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Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 5. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax-exempt entities. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Religious or apostolic associations or corporations described in section 501(d). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Indian tribal governments within the meaning of section 7701(a)(40). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Entity manager. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Prohibited tax shelter transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 6011-4(b)(4). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Subsequently listed transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm To report this tax, file Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Excess Benefit Transactions Excise tax on excess benefit transactions. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A manager of the organization may also have to pay an excise tax under section 4958. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm These taxes are reported on Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   There are three taxes under section 4958. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax on Disqualified Persons An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The disqualified person who benefited from the transaction is liable for the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See definition of Disqualified person, later at Disqualified person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Additional tax on the disqualified person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Taxable period. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm There is also joint and several liability for this tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Organization Manager. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Knowing does not mean having reason to know. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Participation by an organization manager is willful if it is voluntary, conscious, and intentional. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Donor advised fund transactions occurring after August 17, 2006. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For additional information, see the Instructions for Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Supporting organization transactions occurring after July 25, 2006. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For additional information, see the Instructions for Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Correcting the excess benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The correction amount equals the excess benefit plus the interest on the excess benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Exception. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Disqualified Person A disqualified person is: Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization, A family member of an individual described in 1, and A 35% controlled entity. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For certain supporting organization transactions occurring after July 25, 2006. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Investment advisor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Substantial contributor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A substantial contributor includes the grantor of a trust. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Family members. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 35% controlled entity. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A 35% controlled entity is: A corporation in which disqualified persons own more than 35% of the total combined voting power, A partnership in which such persons own more than 35% of the profits interest, or A trust or estate in which such persons own more than 35% of the beneficial interest. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Persons having substantial influence. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Treasurers and chief financial officers. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Persons with a material financial interest in a provider-sponsored organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Persons not considered to have substantial influence. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Facts and circumstances. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person founded the organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The direct supervisor of the person is not a disqualified person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A person may be a disqualified person with respect to transactions with more than one organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Reasonable Compensation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The section 162 standard will apply in determining the reasonableness of compensation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    Intent to treat benefits as compensation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Exception. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Rebuttable presumption that a transaction is not an excess benefit transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm (There is a special safe harbor for small organizations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm ) The authorized body adequately documents the basis for its determination concurrently with making that determination. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Disregarded benefits. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The following economic benefits are disregarded for section 4958 purposes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Nontaxable fringe benefits that are excluded from income under section 132. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm More information. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For more information, see the Instructions to Forms 990 and 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm They may be subject to an excise tax on the amount of any excess business holdings. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Donor advised fund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Supporting organizations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Taxes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The excess holdings are determined on the day during the tax year when they were the largest. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For more information on the tax on excess business holdings, see the Instructions for Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Taxable distribution. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Sponsoring organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Donor advised fund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Exception. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Disqualified supporting organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax on sponsoring organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax on fund manager. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Donor advisor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Related party. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   A related party includes any family member or 35% controlled entity. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See the definition of those terms under Disqualified Person , earlier. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax on donor, donor advisor, or related person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The advisor and the party who received the benefit are jointly and severally liable for the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Tax on fund managers. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Exception. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Capital gains from appreciation are included in the tax base on private foundation net investment income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Form 990-W is used to calculate the estimated tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm In addition, there are several other rules that apply to excise taxes on private foundations. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Both of these excise taxes are reported on Schedule A (Form 990-BL). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm These entities must meet section 501(r)(3) requirements at all times during their tax year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See Schedule H, Hospitals (Form 990), for details. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Prev  Up  Next   Home   More Online Publications
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Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 10. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Cash method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Debt acquired from a decedent. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Liquidation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Introduction You have a bad debt if you cannot collect money owed to you. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A bad debt is either a business bad debt or a nonbusiness bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm This chapter discusses only business bad debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Generally, a business bad debt is one that comes from operating your trade or business. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For more information on nonbusiness bad debts, see Publication 550. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm S. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Bad debts of a corporation (other than an S corporation) are always business bad debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Credit sales. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Business bad debts are mainly the result of credit sales to customers. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Accrual method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you use the accrual method of accounting, you generally report income as you earn it. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Cash method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you use the cash method of accounting, you generally report income when you receive payment. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Debts from a former business. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If any of these receivables subsequently become worthless, the loss is still a business bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Debt acquired from a decedent. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Liquidation. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Types of Business Bad Debts Business bad debts may result from the following. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Loans to clients and suppliers. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Debts owed by political parties. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You use the accrual method of accounting. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The debt arose from the sale of goods or services in the ordinary course of your trade or business. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You made substantial and continuing efforts to collect on the debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Loan or capital contribution. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Debts of an insolvent partner. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Business loan guarantee. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You made the guarantee in the course of your trade or business. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You have a legal duty to pay the debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You made the guarantee before the debt became worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You received reasonable consideration for making the guarantee. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Example. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Jane Zayne owns the Zayne Dress Company. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Elegant Fashions is one of Zayne's largest clients. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Elegant Fashions later defaulted on the loan. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm As a result, Ms. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Zayne paid the remaining balance of the loan in full to the bank. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm She was motivated by the desire to retain one of her better clients and keep a sales outlet. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Deductible in the year paid. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Rights against a borrower. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The debt is then owed to you. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Joint debtor. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Sale of mortgaged property. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm This may occur when the debt is due or prior to that date. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Property received for debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You can deduct the remaining debt as a bad debt if and when it becomes worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm It is not a recovery of a bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For information on the sale of an asset, see Publication 544. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The specific charge-off method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The nonaccrual-experience method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Generally, you must use the specific charge-off method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Partly worthless debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   You can deduct specific bad debts that become partly uncollectible during the tax year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Your tax deduction is limited to the amount you charge off on your books during the year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You do not have to charge off and deduct your partly worthless debts annually. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You can delay the charge off until a later year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, you cannot deduct any part of a debt after the year it becomes totally worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Significantly modified debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For more information, see Regulations section 1. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 166-3(a)(3). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Deduction disallowed. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Totally worthless debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, you may want to do so. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See Partly worthless debts, earlier. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Filing a claim for refund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If the bad debt was totally worthless, you must file the claim by the later of the following dates. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 7 years from the date your original return was due (not including extensions). Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 2 years from the date you paid the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 3 years from the date you filed your original return. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm 2 years from the date you paid the tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Such an impairment requires proof of existence. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   For details and more information about filing a claim, see Publication 556. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Use one of the following forms to file a claim. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For more information, see the instructions for the applicable form. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Table 10-1. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Forms Used To File a Claim IF you filed as a. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm . Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm . Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm THEN file. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm . Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm . Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Under this method, you do not accrue service related income you expect to be uncollectible. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Service related income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   You can use the nonaccrual-experience method only for amounts earned by performing services. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Gross receipts test. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Interest or penalty charged. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You otherwise accrue the full amount due as gross income at the time you provide the services. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Change in accounting method. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See Form 3115 and the Instructions for Form 3115 for more information. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm The amount you include is limited to the amount you actually deducted. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm However, you can exclude the amount deducted that did not reduce your tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Report the recovery as “Other income” on the appropriate business form or schedule. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm See Recoveries in Publication 525 for more information. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Net operating loss (NOL) carryover. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm For more information about NOLs, see Publication 536. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Www hrblock com lp efile html &otppartnerid 9012&campaignid ps_mcm_9012_0011&omnisource msn camp028d e efile free m desktop bmm Prev  Up  Next   Home   More Online Publications