for exemption as a social welfare organization but should file for exemption as a social club described in section 501(c)(7). Form 1040x 2010 Retirement benefit program. Form 1040x 2010   An organization established by its members that has as its primary activity providing supplemental retirement benefits to its members or death benefits to their beneficiaries does not qualify as an exempt social welfare organization. Form 1040x 2010 It may qualify under another paragraph of section 501(c) depending on all the facts. Form 1040x 2010   However, a nonprofit association that is established, maintained, and funded by a local government to provide the only retirement benefits to a class of employees may qualify as a social welfare organization under section 501(c)(4). Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Donations to volunteer fire companies are deductible on the donor's federal income tax return, but only if made for exclusively public purposes. Form 1040x 2010 Contributions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions for federal income tax purposes. Form 1040x 2010 They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer's business. Form 1040x 2010 However, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Form 1040x 2010 for more information. Form 1040x 2010 For more information on social welfare organizations, see Life Cycle of a Social Welfare Organization at IRS. Form 1040x 2010 gov. Form 1040x 2010 Specific Organizations The following information should be contained in the application form and accompanying statements of certain types of civic leagues or social welfare organizations. Form 1040x 2010 Volunteer fire companies. Form 1040x 2010   If your organization wishes to obtain exemption as a volunteer fire company or similar organization, you should submit evidence that its members are actively engaged in fire fighting and similar disaster assistance, whether it actually owns the fire fighting equipment, and whether it provides any assistance for its members, such as death and medical benefits in case of injury to them. Form 1040x 2010   If your organization does not have an independent social purpose, such as providing recreational facilities for members, it may be exempt under section 501(c)(3). Form 1040x 2010 In this event, your organization should file Form 1023. Form 1040x 2010 Homeowners' associations. Form 1040x 2010   A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. Form 1040x 2010 The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Form 1040x 2010 Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Form 1040x 2010 Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community. Form 1040x 2010   The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. Form 1040x 2010 It also must show that it does not engage in exterior maintenance of private homes. Form 1040x 2010   A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally can elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income. Form 1040x 2010 Other organizations. Form 1040x 2010   Other nonprofit organizations that qualify as social welfare organizations include: An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and that serves the general public in an area with no other airport, A community association that works to improve public services, housing, and residential parking; publishes a free community newspaper; sponsors a community sports league, holiday programs, and meetings; and contracts with a private security service to patrol the community, A community association devoted to preserving the community's traditions, architecture, and appearance by representing it before the local legislature and administrative agencies in zoning, traffic, and parking matters, An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses so they will relocate to the area, and An organization that holds an annual festival of regional customs and traditions. Form 1040x 2010 501(c)(5) - Labor, Agricultural and Horticultural Organizations If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural, or horticultural organization, you should submit an application on Form 1024. Form 1040x 2010 You must indicate in your application for exemption and accompanying statements that no part of the organization's net earnings will inure to the benefit of any member. Form 1040x 2010 In addition, you should follow the procedure for obtaining recognition of exempt status described in chapter 1. Form 1040x 2010 Submit any additional information that may be required, as described in this section. Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Contributions to labor, agricultural, and horticultural organizations are not deductible as charitable contributions on the donor's federal income tax return. Form 1040x 2010 However, such payments may be deductible as business expenses if they are ordinary and necessary in the conduct of the taxpayer's trade or business. Form 1040x 2010 For more information about certain limits affecting the deductibility of these business expenses, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Form 1040x 2010 Labor Organizations A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collectively with their employers to secure better working conditions. Form 1040x 2010 To show that your organization has the purpose of a labor organization, you should include in the articles of organization or accompanying statements (submitted with your exemption application) information establishing that the organization is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. Form 1040x 2010 In addition, no net earnings of the organization can inure to the benefit of any member. Form 1040x 2010 Composition of membership. Form 1040x 2010   While a labor organization generally is composed of employees or representatives of the employees (in the form of collective bargaining agents) and similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate an exempt purpose. Form 1040x 2010 You must show in your application that your organization has the purposes described in the preceding paragraph. Form 1040x 2010 These purposes can be accomplished by a single labor organization acting alone or by several organizations acting together through a separate organization. Form 1040x 2010 Benefits to members. Form 1040x 2010   The payment by a labor organization of death, sick, accident, and similar benefits to its individual members with funds contributed by its members, if made under a plan to better the conditions of the members, does not preclude exemption as a labor organization. Form 1040x 2010 However, an organization does not qualify for exemption as a labor organization if it has no authority to represent members in job-related matters, even if it provides weekly income to its members in the event of a lawful strike by the members' union, in return for an annual payment by the member. Form 1040x 2010   For more information on labor organizations, see Life Cycle of a Labor Organization at IRS. Form 1040x 2010 gov. Form 1040x 2010 Agricultural and Horticultural Organizations Agricultural and horticultural organizations are connected with raising livestock, forestry, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits. Form 1040x 2010 For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. Form 1040x 2010 The term harvesting, in this case, includes fishing and related pursuits. Form 1040x 2010 Agricultural organizations can be quasi-public in character and are often designed to encourage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the necessary expenses of upkeep and operation. Form 1040x 2010 When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture, the organization must qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6) organizations. Form 1040x 2010 The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products. Form 1040x 2010 The following list contains some examples of activities that show an agricultural or horticultural purpose. Form 1040x 2010 Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state, farm, or home bureau. Form 1040x 2010 Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture. Form 1040x 2010 Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations being furnished to the community members to educate them in soil treatment. Form 1040x 2010 Guarding the purity of a specific breed of livestock. Form 1040x 2010 Encouraging improvements in the production of fish on privately owned fish farms. Form 1040x 2010 Negotiating with processors for the price to be paid to members for their crops. Form 1040x 2010 For more information on agricultural or horticultural organizations, see Life Cycle of an Agricultural or Horticultural Organization at IRS. Form 1040x 2010 gov. Form 1040x 2010 501(c)(6) - Business Leagues, etc. Form 1040x 2010 If your association wants to apply for recognition of exemption from federal income tax as a nonprofit business league, chamber of commerce, real estate board, or board of trade, it should file Form 1024. Form 1040x 2010 For a discussion of the procedure to follow, see chapter 1. Form 1040x 2010 Your organization must indicate in its application form and attached statements that no part of its net earnings will inure to the benefit of any private shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining). Form 1040x 2010 In addition, your organization must be primarily engaged in activities or functions that are the basis for its exemption. Form 1040x 2010 It must be primarily supported by membership dues and other income from activities substantially related to its exempt purpose. Form 1040x 2010 A business league, in general, is an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Form 1040x 2010 Trade associations and professional associations are considered business leagues. Form 1040x 2010 Chamber of commerce. Form 1040x 2010   A chamber of commerce usually is composed of the merchants and traders of a city. Form 1040x 2010 Board of trade. Form 1040x 2010   A board of trade often consists of persons engaged in similar lines of business. Form 1040x 2010 For example, a nonprofit organization formed to regulate the sale of a specified agricultural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of trade. Form 1040x 2010   Chambers of commerce and boards of trade usually promote the common economic interests of all the commercial enterprises in a given trade community. Form 1040x 2010 Real estate board. Form 1040x 2010   A real estate board consists of members interested in improving the business conditions in the real estate field. Form 1040x 2010 It is not organized for profit and no part of the net earnings inures to the benefit of any private shareholder or individual. Form 1040x 2010 Professional football leagues. Form 1040x 2010   The Internal Revenue Code specifically defines professional football leagues as exempt organizations under section 501(c)(6). Form 1040x 2010 They are exempt whether or not they administer a pension fund for football players. Form 1040x 2010 General purpose. Form 1040x 2010   You must indicate in the material submitted with your application that your organization will be devoted to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. Form 1040x 2010 It must be shown that the conditions of a particular trade or the interests of the community will be advanced. Form 1040x 2010 Merely indicating the name of the organization or the object of the local statute under which it is created is not enough to demonstrate the required general purpose. Form 1040x 2010 Line of business. Form 1040x 2010   This term generally refers either to an entire industry or to all components of an industry within a geographic area. Form 1040x 2010 It does not include a group composed of businesses that market a particular brand within an industry. Form 1040x 2010 Common business interest. Form 1040x 2010   A common business interest of all members of the organization must be established by the application documents. Form 1040x 2010 Examples. Form 1040x 2010   Activities that would tend to illustrate a common business interest are: Promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail merchants association, Education of the public in the use of credit, Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated by casualty insurance companies, Establishment and maintenance of the integrity of a local commercial market, Operation of a trade publication primarily intended to benefit an entire industry, and Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main purpose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying basis as a result). Form 1040x 2010 Improvement of business conditions. Form 1040x 2010   Generally, this must be shown to be the purpose of the organization. Form 1040x 2010 This is not established by evidence of particular services that provide a convenience or economy to individual members in their businesses, such as advertising that carries the name of members, interest-free loans, assigning exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency. Form 1040x 2010 Stock or commodity exchange. Form 1040x 2010   A stock or commodity exchange is not a business league, chamber of commerce, real estate board, or board of trade and is not exempt under section 501(c)(6). Form 1040x 2010 Legislative activity. Form 1040x 2010   An organization that is exempt under section 501(c)(6) can work for the enactment of laws to advance the common business interests of the organization's members. Form 1040x 2010 Deduction not allowed for dues used for political or legislative activities. Form 1040x 2010   A taxpayer cannot deduct the part of dues or other payments to a business league, trade association, labor union, or similar organization that is reported to the taxpayer by the organization as having been used for any of the following activities. Form 1040x 2010 Influencing legislation. Form 1040x 2010 Participating or intervening in a political campaign for, or against, any candidate for public office. Form 1040x 2010 Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or referendums (also known as grass roots lobbying). Form 1040x 2010 Communicating directly with certain executive branch officials to try to influence their official actions or positions. Form 1040x 2010 See Dues Used for Lobbying or Political Activities under Required Disclosures in chapter 2 for more information. Form 1040x 2010 Exception for local legislation. Form 1040x 2010   Members can deduct dues (or assessments) to an organization that are for expenses of: Appearing before, submitting statements to, or sending communications to members of a local council or similar governing body with respect to legislation or proposed legislation of direct interest to the member, or Communicating information between the member and the organization with respect to local legislation or proposed legislation of direct interest to the organization or the member. Form 1040x 2010 Legislation or proposed legislation is of direct interest to a taxpayer if it will, or can reasonably be expected to, affect the taxpayer's trade or business. Form 1040x 2010 De minimis exception. Form 1040x 2010   In-house expenditures of $2,000 or less for the year for activities (1) – (4) listed earlier will not prevent a deduction for dues if the dues meet all other tests to be deductible as a business expense. Form 1040x 2010 Grass roots lobbying. Form 1040x 2010   A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grass roots lobbying if it contacts prospective members or calls upon its own members to contact their employees and customers for the purpose of urging such persons to communicate with their elected state or Congressional representatives to support the promotion, defeat, or repeal of legislation that is of direct interest to the organization. Form 1040x 2010 Any dues or assessments directly related to such activities are not deductible by the taxpayer, since the individuals being contacted, who are not members of the organization, are a segment of the general public. Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Contributions to organizations described in this section are not deductible as charitable contributions on the donor's federal income tax return. Form 1040x 2010 They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer's business. Form 1040x 2010   For more information on business leagues, see Life Cycle of a Business League (Trade Association) on IRS. Form 1040x 2010 gov. Form 1040x 2010 501(c)(7) - Social and Recreation Clubs If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax. Form 1040x 2010 In applying for recognition of exemption, you should submit the information described in this section. Form 1040x 2010 Also see chapter 1 for the procedures to follow. Form 1040x 2010 Typical organizations that should file for recognition of exemption as social clubs include: College alumni associations that are not described in chapter 3 under Alumni association , College fraternities or sororities operating chapter houses for students, Country clubs, Amateur hunting, fishing, tennis, swimming, and other sport clubs, Dinner clubs that provide a meeting place, library, and dining room for members, Hobby clubs, Garden clubs, and Variety clubs. Form 1040x 2010 Discrimination prohibited. Form 1040x 2010   Your organization will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any written policy statement provides for discrimination against any person on the basis of race, color, or religion. Form 1040x 2010   However, a club that in good faith limits its membership to the members of a particular religion to further the teachings or principles of that religion and not to exclude individuals of a particular race or color will not be considered as discriminating on the basis of religion. Form 1040x 2010 Also, the restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed later) if that society is described in section 501(c)(8) and exempt from tax under section 501(a) and limits its membership to the members of a particular religion. Form 1040x 2010 Private benefit prohibited. Form 1040x 2010   No part of the organization's net earnings can inure to the benefit of any person having a personal and private interest in the activities of the organization. Form 1040x 2010 For purposes of this requirement, it is not necessary that net earnings be actually distributed. Form 1040x 2010 Even undistributed earnings can benefit members. Form 1040x 2010 Examples of this include a decrease in membership dues or an increase in the services the club provides to its members without a corresponding increase in dues or other fees paid for club support. Form 1040x 2010 However, fixed-fee payments to members who bring new members into the club are not an inurement of the club's net earnings, if the payments are reasonable compensation for performance of a necessary administrative service. Form 1040x 2010 Purposes. Form 1040x 2010   To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you should submit evidence with your application that personal contact, commingling, and fellowship exist among members. Form 1040x 2010 You must show that members are bound together by a common objective of pleasure, recreation, and other nonprofitable purposes. Form 1040x 2010   Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organization. Form 1040x 2010 A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group. Form 1040x 2010   The term other nonprofitable purposes means other purposes similar to pleasure and recreation. Form 1040x 2010 For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits is not operating exclusively for pleasure, recreation, and other nonprofitable purposes. Form 1040x 2010 Limited membership. Form 1040x 2010   The membership in a social club must be limited. Form 1040x 2010 To show that your organization has a purpose that would characterize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club. Form 1040x 2010   A social club that issues corporate membership is dealing with the general public in the form of the corporation's employees. Form 1040x 2010 Corporate members of a club are not the kind of members contemplated by the law. Form 1040x 2010 Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. Form 1040x 2010 See Gross receipts from nonmembership sources , later. Form 1040x 2010 Bona fide individual memberships paid for by a corporation would not have an effect on the gross receipts source. Form 1040x 2010   The fact that a social club may have an associate (nonvoting) class of membership will not be, in and of itself, a cause for nonrecognition of exemption. Form 1040x 2010 However, if one membership class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited class, resulting in a denial of the club's exemption. Form 1040x 2010 Support. Form 1040x 2010   In general, your club should be supported solely by membership fees, dues, and assessments. Form 1040x 2010 However, if otherwise entitled to exemption, your club will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. Form 1040x 2010 Business activities. Form 1040x 2010   If your club will engage in business, such as selling real estate, timber, or other products or services, it generally will be denied exemption. Form 1040x 2010 However, evidence submitted with your application form that your organization will provide meals, refreshments, or services related to its exempt purposes only to its own members or their dependents or guests will not cause denial of exemption. Form 1040x 2010 Facilities open to public. Form 1040x 2010   Evidence that your club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. Form 1040x 2010 This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. Form 1040x 2010 Gross receipts from nonmembership sources. Form 1040x 2010   A section 501(c)(7) organization can receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Form 1040x 2010 Income from nontraditional business activity with members is not exempt function income, and thus is included as income from sources outside of the membership. Form 1040x 2010 Of the 35% gross receipts listed above, up to 15% of the gross receipts can be derived from the use of the club's facilities or services by the general public. Form 1040x 2010 If an organization has outside income that is more than these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. Form 1040x 2010 Gross receipts. Form 1040x 2010   Gross receipts, for this purpose, are receipts from the normal and usual (traditionally conducted) activities of the club. Form 1040x 2010 These receipts include charges, admissions, membership fees, dues, assessments, investment income, and normal recurring capital gains on investments. Form 1040x 2010 Receipts do not include initiation fees and capital contributions. Form 1040x 2010 Unusual amounts of income, such as from the sale of a clubhouse or similar facility, are not included in gross receipts or in figuring the percentage limits. Form 1040x 2010 Nontraditional activities. Form 1040x 2010   Activities conducted by a social club need to further its exempt purposes. Form 1040x 2010 Traditional business activities are those that further a social club's exempt purposes. Form 1040x 2010 Nontraditional business activities do not further the exempt purposes of a social club even if conducted solely on a membership basis. Form 1040x 2010 Nontraditional business activities are prohibited (subject to an insubstantial, trivial, and nonrecurrent test) for businesses conducted with both members and nonmembers. Form 1040x 2010 Examples of nontraditional business activities include sale of package liquor, take-out food, and long-term room rental. Form 1040x 2010 Fraternity foundations. Form 1040x 2010   If your organization is a foundation formed for the exclusive purpose of acquiring and leasing a chapter house to a local fraternity chapter or sorority chapter maintained at an educational institution and does not engage in any social or recreational activities, it may be a title holding corporation (discussed later under section 501(c)(2) organizations and under section 501(c)(25) organizations) rather than a social club. Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor's federal income tax return. Form 1040x 2010 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies This section describes the information to be provided upon application for recognition of exemption by two types of fraternal societies: beneficiary and domestic. Form 1040x 2010 The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other benefits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather devote their earnings to fraternal, religious, charitable, etc. Form 1040x 2010 , purposes. Form 1040x 2010 The procedures to follow in applying for recognition of exemption are described in chapter 1. Form 1040x 2010 If your organization is controlled by a central organization, you should check with your controlling organization to determine whether your unit has been included in a group exemption letter or can be added. Form 1040x 2010 If so, your organization need not apply for individual recognition of exemption. Form 1040x 2010 For more information, see Group Exemption Letter in chapter 1 of this publication. Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Donations by an individual to a domestic fraternal beneficiary society or a domestic fraternal society operating under the lodge system are deductible as charitable contributions only if used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Form 1040x 2010 Fraternal Beneficiary Societies (501(c)(8)) A fraternal beneficiary society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Form 1040x 2010 The application and accompanying statements should establish that the organization: Is a fraternal organization, Operates under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system, and Provides for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or their dependents. Form 1040x 2010 Lodge system. Form 1040x 2010   Operating under the lodge system means carrying on activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. Form 1040x 2010 Payment of benefits. Form 1040x 2010   It is not essential that every member be covered by the society's program of sick, accident, or death benefits. Form 1040x 2010 An organization can qualify for exemption if most of its members are eligible for benefits, and the benefits are paid from contributions or dues paid by those members. Form 1040x 2010   The benefits must be limited to members and their dependents. Form 1040x 2010 If members will have the ability to confer benefits to other than themselves and their dependents, exemption will not be recognized. Form 1040x 2010 Whole-life insurance. Form 1040x 2010   Whole-life insurance constitutes a life benefit under section 501(c)(8) even though the policy may contain investment features such as a cash surrender value or a policy loan. Form 1040x 2010 Reinsurance pool. Form 1040x 2010   Payments by a fraternal beneficiary society into a state-sponsored reinsurance pool that protects participating insurers against excessive losses on major medical health and accident insurance will not preclude exemption as a fraternal beneficiary society. Form 1040x 2010 Domestic Fraternal Societies (501(c)(10)) A domestic fraternal society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Form 1040x 2010 The application and accompanying statements should establish that the organization: Is a domestic fraternal organization organized in the U. Form 1040x 2010 S. Form 1040x 2010 , Operates under the lodge system, Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and Does not provide for the payment of life, sick, accident, or other benefits to its members. Form 1040x 2010 The organization can arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status. Form 1040x 2010 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' Associations This section describes the information to be provided upon application for recognition of exemption by the following types of employees' associations: A voluntary employees' beneficiary association (including federal employees' associations) organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries, if no part of the net earnings of the association inures to the benefit of any private shareholder or individual, and A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemployment benefits. Form 1040x 2010 Both the application form to file and the information to provide are discussed later under the section that describes your employee association. Form 1040x 2010 Chapter 1 describes the procedures to follow in applying for exemption. Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Donations to these organizations are not deductible as charitable contributions on the donor's federal income tax return. Form 1040x 2010 Local Employees' Associations (501(c)(4)) A local association of employees whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. Form 1040x 2010 A local employees' association must apply for recognition of exemption by filing Form 1024. Form 1040x 2010 The organization must submit evidence that: It is of a purely local character, Its membership is limited to employees of a designated person or persons in a particular locality, and Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes. Form 1040x 2010 A local association of employees that has established a system of paying retirement or death benefits, or both, to its members will not qualify for exemption since the payment of these benefits is not considered as being for charitable, educational, or recreational purposes. Form 1040x 2010 Similarly, a local association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount prices on merchandise, services, and activities does not qualify for exemption. Form 1040x 2010 Voluntary Employees' Beneficiary Associations (501(c)(9)) An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. Form 1040x 2010 The material submitted with the application must show that your organization: Is a voluntary association of employees, Will provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and Will not allow any of its net earnings to inure to the benefit of any private individual or shareholder except in the form of scheduled benefit payments. Form 1040x 2010 To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Form 1040x 2010 Note. Form 1040x 2010 Under section 4976, the reversion of funds from a section 501(c)(9) organization to the employer who created the beneficiary association may subject the employer to a 100% penalty excise tax on the amount of the reversion. Form 1040x 2010 Notice requirement. Form 1040x 2010   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Form 1040x 2010 The organization gives notice by filing Form 1024. Form 1040x 2010 If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before notice is given. Form 1040x 2010 An extension of time for filing the notice can be granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Form 1040x 2010 Membership. Form 1040x 2010   Membership of a section 501(c)(9) organization must consist of individuals who are employees and have an employment-related common bond. Form 1040x 2010 This common bond can be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. Form 1040x 2010   The membership of an association can include some individuals who are not employees, provided they have an employment-related bond with the employee-members. Form 1040x 2010 For example, the owner of a business whose employees are members of the association can be a member. Form 1040x 2010 An association will be considered composed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees. Form 1040x 2010 Employees. Form 1040x 2010   Employees include individuals who became entitled to membership because they are or were employees. Form 1040x 2010 For example, an individual will qualify as an employee even though the individual is on a leave of absence or has been terminated due to retirement, disability, or layoff. Form 1040x 2010   Generally, membership is voluntary if an affirmative act is required on the part of an employee to become a member. Form 1040x 2010 Conversely, membership is involuntary if the designation as a member is due to employee status. Form 1040x 2010 However, an association will be considered voluntary if employees are required to be members of the organization as a condition of their employment and they do not incur a detriment (such as a payroll deduction) as a result of their membership. Form 1040x 2010 An employer has not imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization. Form 1040x 2010 Payment of benefits. Form 1040x 2010   The information submitted with your application must show that your organization will pay life, sick, accident, supplemental unemployment, or other similar benefits. Form 1040x 2010 The benefits can be provided directly by your association or indirectly by your association through the payments of premiums to an insurance company (or fees to a medical clinic). Form 1040x 2010 Benefits can be in the form of medical, clinical, or hospital services, transportation furnished for medical care, or money payments. Form 1040x 2010 Nondiscrimination requirements. Form 1040x 2010   An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. Form 1040x 2010 However, if the organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between employee organizations and employers, the plan need not meet these requirements for the organization to qualify as tax exempt. Form 1040x 2010   A plan meets the nondiscrimination requirements only if both of the following statements are true. Form 1040x 2010 Each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and does not discriminate in favor of employees who are highly compensated individuals. Form 1040x 2010 The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals. Form 1040x 2010 A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor of highly compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan. Form 1040x 2010   For purposes of determining whether a plan meets the nondiscrimination requirements, the employer can elect to exclude all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. Form 1040x 2010 This will not apply to any increase in such payment by any plan amendment adopted after June 22, 1984. Form 1040x 2010   If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal Revenue Code as a condition of that benefit being excluded from gross income, these nondiscrimination requirements do not apply. Form 1040x 2010 The benefit will be considered nondiscriminatory only if it meets the nondiscrimination provision of the applicable Code section. Form 1040x 2010 For example, benefits provided under a medical reimbursement plan would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimination requirements of section 105(h)(3) and 105(h)(4). Form 1040x 2010 Excluded employees. Form 1040x 2010   Certain employees who are not covered by a plan can be excluded from consideration in applying these requirements. Form 1040x 2010 These include employees: Who have not completed 3 years of service, Who have not attained age 21, Who are seasonal or less than half-time employees, Who are not in the plan and who are included in a unit of employees covered by a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining, or Who are nonresident aliens and who receive no earned income from the employer that has United States source income. Form 1040x 2010 Highly compensated individual. Form 1040x 2010   A highly compensated individual is one who: Owned 5 percent or more of the employer at any time during the current year or the preceding year, Received more than $115,000 in compensation from the employer for the preceding year (the amount is annualized for inflation. Form 1040x 2010 Go to IRS. Form 1040x 2010 gov, and search “Pension Plan Limitation” for the year), and Was among the top 20% of employees by compensation for the preceding year. Form 1040x 2010 However, the employer can choose not to have (3) apply. Form 1040x 2010 Aggregation rules. Form 1040x 2010   The employer can choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination requirements. Form 1040x 2010 Employees of controlled groups of corporations, trades, or businesses under common control, or members of an affiliated service group, are treated as employees of a single employer. Form 1040x 2010 Leased employees are treated as employees of the recipient. Form 1040x 2010 One employee. Form 1040x 2010   A trust created to provide benefits to one employee will not qualify as a voluntary employees' beneficiary association under section 501(c)(9). Form 1040x 2010 Supplemental Unemployment Benefit Trusts (501(c)(17)) A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. Form 1040x 2010 The trust must be a valid, existing trust under local law and must be evidenced by an executed document. Form 1040x 2010 A conformed copy of the plan of which the trust is a part should be attached to the application. Form 1040x 2010 To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Form 1040x 2010 Note. Form 1040x 2010 Under section 4976, the reversion of funds from a section 501(c)(17) organization to the employer who created the supplemental unemployment benefit trust may subject the employer to a 100% penalty excise tax on the amount of the reversion. Form 1040x 2010 Notice requirement. Form 1040x 2010   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Form 1040x 2010 The organization gives notice by filing Form 1024. Form 1040x 2010 If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before such notice is given. Form 1040x 2010 An extension of time for filing the notice is granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Form 1040x 2010 Types of payments. Form 1040x 2010   You must show that the supplemental unemployment compensation benefits will be benefits paid to an employee because of the employee's involuntary separation from employment (whether or not the separation is temporary) resulting directly from a reduction-in-force, discontinuance of a plant or operation, or other similar conditions. Form 1040x 2010 In addition, sickness and accident benefits (but not vacation, retirement, or death benefits) may be included in the plan if these are subordinate to the unemployment compensation benefits. Form 1040x 2010 Diversion of funds. Form 1040x 2010   It must be impossible under the plan (at any time before the satisfaction of all liabilities with respect to employees under the plan) to use or to divert any of the corpus or income of the trust to any purpose other than the payment of supplemental unemployment compensation benefits (or sickness or accident benefits to the extent just explained). Form 1040x 2010 Discrimination in benefits. Form 1040x 2010   Neither the terms of the plan nor the actual payment of benefits can be discriminatory in favor of the company's officers, stockholders, supervisors, or highly paid employees. Form 1040x 2010 However, a plan is not discriminatory merely because benefits bear a uniform relationship to compensation or the rate of compensation. Form 1040x 2010 Prohibited transactions and exemption. Form 1040x 2010   If your organization is a supplemental unemployment benefit trust and has received a denial of exemption because it engaged in a prohibited transaction, as defined by section 503(b), it can file a claim for exemption in any tax year following the tax year in which the notice of denial was issued. Form 1040x 2010 It must file the claim on Form 1024. Form 1040x 2010 The organization must include a written declaration that it will not knowingly again engage in a prohibited transaction. Form 1040x 2010 An authorized principal officer of your organization must make this declaration under the penalties of perjury. Form 1040x 2010   If your organization has satisfied all requirements as a supplemental unemployment benefit trust described in section 501(c)(17), it will be notified in writing that it has been recognized as exempt. Form 1040x 2010 However, the organization will be exempt only for those tax years after the tax year in which the claim for exemption (Form 1024) is filed. Form 1040x 2010 Tax year in this case means the established annual accounting period of the organization or, if the organization has not established an annual accounting period, the calendar year. Form 1040x 2010 For more information about the requirements for reestablishing an exemption previously denied, contact the IRS. Form 1040x 2010 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations Each of the following organizations apply for recognition of exemption from federal income tax by filing Form 1024. Form 1040x 2010 Benevolent life insurance associations of a purely local character and like organizations. Form 1040x 2010 Mutual ditch or irrigation companies and like organizations. Form 1040x 2010 Mutual or cooperative telephone companies and like organizations. Form 1040x 2010 A like organization is an organization that performs a service comparable to that performed by any one of the above organizations. Form 1040x 2010 The information to be provided upon application by each of these organizations is described in this section. Form 1040x 2010 For information as to the procedures to follow in applying for exemption, see chapter 1. Form 1040x 2010 General requirements. Form 1040x 2010   These organizations must use their income solely to cover losses and expenses, with any excess being returned to members or retained to cover future losses and expenses. Form 1040x 2010 They must collect at least 85% of their income from members for the sole purpose of meeting losses and expenses. Form 1040x 2010 Mutual character. Form 1040x 2010   These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual or cooperative basis. Form 1040x 2010 They are associations of persons or organizations, or both, banded together to provide themselves a mutually desirable service approximately at cost and on a mutual basis. Form 1040x 2010 To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated that their members have the right to choose the management, to receive services at cost, to receive a return of any excess of payments over losses and expenses, and to share in any assets upon dissolution. Form 1040x 2010   The rights and interests of members in the annual savings of the organization must be determined in proportion to their business with the organization. Form 1040x 2010 Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members during the period the assets were owned by the organization in proportion to the amount of business done during that period. Form 1040x 2010 The bylaws must not provide for forfeiture of a member's rights and interest upon withdrawal or termination. Form 1040x 2010 Membership. Form 1040x 2010   Membership of a mutual organization consists of those who join the organization to obtain its services, and have a voice in its management. Form 1040x 2010 In a stock company, the stockholders are members. Form 1040x 2010 However, a mutual life insurance organization cannot have policyholders other than its members. Form 1040x 2010 Losses and expenses. Form 1040x 2010   In furnishing services substantially at cost, an organization must use its income solely for paying losses and expenses. Form 1040x 2010 Any excess income not retained in reasonable reserves for future losses and expenses belongs to members in proportion to their patronage or business done with the organization. Form 1040x 2010 If such patronage refunds are retained in reasonable amounts for purposes of expanding and improving facilities, retiring capital indebtedness, acquiring other assets, and unexpected expenses, the organization must maintain records sufficient to reflect the equity of each member in the assets acquired with the funds. Form 1040x 2010 Distributions of proceeds. Form 1040x 2010   The cooperative may distribute the unexpended balance of collections or assessments remaining on hand at the end of the year to members or patrons prorated on the basis of their patronage or business done with the cooperative. Form 1040x 2010 Such distribution represents a refund in the costs of services rendered to the member. Form 1040x 2010 The 85% Requirement All of the organizations listed above must submit evidence with their application that they receive 85% or more of their gross income from their members for the sole purpose of meeting losses and expenses. Form 1040x 2010 Nevertheless, certain items of income are excluded from the computation of the 85% requirement if the organization is a mutual or cooperative telephone or electric company. Form 1040x 2010 Mutual or cooperative telephone company. Form 1040x 2010   A mutual or cooperative telephone company will exclude from the computation of the 85% requirement any income received or accrued from: A nonmember telephone company for the performance of communication services involving the completion of long distance calls to, from, or between members of the mutual or cooperative telephone company, Qualified pole rentals, The sale of display listings in a directory furnished to its members, or The prepayment of a loan created in 1987, 1988, or 1989, under section 306A, 306B, or 311 of the Rural Electrification Act of 1936. Form 1040x 2010 Mutual or cooperative electric company. Form 1040x 2010   A mutual or cooperative electric company will exclude from the computation of the 85% requirement any income received or accrued from: Qualified pole rentals, Any provision or sale of electric energy transmission services or ancillary service if the services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by the Federal Energy Regulatory Commission (FERC) or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member), The provision or sale of electric energy distribution services or ancillary services if the services are provided on a nondiscriminatory open-access basis to distribute electric energy not owned by the mutual or electric cooperative company: To end-users who are served by distribution facilities not owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), or Generated by a generation facility not owned or leased by the company or any of its members and which is directly connected to distribution facilities owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), Any nuclear decommissioning transaction, or Any asset exchange or conversion transaction. Form 1040x 2010   An electric cooperative's sale of excess fuel at cost in the year of purchase is not income for purposes of determining compliance with the 85% requirement. Form 1040x 2010 Qualified pole rental. Form 1040x 2010   The term qualified pole rental means any rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that are used by the company in providing telephone or electric services to its members, and Pursuant to the rental to support one or more wires (in addition to wires described in (1)) for use in connection with the transmission by wire of electricity or of telephone or other communications. Form 1040x 2010   The term rental, for this purpose, includes any sale of the right to use the pole (or other structure). Form 1040x 2010 The 85% requirement is applied on the basis of an annual accounting period. Form 1040x 2010 Failure of an organization to meet the requirement in a particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement is met. Form 1040x 2010 Gain from the sale or conversion of the organization's property is not considered an amount received from members in determining whether the organization's income consists of amounts collected from members. Form 1040x 2010 Because the 85% income test is based on gross income, capital losses cannot be used to reduce capital gains for purposes of this test. Form 1040x 2010 Example. Form 1040x 2010   The books of an organization reflect the following for the calendar year. Form 1040x 2010 Collections from members $2,400 Short-term capital gains 600 Short-term capital losses 400 Other income None Gross income ($2,400 + $600 =$3000) 100% Collected from members ($2,400) 80%   Since amounts collected from members do not constitute at least 85% of gross income, the organization is not entitled to exemption from federal income tax for the year. Form 1040x 2010   Voluntary contributions in the nature of gifts are not taken into account for purposes of the 85% computation. Form 1040x 2010   Other tax-exempt income besides gifts is considered as income received from other than members in applying the 85% test. Form 1040x 2010   If the 85% test is not met, your organization, if classifiable under this section, will not qualify for exemption as any other type of organization described in this publication. Form 1040x 2010 Tax treatment of donations. Form 1040x 2010   Donations to an organization described in this section are not deductible as charitable contributions on the donor's federal income tax return. Form 1040x 2010 Local Life Insurance Associations A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a benevolent life insurance association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that its excess funds will be refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income requirement. Form 1040x 2010 If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15% of its income is derived, it will not be entitled to exemption. Form 1040x 2010 To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular community, place, or district irrespective of political subdivisions. Form 1040x 2010 If the activities of an organization are limited only by the borders of a state, it cannot be purely local in character. Form 1040x 2010 A benevolent life insurance association that does not terminate membership when a member moves from the local area in which the association operates will qualify for exemption if it meets the other requirements. Form 1040x 2010 A copy of each type of policy issued by your organization should be included with the application for recognition of exemption. Form 1040x 2010 Organizations similar to local benevolent life insurance companies. Form 1040x 2010   These organizations include those that in addition to paying death benefits also provide for the payment of sick, accident, or health benefits. Form 1040x 2010 However, an organization that pays only sick, accident, or health benefits, but not life insurance benefits, is not an organization similar to a benevolent life insurance association and should not apply for recognition of exemption as described in this section. Form 1040x 2010 Burial and funeral benefit insurance organization. Form 1040x 2010   This type of organization can apply for recognition of exemption as an organization similar to a benevolent life insurance company if it establishes that the benefits are paid in cash and if it is not engaged directly in the manufacture of funeral supplies or the performance of funeral services. Form 1040x 2010 An organization that provides its benefits in the form of supplies and service is not a life insurance company. Form 1040x 2010 Such an organization can seek recognition of exemption from federal income tax, however, as a mutual insurance company other than life. Form 1040x 2010 Mutual or Cooperative Associations Mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations need not establish that they are of a purely local character. Form 1040x 2010 They can serve noncontiguous areas. Form 1040x 2010 Like organization. Form 1040x 2010   A like organization is a cooperative or mutual organization that performs a service similar to mutual ditch, irrigation, telephone, or electric companies. Form 1040x 2010 Examples include the following: cooperatives that provide protection of river banks to prevent erosion, water and sewer services, cable television, satellite, television, cellular phone services, two-way radio service, or natural gas services. Form 1040x 2010 501(c)(13) - Cemetery Companies If your organization wishes to obtain recognition of exemption from federal income tax as a cemetery company or a corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, it must file an application on Form 1024. Form 1040x 2010 For the procedure to follow to file an application, see Application, Approval, and Appeal Procedures in chapter 1. Form 1040x 2010 A nonprofit mutual cemetery company that seeks recognition of exemption should submit evidence with its application that it is owned and operated exclusively for the benefit of its lot owners who hold lots for bona fide burial purposes and not for purposes of resale. Form 1040x 2010 A mutual cemetery company that also engages in charitable activities, such as the burial of paupers, will be regarded as operating within this standard. Form 1040x 2010 The fact that a mutual cemetery company limits its membership to a particular class of individuals, such as members of a family, will not affect its status as mutual so long as all the other requirements of section 501(c)(13) are met. Form 1040x 2010 If your organization is a nonprofit corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, you should show that it is not permitted by its charter to engage in any business not necessarily incident to that purpose. Form 1040x 2010 Operating a mortuary is not permitted. Form 1040x 2010 However, selling monuments, markers, vaults, and flowers solely for use in the cemetery is permitted if the profits from these sales are used to maintain the cemetery as a whole. Form 1040x 2010 How income can be used. Form 1040x 2010   You should show that your organization's earnings are or will be used only in one or more of the following ways. Form 1040x 2010 To pay the ordinary and necessary expenses of operating, maintaining, and improving the cemetery or crematorium. Form 1040x 2010 To buy cemetery property. Form 1040x 2010 To create a fund that will provide a source of income for the perpetual care of the cemetery or a reasonable reserve for any ordinary or necessary purpose. Form 1040x 2010 No part of the net earnings of your organization can inure to the benefit of any private shareholder or individual. Form 1040x 2010 Ordinary and necessary expenses in connection with the operation, management, maintenance, and improvement of the cemetery are permitted, as are reasonable fees for the services of a manager. Form 1040x 2010 Buying cemetery property. Form 1040x 2010   Payments can be made to amortize debt incurred to buy land, but cannot be in the nature of profit distributions. Form 1040x 2010 You must show the method used to finance the purchase of the cemetery property and that the purchase price of the land at the time of its sale to the cemetery was not unreasonable. Form 1040x 2010   Except for holders of preferred stock (discussed later), no person can have any interest in the net earnings of a tax-exempt cemetery company or crematorium. Form 1040x 2010 Therefore, if property is transferred to the organization in exchange for an interest in the organization's net earnings, the organization will not
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The Form 1040x 2010

Form 1040x 2010 3. Form 1040x 2010   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). Form 1040x 2010 There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. Form 1040x 2010 There are also the limitations which may need to be applied if you have a net loss on Schedule E. Form 1040x 2010 There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. Form 1040x 2010 You may also have a gain or loss related to your rental property from a casualty or theft. Form 1040x 2010 This is considered separately from the income and expense information you report on Schedule E. Form 1040x 2010 Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Form 1040x 2010 However, do not use that schedule to report a not-for-profit activity. Form 1040x 2010 See Not Rented for Profit , in chapter 4. Form 1040x 2010 There are also other rental situations in which forms other than Schedule E would be used. Form 1040x 2010 Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Form 1040x 2010 , you normally report your rental income and expenses on Schedule E, Part I. Form 1040x 2010 List your total income, expenses, and depreciation for each rental property. Form 1040x 2010 Be sure to enter the number of fair rental and personal use days on line 2. Form 1040x 2010 If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Form 1040x 2010 Complete lines 1 and 2 for each property. Form 1040x 2010 However, fill in lines 23a through 26 on only one Schedule E. Form 1040x 2010 On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Form 1040x 2010 To find out if you need to attach Form 4562, see Form 4562 , later. Form 1040x 2010 If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Form 1040x 2010 Form 6198, At-Risk Limitations. Form 1040x 2010 See At-Risk Rules , later. Form 1040x 2010 Also see Publication 925. Form 1040x 2010 Form 8582, Passive Activity Loss Limitations. Form 1040x 2010 See Passive Activity Limits , later. Form 1040x 2010 Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Form 1040x 2010 If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Form 1040x 2010 Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Form 1040x 2010 Form 4562. Form 1040x 2010   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. Form 1040x 2010 Otherwise, figure your depreciation on your own worksheet. Form 1040x 2010 You do not have to attach these computations to your return, but you should keep them in your records for future reference. Form 1040x 2010   See Publication 946 for information on preparing Form 4562. Form 1040x 2010 Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. Form 1040x 2010 Providing substantial services. Form 1040x 2010   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Form 1040x 2010 Use Form 1065, U. Form 1040x 2010 S. Form 1040x 2010 Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Form 1040x 2010 Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Form 1040x 2010 For information, see Publication 334, Tax Guide for Small Business. Form 1040x 2010 Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Form 1040x 2010 For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. Form 1040x 2010 Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Form 1040x 2010 This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Form 1040x 2010 If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). Form 1040x 2010 You will not be required to file Form 1065 for any year the election is in effect. Form 1040x 2010 Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. Form 1040x 2010 If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. Form 1040x 2010 For more information on qualified joint ventures, go to IRS. Form 1040x 2010 gov and enter “qualified joint venture” in the search box. Form 1040x 2010 Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Form 1040x 2010 You must consider these rules in the order shown below. Form 1040x 2010 Both are discussed in this section. Form 1040x 2010 At-risk rules. Form 1040x 2010 These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Form 1040x 2010 This applies only if the real property was placed in service after 1986. Form 1040x 2010 Passive activity limits. Form 1040x 2010 Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Form 1040x 2010 However, there are exceptions. Form 1040x 2010 At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Form 1040x 2010 Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Form 1040x 2010 In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Form 1040x 2010 You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Form 1040x 2010 Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. Form 1040x 2010 See Publication 925 for a discussion of the at-risk rules. Form 1040x 2010 Form 6198. Form 1040x 2010   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. Form 1040x 2010 Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Form 1040x 2010 For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Form 1040x 2010 For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. Form 1040x 2010 Deductions or losses from passive activities are limited. Form 1040x 2010 You generally cannot offset income, other than passive income, with losses from passive activities. Form 1040x 2010 Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Form 1040x 2010 Any excess loss or credit is carried forward to the next tax year. Form 1040x 2010 Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. Form 1040x 2010 For a detailed discussion of these rules, see Publication 925. Form 1040x 2010 Real estate professionals. Form 1040x 2010   If you are a real estate professional, complete line 43 of Schedule E. Form 1040x 2010      You qualify as a real estate professional for the tax year if you meet both of the following requirements. Form 1040x 2010 More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. Form 1040x 2010 You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. Form 1040x 2010 If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Form 1040x 2010 For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. Form 1040x 2010   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. Form 1040x 2010 You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. Form 1040x 2010   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. Form 1040x 2010 However, you can count your spouse's participation in an activity in determining if you materially participated. Form 1040x 2010 Real property trades or businesses. Form 1040x 2010   A real property trade or business is a trade or business that does any of the following with real property. Form 1040x 2010 Develops or redevelops it. Form 1040x 2010 Constructs or reconstructs it. Form 1040x 2010 Acquires it. Form 1040x 2010 Converts it. Form 1040x 2010 Rents or leases it. Form 1040x 2010 Operates or manages it. Form 1040x 2010 Brokers it. Form 1040x 2010 Choice to treat all interests as one activity. Form 1040x 2010   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. Form 1040x 2010 You can make this choice for any year that you qualify as a real estate professional. Form 1040x 2010 If you forgo making the choice for one year, you can still make it for a later year. Form 1040x 2010   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. Form 1040x 2010 This is true even if you are not a real estate professional in any intervening year. Form 1040x 2010 (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. Form 1040x 2010 )   See the Instructions for Schedule E for information about making this choice. Form 1040x 2010 Material participation. Form 1040x 2010   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. Form 1040x 2010 For details, see Publication 925 or the Instructions for Schedule C. Form 1040x 2010 Participating spouse. Form 1040x 2010   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Form 1040x 2010 Do this even if your spouse owns no interest in the activity or files a separate return for the year. Form 1040x 2010 Form 8582. Form 1040x 2010    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Form 1040x 2010 See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. Form 1040x 2010   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. Form 1040x 2010 Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Form 1040x 2010 Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040x 2010 Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Form 1040x 2010 This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Form 1040x 2010 Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Form 1040x 2010 Example. Form 1040x 2010 Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. Form 1040x 2010 $2,000 of Jane's $3,500 loss offsets her passive income. Form 1040x 2010 The remaining $1,500 loss can be deducted from her $40,000 wages. Form 1040x 2010 The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. Form 1040x 2010 Active participation. Form 1040x 2010   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Form 1040x 2010 Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. Form 1040x 2010 Example. Form 1040x 2010 Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. Form 1040x 2010 Mike had advertised and rented the house to the current tenant himself. Form 1040x 2010 He also collected the rents, which usually came by mail. Form 1040x 2010 All repairs were either made or contracted out by Mike. Form 1040x 2010 Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. Form 1040x 2010 Maximum special allowance. Form 1040x 2010   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Form 1040x 2010   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Form 1040x 2010 If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Form 1040x 2010   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Form 1040x 2010 Modified adjusted gross income (MAGI). Form 1040x 2010   This is your adjusted gross income from Form 1040, U. Form 1040x 2010 S. Form 1040x 2010 Individual Income Tax Return, line 38, or Form 1040NR, U. Form 1040x 2010 S. Form 1040x 2010 Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. Form 1040x 2010 S. Form 1040x 2010 savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). Form 1040x 2010 Form 8582 not required. Form 1040x 2010   Do not complete Form 8582 if you meet all of the following conditions. Form 1040x 2010 Your only passive activities were rental real estate activities in which you actively participated. Form 1040x 2010 Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). Form 1040x 2010 If married filing separately, you lived apart from your spouse all year. Form 1040x 2010 You have no prior year unallowed losses from these (or any other passive) activities. Form 1040x 2010 You have no current or prior year unallowed credits from passive activities. Form 1040x 2010 Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). Form 1040x 2010 You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. Form 1040x 2010   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. Form 1040x 2010 On lines 23a through 23e of your Schedule E, enter the applicable amounts. Form 1040x 2010 Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. Form 1040x 2010 You may be able to deduct the loss on your income tax return. Form 1040x 2010 Casualty. Form 1040x 2010   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Form 1040x 2010 Such events include a storm, fire, or earthquake. Form 1040x 2010 Theft. Form 1040x 2010   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. Form 1040x 2010 Gain from casualty or theft. Form 1040x 2010   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. Form 1040x 2010 Generally, you must report this gain. Form 1040x 2010 However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. Form 1040x 2010 To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. Form 1040x 2010 In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. Form 1040x 2010 The cost of the replacement property must be equal to or more than the net insurance or other payment you received. Form 1040x 2010 More information. Form 1040x 2010   For information on business and nonbusiness casualty and theft losses, see Publication 547. Form 1040x 2010 How to report. Form 1040x 2010    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. Form 1040x 2010 Follow the Instructions for Form 4684 for where to carry your net gain or loss. Form 1040x 2010 Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. Form 1040x 2010 In 2013, she rented it all 12 months for a monthly rental fee of $1,125. Form 1040x 2010 In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. Form 1040x 2010 Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. Form 1040x 2010 This means using the straight line method over a recovery period of 27. Form 1040x 2010 5 years. Form 1040x 2010 She uses Table 2-2d to find her depreciation percentage. Form 1040x 2010 Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. Form 1040x 2010 For year 6, the rate is 3. Form 1040x 2010 636%. Form 1040x 2010 Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. Form 1040x 2010 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. Form 1040x 2010 Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. Form 1040x 2010 Marie also meets all of the requirements for not having to file Form 8582. Form 1040x 2010 She uses Schedule E, Part I, to report her rental income and expenses. Form 1040x 2010 She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. Form 1040x 2010 Form 4562 is not required. Form 1040x 2010 Prev  Up  Next   Home   More Online Publications