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Free Taxes Online 2012

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Free Taxes Online 2012

Free taxes online 2012 9. Free taxes online 2012   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Free taxes online 2012 Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Free taxes online 2012 Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Free taxes online 2012 Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Free taxes online 2012 It also covers the following topics. Free taxes online 2012 Personal use of dwelling unit (including vacation home). Free taxes online 2012 Depreciation. Free taxes online 2012 Limits on rental losses. Free taxes online 2012 How to report your rental income and expenses. Free taxes online 2012 If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Free taxes online 2012 If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Free taxes online 2012 If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Free taxes online 2012 See Publication 527, Residential Rental Property, for more information. Free taxes online 2012 Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Free taxes online 2012 Rental income is any payment you receive for the use or occupation of property. Free taxes online 2012 In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Free taxes online 2012 When to report. Free taxes online 2012   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Free taxes online 2012 You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Free taxes online 2012 You constructively receive income when it is made available to you, for example, by being credited to your bank account. Free taxes online 2012   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Free taxes online 2012 Advance rent. Free taxes online 2012   Advance rent is any amount you receive before the period that it covers. Free taxes online 2012 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Free taxes online 2012 Example. Free taxes online 2012 You sign a 10-year lease to rent your property. Free taxes online 2012 In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Free taxes online 2012 You must include $10,000 in your income in the first year. Free taxes online 2012 Canceling a lease. Free taxes online 2012   If your tenant pays you to cancel a lease, the amount you receive is rent. Free taxes online 2012 Include the payment in your income in the year you receive it regardless of your method of accounting. Free taxes online 2012 Expenses paid by tenant. Free taxes online 2012   If your tenant pays any of your expenses, the payments are rental income. Free taxes online 2012 Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Free taxes online 2012 See Rental Expenses , later, for more information. Free taxes online 2012 Property or services. Free taxes online 2012   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Free taxes online 2012   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Free taxes online 2012 Security deposits. Free taxes online 2012   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Free taxes online 2012 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Free taxes online 2012   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Free taxes online 2012 Include it in your income when you receive it. Free taxes online 2012 Part interest. Free taxes online 2012   If you own a part interest in rental property, you must report your part of the rental income from the property. Free taxes online 2012 Rental of property also used as your home. Free taxes online 2012   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Free taxes online 2012 However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Free taxes online 2012 See Personal Use of Dwelling Unit (Including Vacation Home) , later. Free taxes online 2012 Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Free taxes online 2012 It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Free taxes online 2012 Depreciation , which you can also deduct from your rental income, is discussed later. Free taxes online 2012 Personal use of rental property. Free taxes online 2012   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Free taxes online 2012 Also, your rental expense deductions may be limited. Free taxes online 2012 See Personal Use of Dwelling Unit (Including Vacation Home) , later. Free taxes online 2012 Part interest. Free taxes online 2012   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Free taxes online 2012 When to deduct. Free taxes online 2012   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Free taxes online 2012 Depreciation. Free taxes online 2012   You can begin to depreciate rental property when it is ready and available for rent. Free taxes online 2012 See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Free taxes online 2012 Pre-rental expenses. Free taxes online 2012   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Free taxes online 2012 Uncollected rent. Free taxes online 2012   If you are a cash-basis taxpayer, do not deduct uncollected rent. Free taxes online 2012 Because you have not included it in your income, it is not deductible. Free taxes online 2012 Vacant rental property. Free taxes online 2012   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Free taxes online 2012 However, you cannot deduct any loss of rental income for the period the property is vacant. Free taxes online 2012 Vacant while listed for sale. Free taxes online 2012   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Free taxes online 2012 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Free taxes online 2012 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Free taxes online 2012 Improvements. Free taxes online 2012   You must capitalize any expense you pay to improve your rental property. Free taxes online 2012 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Free taxes online 2012 Betterments. Free taxes online 2012   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Free taxes online 2012 Restoration. Free taxes online 2012   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Free taxes online 2012 Adaptation. Free taxes online 2012   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Free taxes online 2012 Separate the costs of repairs and improvements, and keep accurate records. Free taxes online 2012 You will need to know the cost of improvements when you sell or depreciate your property. Free taxes online 2012 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Free taxes online 2012 Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Free taxes online 2012 Insurance premiums paid in advance. Free taxes online 2012   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Free taxes online 2012 You cannot deduct the total premium in the year you pay it. Free taxes online 2012 Legal and other professional fees. Free taxes online 2012   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Free taxes online 2012 For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Free taxes online 2012 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Free taxes online 2012 Local benefit taxes. Free taxes online 2012   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Free taxes online 2012 These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Free taxes online 2012 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Free taxes online 2012 Local transportation expenses. Free taxes online 2012    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Free taxes online 2012 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Free taxes online 2012 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Free taxes online 2012   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Free taxes online 2012 For 2013, the standard mileage rate for business use is 56. Free taxes online 2012 5 cents per mile. Free taxes online 2012 For more information, see chapter 26. Free taxes online 2012    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Free taxes online 2012 In addition, you must complete Form 4562, Part V, and attach it to your tax return. Free taxes online 2012 Rental of equipment. Free taxes online 2012   You can deduct the rent you pay for equipment that you use for rental purposes. Free taxes online 2012 However, in some cases, lease contracts are actually purchase contracts. Free taxes online 2012 If so, you cannot deduct these payments. Free taxes online 2012 You can recover the cost of purchased equipment through depreciation. Free taxes online 2012 Rental of property. Free taxes online 2012   You can deduct the rent you pay for property that you use for rental purposes. Free taxes online 2012 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Free taxes online 2012 Travel expenses. Free taxes online 2012   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Free taxes online 2012 You must properly allocate your expenses between rental and nonrental activities. Free taxes online 2012 You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Free taxes online 2012 You recover the cost of improvements by taking depreciation. Free taxes online 2012 For information on travel expenses, see chapter 26. Free taxes online 2012    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Free taxes online 2012   See Rental Expenses in Publication 527 for more information. Free taxes online 2012 Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Free taxes online 2012 You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Free taxes online 2012 You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Free taxes online 2012 However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Free taxes online 2012 Example. Free taxes online 2012 Your tax year is the calendar year. Free taxes online 2012 You moved from your home in May and started renting it out on June 1. Free taxes online 2012 You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Free taxes online 2012 Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Free taxes online 2012 Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Free taxes online 2012 You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Free taxes online 2012 You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. Free taxes online 2012 There is no change in the types of expenses deductible for the personal-use part of your property. Free taxes online 2012 Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Free taxes online 2012 You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Free taxes online 2012 You do not have to divide the expenses that belong only to the rental part of your property. Free taxes online 2012 For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Free taxes online 2012 If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Free taxes online 2012 You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Free taxes online 2012 How to divide expenses. Free taxes online 2012   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. Free taxes online 2012 You can use any reasonable method for dividing the expense. Free taxes online 2012 It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Free taxes online 2012 The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Free taxes online 2012 Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Free taxes online 2012 You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Free taxes online 2012 For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Free taxes online 2012 Where to report. Free taxes online 2012   Report your not-for-profit rental income on Form 1040, line 21. Free taxes online 2012 For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Free taxes online 2012   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. Free taxes online 2012 You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Free taxes online 2012 Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Free taxes online 2012 In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Free taxes online 2012 Only your rental expenses may be deducted on Schedule E (Form 1040). Free taxes online 2012 Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Free taxes online 2012 You must also determine if the dwelling unit is considered a home. Free taxes online 2012 The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Free taxes online 2012 Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Free taxes online 2012 There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Free taxes online 2012 Dwelling unit. Free taxes online 2012   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Free taxes online 2012 It also includes all structures or other property belonging to the dwelling unit. Free taxes online 2012 A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Free taxes online 2012   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Free taxes online 2012 Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Free taxes online 2012 Example. Free taxes online 2012   You rent a room in your home that is always available for short-term occupancy by paying customers. Free taxes online 2012 You do not use the room yourself, and you allow only paying customers to use the room. Free taxes online 2012 The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Free taxes online 2012 Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Free taxes online 2012 When dividing your expenses, follow these rules. Free taxes online 2012 Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Free taxes online 2012 This rule does not apply when determining whether you used the unit as a home. Free taxes online 2012 Any day that the unit is available for rent but not actually rented is not a day of rental use. Free taxes online 2012 Example. Free taxes online 2012 Your beach cottage was available for rent from June 1 through August 31 (92 days). Free taxes online 2012 During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Free taxes online 2012 The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Free taxes online 2012 Your family also used the cottage during the last 2 weeks of May (14 days). Free taxes online 2012 The cottage was not used at all before May 17 or after August 31. Free taxes online 2012 You figure the part of the cottage expenses to treat as rental expenses as follows. Free taxes online 2012 The cottage was used for rental a total of 85 days (92 − 7). Free taxes online 2012 The days it was available for rent but not rented (7 days) are not days of rental use. Free taxes online 2012 The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Free taxes online 2012 You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Free taxes online 2012 The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Free taxes online 2012 Your rental expenses are 85/99 (86%) of the cottage expenses. Free taxes online 2012 Note. Free taxes online 2012 When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Free taxes online 2012 Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Free taxes online 2012 Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Free taxes online 2012 If you have a net loss, you may not be able to deduct all of the rental expenses. Free taxes online 2012 See Dwelling Unit Used as a Home, next. Free taxes online 2012 Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Free taxes online 2012 You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Free taxes online 2012 See What is a day of personal use , later. Free taxes online 2012 Fair rental price. Free taxes online 2012   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Free taxes online 2012 The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Free taxes online 2012   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Free taxes online 2012 Instead, count it as a day of personal use in applying both (1) and (2) above. Free taxes online 2012 What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Free taxes online 2012 You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Free taxes online 2012 However, see Days used as a main home before or after renting , later. Free taxes online 2012 A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Free taxes online 2012 Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Free taxes online 2012 ), and lineal descendants (children, grandchildren, etc. Free taxes online 2012 ). Free taxes online 2012 Anyone under an arrangement that lets you use some other dwelling unit. Free taxes online 2012 Anyone at less than a fair rental price. Free taxes online 2012 Main home. Free taxes online 2012   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Free taxes online 2012 Shared equity financing agreement. Free taxes online 2012   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Free taxes online 2012 Donation of use of property. Free taxes online 2012   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Free taxes online 2012 Examples. Free taxes online 2012   The following examples show how to determine days of personal use. Free taxes online 2012 Example 1. Free taxes online 2012 You and your neighbor are co-owners of a condominium at the beach. Free taxes online 2012 Last year, you rented the unit to vacationers whenever possible. Free taxes online 2012 The unit was not used as a main home by anyone. Free taxes online 2012 Your neighbor used the unit for 2 weeks last year; you did not use it at all. Free taxes online 2012 Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Free taxes online 2012 Example 2. Free taxes online 2012 You and your neighbors are co-owners of a house under a shared equity financing agreement. Free taxes online 2012 Your neighbors live in the house and pay you a fair rental price. Free taxes online 2012 Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Free taxes online 2012 This is because your neighbors rent the house as their main home under a shared equity financing agreement. Free taxes online 2012 Example 3. Free taxes online 2012 You own a rental property that you rent to your son. Free taxes online 2012 Your son does not own any interest in this property. Free taxes online 2012 He uses it as his main home and pays you a fair rental price. Free taxes online 2012 Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Free taxes online 2012 Example 4. Free taxes online 2012 You rent your beach house to Joshua. Free taxes online 2012 Joshua rents his cabin in the mountains to you. Free taxes online 2012 You each pay a fair rental price. Free taxes online 2012 You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Free taxes online 2012 Days used for repairs and maintenance. Free taxes online 2012   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Free taxes online 2012 Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Free taxes online 2012 Days used as a main home before or after renting. Free taxes online 2012   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Free taxes online 2012 Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Free taxes online 2012 You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Free taxes online 2012 However, this special rule does not apply when dividing expenses between rental and personal use. Free taxes online 2012 Examples. Free taxes online 2012   The following examples show how to determine whether you used your rental property as a home. Free taxes online 2012 Example 1. Free taxes online 2012 You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Free taxes online 2012 You rented the basement apartment at a fair rental price to college students during the regular school year. Free taxes online 2012 You rented to them on a 9-month lease (273 days). Free taxes online 2012 You figured 10% of the total days rented to others at a fair rental price is 27 days. Free taxes online 2012 During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Free taxes online 2012 Your basement apartment was used as a home because you used it for personal purposes for 30 days. Free taxes online 2012 Rent-free use by your brothers is considered personal use. Free taxes online 2012 Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Free taxes online 2012 Example 2. Free taxes online 2012 You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Free taxes online 2012 Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Free taxes online 2012 You figured 10% of the total days rented to others at a fair rental price is 3 days. Free taxes online 2012 The room was used as a home because you used it for personal purposes for 21 days. Free taxes online 2012 That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Free taxes online 2012 Example 3. Free taxes online 2012 You own a condominium apartment in a resort area. Free taxes online 2012 You rented it at a fair rental price for a total of 170 days during the year. Free taxes online 2012 For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Free taxes online 2012 Your family actually used the apartment for 10 of those days. Free taxes online 2012 Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Free taxes online 2012 You figured 10% of the total days rented to others at a fair rental price is 16 days. Free taxes online 2012 Your family also used the apartment for 7 other days during the year. Free taxes online 2012 You used the apartment as a home because you used it for personal purposes for 17 days. Free taxes online 2012 That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Free taxes online 2012 Minimal rental use. Free taxes online 2012   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Free taxes online 2012 See Used as a home but rented less than 15 days , later, for more information. Free taxes online 2012 Limit on deductions. Free taxes online 2012   Renting a dwelling unit that is considered a home is not a passive activity. Free taxes online 2012 Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Free taxes online 2012 The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Free taxes online 2012 Any expenses carried forward to the next year will be subject to any limits that apply for that year. Free taxes online 2012 This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Free taxes online 2012   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Free taxes online 2012 Reporting Income and Deductions Property not used for personal purposes. Free taxes online 2012   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Free taxes online 2012 Property used for personal purposes. Free taxes online 2012   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Free taxes online 2012 Not used as a home. Free taxes online 2012   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Free taxes online 2012 Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Free taxes online 2012 The expenses for personal use are not deductible as rental expenses. Free taxes online 2012   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Free taxes online 2012 Used as a home but rented less than 15 days. Free taxes online 2012   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Free taxes online 2012 You are not required to report the rental income and rental expenses from this activity. Free taxes online 2012 The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Free taxes online 2012 See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Free taxes online 2012 Used as a home and rented 15 days or more. Free taxes online 2012   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Free taxes online 2012 Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Free taxes online 2012 The expenses for personal use are not deductible as rental expenses. Free taxes online 2012   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Free taxes online 2012 You do not need to use Worksheet 9-1. Free taxes online 2012   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Free taxes online 2012 To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Free taxes online 2012 Depreciation You recover the cost of income-producing property through yearly tax deductions. Free taxes online 2012 You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Free taxes online 2012 Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Free taxes online 2012 You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Free taxes online 2012 You can deduct depreciation only on the part of your property used for rental purposes. Free taxes online 2012 Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Free taxes online 2012 You may have to use Form 4562 to figure and report your depreciation. Free taxes online 2012 See How To Report Rental Income and Expenses , later. Free taxes online 2012 Alternative minimum tax (AMT). Free taxes online 2012    If you use accelerated depreciation, you may be subject to the AMT. Free taxes online 2012 Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Free taxes online 2012 Claiming the correct amount of depreciation. Free taxes online 2012   You should claim the correct amount of depreciation each tax year. Free taxes online 2012 If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Free taxes online 2012   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Free taxes online 2012 S Individual Income Tax Return. Free taxes online 2012 If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Free taxes online 2012 See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Free taxes online 2012 Changing your accounting method to deduct unclaimed depreciation. Free taxes online 2012   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Free taxes online 2012 In some instances, that consent is automatic. Free taxes online 2012 For more information, see chapter 1 of Publication 946. Free taxes online 2012 Land. Free taxes online 2012   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Free taxes online 2012 The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Free taxes online 2012 More information. Free taxes online 2012   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Free taxes online 2012 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. Free taxes online 2012 You must consider these rules in the order shown below. Free taxes online 2012 At-risk rules. Free taxes online 2012 These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Free taxes online 2012 This applies only if the real property was placed in service after 1986. Free taxes online 2012 Passive activity limits. Free taxes online 2012 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. Free taxes online 2012 However, there are exceptions. Free taxes online 2012 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. Free taxes online 2012 Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Free taxes online 2012 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. Free taxes online 2012 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. Free taxes online 2012 See Publication 925 for more information. Free taxes online 2012 Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Free taxes online 2012 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. Free taxes online 2012 Limits on passive activity deductions and credits. Free taxes online 2012    Deductions or losses from passive activities are limited. Free taxes online 2012 You generally cannot offset income, other than passive income, with losses from passive activities. Free taxes online 2012 Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Free taxes online 2012 Any excess loss or credit is carried forward to the next tax year. Free taxes online 2012   For a detailed discussion of these rules, see Publication 925. Free taxes online 2012    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. Free taxes online 2012 Real estate professionals. Free taxes online 2012   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Free taxes online 2012 For a detailed discussion of the requirements, see Publication 527. Free taxes online 2012 For a detailed discussion of material participation, see Publication 925. Free taxes online 2012 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. Free taxes online 2012 Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Free taxes online 2012 Exception for Rental Real Estate Activities 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. Free taxes online 2012 This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Free taxes online 2012 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. Free taxes online 2012 Active participation. Free taxes online 2012   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. Free taxes online 2012 Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Free taxes online 2012 Maximum special allowance. Free taxes online 2012   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. Free taxes online 2012   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. Free taxes online 2012 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. Free taxes online 2012   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Free taxes online 2012 More information. Free taxes online 2012   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Free taxes online 2012 How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Free taxes online 2012 However, do not use that schedule to report a not-for-profit activity. Free taxes online 2012 See Not Rented for Profit, earlier. Free taxes online 2012 Providing substantial services. Free taxes online 2012   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, 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 (Sole Proprietorship). Free taxes online 2012 Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Free taxes online 2012 For information, see Publication 334, Tax Guide for Small Business. Free taxes online 2012 You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Free taxes online 2012   Use Form 1065, U. Free taxes online 2012 S. Free taxes online 2012 Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Free taxes online 2012 Qualified joint venture. Free taxes online 2012   If you and your spouse each materially participate 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. Free taxes online 2012 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. Free taxes online 2012 For more information, see Publication 527. Free taxes online 2012 Form 1098, Mortgage Interest Statement. Free taxes online 2012    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Free taxes online 2012 If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Free taxes online 2012 Attach a statement to your return showing the name and address of the other person. Free taxes online 2012 In the left margin of Schedule E, next to line 13, enter “See attached. Free taxes online 2012 ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Free taxes online 2012 , you normally report your rental income and expenses on Schedule E, Part I. Free taxes online 2012 List your total income, expenses, and depreciation for each rental property. Free taxes online 2012 Be sure to enter the number of fair rental and personal use days on line 2. Free taxes online 2012 If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Free taxes online 2012 Complete lines 1 and 2 for each property. Free taxes online 2012 However, fill in lines 23a through 26 on only one Schedule E. Free taxes online 2012 On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Free taxes online 2012 To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Free taxes online 2012 If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Free taxes online 2012 Form 6198, At-Risk Limitations. Free taxes online 2012 See At-Risk Rules , earlier. Free taxes online 2012 Also see Publication 925. Free taxes online 2012 Form 8582, Passive Activity Loss Limitations. Free taxes online 2012 See Passive Activity Limits , earlier. Free taxes online 2012 Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Free taxes online 2012 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. Free taxes online 2012 Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Free taxes online 2012 Worksheet 9-1. Free taxes online 2012 Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Free taxes online 2012 Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Free taxes online 2012 ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Free taxes online 2012 Rental Use Percentage A. Free taxes online 2012 Total days available for rent at fair rental price A. Free taxes online 2012       B. Free taxes online 2012 Total days available for rent (line A) but not rented B. Free taxes online 2012       C. Free taxes online 2012 Total days of rental use. Free taxes online 2012 Subtract line B from line A C. Free taxes online 2012       D. Free taxes online 2012 Total days of personal use (including days rented at less than fair rental price) D. Free taxes online 2012       E. Free taxes online 2012 Total days of rental and personal use. Free taxes online 2012 Add lines C and D E. Free taxes online 2012       F. Free taxes online 2012 Percentage of expenses allowed for rental. Free taxes online 2012 Divide line C by line E     F. Free taxes online 2012   PART II. Free taxes online 2012 Allowable Rental Expenses 1. Free taxes online 2012 Enter rents received 1. Free taxes online 2012   2a. Free taxes online 2012 Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Free taxes online 2012       b. Free taxes online 2012 Enter the rental portion of real estate taxes b. Free taxes online 2012       c. Free taxes online 2012 Enter the rental portion of deductible casualty and theft losses (see instructions) c. Free taxes online 2012       d. Free taxes online 2012 Enter direct rental expenses (see instructions) d. Free taxes online 2012       e. Free taxes online 2012 Fully deductible rental expenses. Free taxes online 2012 Add lines 2a–2d. Free taxes online 2012 Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Free taxes online 2012   3. Free taxes online 2012 Subtract line 2e from line 1. Free taxes online 2012 If zero or less, enter -0- 3. Free taxes online 2012   4a. Free taxes online 2012 Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Free taxes online 2012       b. Free taxes online 2012 Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Free taxes online 2012       c. Free taxes online 2012 Carryover of operating expenses from 2012 worksheet c. Free taxes online 2012       d. Free taxes online 2012 Add lines 4a–4c d. Free taxes online 2012       e. Free taxes online 2012 Allowable expenses. Free taxes online 2012 Enter the smaller of line 3 or line 4d (see instructions) 4e. Free taxes online 2012   5. Free taxes online 2012 Subtract line 4e from line 3. Free taxes online 2012 If zero or less, enter -0- 5. Free taxes online 2012   6a. Free taxes online 2012 Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Free taxes online 2012       b. Free taxes online 2012 Enter the rental portion of depreciation of the dwelling unit b. Free taxes online 2012       c. Free taxes online 2012 Carryover of excess casualty losses and depreciation from 2012 worksheet c. Free taxes online 2012       d. Free taxes online 2012 Add lines 6a–6c d. Free taxes online 2012       e. Free taxes online 2012 Allowable excess casualty and theft losses and depreciation. Free taxes online 2012 Enter the smaller of  line 5 or line 6d (see instructions) 6e. Free taxes online 2012   PART III. Free taxes online 2012 Carryover of Unallowed Expenses to Next Year 7a. Free taxes online 2012 Operating expenses to be carried over to next year. Free taxes online 2012 Subtract line 4e from line 4d 7a. Free taxes online 2012   b. Free taxes online 2012 Excess casualty and theft losses and depreciation to be carried over to next year. Free taxes online 2012  Subtract line 6e from line 6d b. Free taxes online 2012   Worksheet 9-1 Instructions. Free taxes online 2012 Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Free taxes online 2012 Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Free taxes online 2012 Line 2a. Free taxes online 2012 Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Free taxes online 2012 Do not include interest on a loan that did not benefit the dwelling unit. Free taxes online 2012 For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Free taxes online 2012 Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Free taxes online 2012 Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Free taxes online 2012   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Free taxes online 2012 See the Schedule A instructions. Free taxes online 2012 However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Free taxes online 2012 See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Free taxes online 2012 Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Free taxes online 2012   Note. Free taxes online 2012 Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Free taxes online 2012 Instead, figure the personal portion on a separate Schedule A. Free taxes online 2012 If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Free taxes online 2012           Line 2c. Free taxes online 2012 Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Free taxes online 2012 To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Free taxes online 2012 If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Free taxes online 2012 On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Free taxes online 2012 Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Free taxes online 2012   Note. Free taxes online 2012 Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Free taxes online 2012 Instead, figure the personal portion on a separate Form 4684. Free taxes online 2012           Line 2d. Free taxes online 2012 Enter the total of your rental expenses that are directly related only to the rental activity. Free taxes online 2012 These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Free taxes online 2012 Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Free taxes online 2012           Line 2e. Free taxes online 2012 You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Free taxes online 2012 Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Free taxes online 2012           Line 4b. Free taxes online 2012 On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Free taxes online 2012 If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Free taxes online 2012 Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Free taxes online 2012           Line 4e. Free taxes online 2012 You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Free taxes online 2012 *           Line 6a. Free taxes online 2012 To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Free taxes online 2012   A. Free taxes online 2012 Enter the amount from Form 4684, line 10       B. Free taxes online 2012 Enter the rental portion of line A       C. Free taxes online 2012 Enter the amount from line 2c of this worksheet       D. Free taxes online 2012 Subtract line C from line B. Free taxes online 2012 Enter the result here and on line 6a of this worksheet               Line 6e. Free taxes online 2012 You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Free taxes online 2012 * *Allocating the limited deduction. Free taxes online 2012 If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Free taxes online 2012 Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Free taxes online 2012 Prev  Up  Next   Home   More Online Publications
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Free taxes online 2012 3. Free taxes online 2012   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. Free taxes online 2012 Dual use of assets or facilities. Free taxes online 2012 Exploitation of exempt functions. Free taxes online 2012 ExamplesExceptions. Free taxes online 2012 Excluded Trade or Business ActivitiesQualified sponsorship payment. Free taxes online 2012 Advertising. Free taxes online 2012 Exception for contingent payments. Free taxes online 2012 Exception for periodicals. Free taxes online 2012 Exception for conventions and trade shows. Free taxes online 2012 Legal definition. Free taxes online 2012 Legal where played. Free taxes online 2012 No for-profit games where played. Free taxes online 2012 Unrelated business income. Free taxes online 2012   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Free taxes online 2012   Certain trade or business activities are not treated as an unrelated trade or business. Free taxes online 2012 See Excluded Trade or Business Activities, later. Free taxes online 2012 Trade or business. Free taxes online 2012   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. Free taxes online 2012 An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. Free taxes online 2012   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. Free taxes online 2012 Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. Free taxes online 2012 Regularly conducted. Free taxes online 2012   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Free taxes online 2012   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. Free taxes online 2012 The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. Free taxes online 2012 However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. Free taxes online 2012 Not substantially related. Free taxes online 2012    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Free taxes online 2012 Whether an activity contributes importantly depends in each case on the facts involved. Free taxes online 2012   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. Free taxes online 2012 For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. Free taxes online 2012 The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Free taxes online 2012   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. Free taxes online 2012 Selling of products of exempt functions. Free taxes online 2012   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. Free taxes online 2012 Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. Free taxes online 2012   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. Free taxes online 2012 For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. Free taxes online 2012 But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. Free taxes online 2012 , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. Free taxes online 2012 Dual use of assets or facilities. Free taxes online 2012   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. Free taxes online 2012 The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. Free taxes online 2012   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. Free taxes online 2012 The theater is a principal feature of the museum and operates continuously while the museum is open to the public. Free taxes online 2012 If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. Free taxes online 2012   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. Free taxes online 2012 Exploitation of exempt functions. Free taxes online 2012   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. Free taxes online 2012 When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. Free taxes online 2012 Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. Free taxes online 2012   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. Free taxes online 2012 Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. Free taxes online 2012 Sales commissions. Free taxes online 2012   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. Free taxes online 2012 Artists' facilities. Free taxes online 2012   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. Free taxes online 2012 These two activities do not contribute importantly to accomplishing the organization's exempt purpose. Free taxes online 2012 Therefore, they are unrelated trades or businesses. Free taxes online 2012 Membership list sales. Free taxes online 2012   An exempt educational organization regularly sells membership mailing lists to business firms. Free taxes online 2012 This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. Free taxes online 2012 Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. Free taxes online 2012 Hospital facilities. Free taxes online 2012   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. Free taxes online 2012 The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. Free taxes online 2012 The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. Free taxes online 2012   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. Free taxes online 2012 These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. Free taxes online 2012 Book publishing. Free taxes online 2012   An exempt organization engages primarily in activities that further its exempt purposes. Free taxes online 2012 It also owns the publication rights to a book that does not relate to any of its exempt purposes. Free taxes online 2012 The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. Free taxes online 2012 These activities constitute a trade or business regularly conducted. Free taxes online 2012 Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. Free taxes online 2012   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. Free taxes online 2012 See Royalties under Exclusions in chapter 4. Free taxes online 2012 School handicraft shop. Free taxes online 2012   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. Free taxes online 2012 The students are paid a percentage of the sales price. Free taxes online 2012 In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. Free taxes online 2012 The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Free taxes online 2012 Although many local participants are former students of the school, any qualified person may participate in the program. Free taxes online 2012 The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. Free taxes online 2012 School facilities. Free taxes online 2012   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. Free taxes online 2012 During the summer, the school operates a tennis club open to the general public. Free taxes online 2012 Employees of the school run the club, including collecting membership fees and scheduling court time. Free taxes online 2012   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. Free taxes online 2012 The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. Free taxes online 2012   In both situations, the exempt purpose is the advancement of education. Free taxes online 2012 Furnishing tennis facilities in the manner described does not further that exempt purpose. Free taxes online 2012 These activities are unrelated trades or businesses. Free taxes online 2012 However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. Free taxes online 2012 See Rents under Exclusions in chapter 4. Free taxes online 2012 Services provided with lease. Free taxes online 2012   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Free taxes online 2012 Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. Free taxes online 2012 It also provides dressing room, linen, and stadium security services for the professional team. Free taxes online 2012   Leasing of the stadium is an unrelated trade or business. Free taxes online 2012 In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. Free taxes online 2012 Therefore, the income from this lease is rent from real property and unrelated business taxable income. Free taxes online 2012 Broadcasting rights. Free taxes online 2012   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. Free taxes online 2012 Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. Free taxes online 2012 An athletic program is considered an integral part of the educational process of a university. Free taxes online 2012   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. Free taxes online 2012 Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. Free taxes online 2012 Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. Free taxes online 2012   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. Free taxes online 2012 The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. Free taxes online 2012   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. Free taxes online 2012 The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. Free taxes online 2012 Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. Free taxes online 2012 Yearbook advertising. Free taxes online 2012   An exempt organization receives income from the sale of advertising in its annual yearbook. Free taxes online 2012 The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. Free taxes online 2012 This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Free taxes online 2012 This advertising activity is an unrelated trade or business. Free taxes online 2012 Pet boarding and grooming services. Free taxes online 2012   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. Free taxes online 2012 These activities do not contribute importantly to its purpose of preventing cruelty to animals. Free taxes online 2012 Museum eating facilities. Free taxes online 2012   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. Free taxes online 2012 Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. Free taxes online 2012 The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. Free taxes online 2012 Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. Free taxes online 2012 Halfway house workshop. Free taxes online 2012   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. Free taxes online 2012 The profits are applied to the operating costs of the halfway house. Free taxes online 2012 The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. Free taxes online 2012 Travel tour programs. Free taxes online 2012   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. Free taxes online 2012 Example 1. Free taxes online 2012 A tax-exempt university alumni association provides a travel tour program for its members and their families. Free taxes online 2012 The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. Free taxes online 2012 It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. Free taxes online 2012 The organization provides an employee for each tour as a tour leader. Free taxes online 2012 There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. Free taxes online 2012 By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. Free taxes online 2012 Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. Free taxes online 2012 Therefore, the sale of the travel tours is an unrelated trade or business. Free taxes online 2012 Example 2. Free taxes online 2012 A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. Free taxes online 2012 These tours are conducted by teachers and others certified by the state board of education. Free taxes online 2012 The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. Free taxes online 2012 A tour's study program consists of instruction on subjects related to the location being visited on the tour. Free taxes online 2012 Each tour group brings along a library of material related to the subjects being studied on the tour. Free taxes online 2012 During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. Free taxes online 2012 Examinations are given at the end of each tour. Free taxes online 2012 The state board of education awards academic credit for tour participation. Free taxes online 2012 Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. Free taxes online 2012 Insurance programs. Free taxes online 2012   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. Free taxes online 2012 Exceptions. Free taxes online 2012   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. Free taxes online 2012 Magazine publishing. Free taxes online 2012   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. Free taxes online 2012   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. Free taxes online 2012 This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. Free taxes online 2012   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. Free taxes online 2012 Directory of members. Free taxes online 2012   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. Free taxes online 2012 Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. Free taxes online 2012 The directory contains no commercial advertisement and is sold only to the organization's members. Free taxes online 2012   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. Free taxes online 2012 Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. Free taxes online 2012 The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. Free taxes online 2012 This directory differs from the publication discussed next because of its noncommercial characteristics. Free taxes online 2012 Sales of advertising space. Free taxes online 2012   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. Free taxes online 2012 The journal is distributed without charge, mainly to the organization's members. Free taxes online 2012   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. Free taxes online 2012 Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. Free taxes online 2012 A business firm identified in a separate space is further identified in an Index of Advertisers. Free taxes online 2012   The organization solicits advertising by personal contacts. Free taxes online 2012 Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. Free taxes online 2012 The organization also solicits advertising in form letters appealing for corporate and personal contributions. Free taxes online 2012   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. Free taxes online 2012 Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. Free taxes online 2012 Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. Free taxes online 2012 However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. Free taxes online 2012 In that case, other factors should also be considered in determining whether a commercial benefit can be expected. Free taxes online 2012 Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. Free taxes online 2012   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. Free taxes online 2012 However, the purchaser of a listing cannot expect more than an inconsequential benefit. Free taxes online 2012 Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. Free taxes online 2012 Publishing legal notices. Free taxes online 2012   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. Free taxes online 2012 The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. Free taxes online 2012 The state designated the bar association's journal as the place to publish the required notices. Free taxes online 2012   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. Free taxes online 2012 Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. Free taxes online 2012 Therefore, the advertising income is unrelated trade or business income. Free taxes online 2012   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. Free taxes online 2012 This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. Free taxes online 2012 Therefore, the publishing of legal notices does not constitute an unrelated trade or business. Free taxes online 2012 Museum greeting card sales. Free taxes online 2012    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. Free taxes online 2012 Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. Free taxes online 2012 The cards contain appropriate greetings and are personalized on request. Free taxes online 2012   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. Free taxes online 2012 It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. Free taxes online 2012 As a result, a large number of cards are sold at a significant profit. Free taxes online 2012   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. Free taxes online 2012 The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. Free taxes online 2012 The cards may encourage more people to visit the museum itself to share in its educational programs. Free taxes online 2012 The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. Free taxes online 2012 Therefore, these sales activities are not an unrelated trade or business. Free taxes online 2012 Museum shop. Free taxes online 2012   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. Free taxes online 2012   The shop also rents originals or reproductions of paintings contained in its collection. Free taxes online 2012 All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. Free taxes online 2012   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. Free taxes online 2012   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. Free taxes online 2012 The same is true for the sale of literature relating to art. Free taxes online 2012 Therefore, these sales activities are not an unrelated trade or business. Free taxes online 2012   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. Free taxes online 2012 The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. Free taxes online 2012 Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. Free taxes online 2012 Therefore, these sales are an unrelated trade or business. Free taxes online 2012 Business league's parking and bus services. Free taxes online 2012   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. Free taxes online 2012 It also operates, as an insubstantial part of its activities, a park and shop plan. Free taxes online 2012   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. Free taxes online 2012 The merchants cannot offer free or discount parking or bus fares to their customers. Free taxes online 2012   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. Free taxes online 2012 Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. Free taxes online 2012   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. Free taxes online 2012 That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. Free taxes online 2012   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. Free taxes online 2012 This provides a particular service to individual members of the organization and does not further its exempt purpose. Free taxes online 2012 Therefore, operating the park and shop plan is an unrelated trade or business. Free taxes online 2012 Youth residence. Free taxes online 2012   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. Free taxes online 2012 The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. Free taxes online 2012 The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. Free taxes online 2012 The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. Free taxes online 2012 Health club program. Free taxes online 2012   An exempt charitable organization's purpose is to provide for the welfare of young people. Free taxes online 2012 The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. Free taxes online 2012 Nominal annual dues are charged for membership in the organization and use of the facilities. Free taxes online 2012   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. Free taxes online 2012 The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. Free taxes online 2012   The health club program is in addition to the general physical fitness program of the organization. Free taxes online 2012 Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. Free taxes online 2012 Miniature golf course. Free taxes online 2012   An exempt youth welfare organization operates a miniature golf course that is open to the general public. Free taxes online 2012 The course, which is managed by salaried employees, is substantially similar to commercial courses. Free taxes online 2012 The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. Free taxes online 2012   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. Free taxes online 2012 Sales of hearing aids. Free taxes online 2012   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. Free taxes online 2012 This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. Free taxes online 2012 It is not an unrelated trade or business. Free taxes online 2012 Nonpatient laboratory testing. Free taxes online 2012   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. Free taxes online 2012 However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. Free taxes online 2012 Selling endorsements. Free taxes online 2012   An exempt scientific organization enjoys an excellent reputation in the field of biological research. Free taxes online 2012 It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. Free taxes online 2012 Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. Free taxes online 2012 Accordingly, the sale of endorsements is an unrelated trade or business. Free taxes online 2012 Sponsoring entertainment events. Free taxes online 2012   An exempt university has a regular faculty and a regularly enrolled student body. Free taxes online 2012 During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. Free taxes online 2012 Members of the general public also are admitted. Free taxes online 2012 The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. Free taxes online 2012 Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. Free taxes online 2012 Therefore, the activity is not an unrelated trade or business. Free taxes online 2012 Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. Free taxes online 2012 Volunteer workforce. Free taxes online 2012   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. Free taxes online 2012 Example 1. Free taxes online 2012 A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. Free taxes online 2012 Example 2. Free taxes online 2012 A volunteer fire company conducts weekly public dances. Free taxes online 2012 Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. Free taxes online 2012 However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. Free taxes online 2012 Convenience of members. Free taxes online 2012   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. Free taxes online 2012 For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. Free taxes online 2012 Qualified sponsorship activities. Free taxes online 2012   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. Free taxes online 2012 Qualified sponsorship payment. Free taxes online 2012   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. Free taxes online 2012 “Use or acknowledgment” does not include advertising the sponsor's products or services. Free taxes online 2012 The organization's activities include all its activities, whether or not related to its exempt purposes. Free taxes online 2012   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. Free taxes online 2012   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. Free taxes online 2012 Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. Free taxes online 2012 Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. Free taxes online 2012   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. Free taxes online 2012   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. Free taxes online 2012 For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. Free taxes online 2012 Advertising. Free taxes online 2012   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. Free taxes online 2012 For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Free taxes online 2012   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. Free taxes online 2012   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. Free taxes online 2012 In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. Free taxes online 2012 Exception for contingent payments. Free taxes online 2012   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. Free taxes online 2012 However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. Free taxes online 2012 Exception for periodicals. Free taxes online 2012   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. Free taxes online 2012 For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. Free taxes online 2012 It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). Free taxes online 2012   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. Free taxes online 2012 See Sales of advertising space under Examples, earlier in this chapter. Free taxes online 2012 Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Free taxes online 2012 Exception for conventions and trade shows. Free taxes online 2012   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. Free taxes online 2012 The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. Free taxes online 2012 Selling donated merchandise. Free taxes online 2012   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. Free taxes online 2012 For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. Free taxes online 2012 Employee association sales. Free taxes online 2012   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. Free taxes online 2012 This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. Free taxes online 2012 Bingo games. Free taxes online 2012   Certain bingo games are not included in the term “unrelated trade or business. Free taxes online 2012 ” To qualify for this exclusion, the bingo game must meet the following requirements. Free taxes online 2012 It meets the legal definition of bingo. Free taxes online 2012 It is legal where it is played. Free taxes online 2012 It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. Free taxes online 2012 Legal definition. Free taxes online 2012   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. Free taxes online 2012   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. Free taxes online 2012 For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. Free taxes online 2012 Legal where played. Free taxes online 2012   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. Free taxes online 2012 The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. Free taxes online 2012 No for-profit games where played. Free taxes online 2012   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. Free taxes online 2012 Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. Free taxes online 2012 Example. Free taxes online 2012 Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. Free taxes online 2012 In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. Free taxes online 2012 Several for-profit organizations conduct nightly games. Free taxes online 2012 Y conducts weekly bingo games in city S, while X conducts weekly games in county R. Free taxes online 2012 Since state law confines the for-profit organizations to city S, local jurisdiction controls. Free taxes online 2012 Y's bingo games conducted in city S are an unrelated trade or business. Free taxes online 2012 However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. Free taxes online 2012 Gambling activities other than bingo. Free taxes online 2012   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. Free taxes online 2012 Pole rentals. Free taxes online 2012   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). Free taxes online 2012 A qualified pole rental is the 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 the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. Free taxes online 2012 For this purpose, the term rental includes any sale of the right to use the pole (or other structure). Free taxes online 2012 Distribution of low cost articles. Free taxes online 2012   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. Free taxes online 2012 This applies to organizations described in section 501 that are eligible to receive charitable contributions. Free taxes online 2012   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. Free taxes online 2012   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. Free taxes online 2012 The maximum cost of a low cost article is $9. Free taxes online 2012 70 for 2011. Free taxes online 2012 The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. Free taxes online 2012 Exchange or rental of member lists. Free taxes online 2012   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. Free taxes online 2012 Hospital services. Free taxes online 2012   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. Free taxes online 2012 This exclusion applies only to services described in section 501(e)(1)(A). Free taxes online 2012 Public entertainment activity. Free taxes online 2012   An unrelated trade or business does not include a qualified public entertainment activity. Free taxes online 2012 A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. Free taxes online 2012   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. Free taxes online 2012   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. Free taxes online 2012 Its conducting qualified public entertainment activities will not affect determination of its exempt status. Free taxes online 2012 Convention or trade show activity. Free taxes online 2012   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. Free taxes online 2012   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. Free taxes online 2012   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). Free taxes online 2012 The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. Free taxes online 2012   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. Free taxes online 2012 For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. Free taxes online 2012    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. Free taxes online 2012 The trade show itself must be a qualified convention and trade show activity. Free taxes online 2012 The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. Free taxes online 2012 Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. Free taxes online 2012 Prev  Up  Next   Home   More Online Publications