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Free federal tax filing 4. Free federal tax filing   Other Section 501(c) Organizations Table of Contents Introduction 501(c)(4) - Civic Leagues and Social Welfare OrganizationsSpecific Organizations 501(c)(5) - Labor, Agricultural and Horticultural OrganizationsLabor Organizations Agricultural and Horticultural Organizations 501(c)(6) - Business Leagues, etc. Free federal tax filing Line of business. Free federal tax filing Examples. Free federal tax filing Improvement of business conditions. Free federal tax filing Exception for local legislation. Free federal tax filing De minimis exception. Free federal tax filing Grass roots lobbying. Free federal tax filing 501(c)(7) - Social and Recreation ClubsLimited membership. Free federal tax filing Support. Free federal tax filing Facilities open to public. Free federal tax filing Gross receipts from nonmembership sources. Free federal tax filing Gross receipts. Free federal tax filing Nontraditional activities. Free federal tax filing 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal SocietiesFraternal Beneficiary Societies (501(c)(8)) Domestic Fraternal Societies (501(c)(10)) 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' AssociationsLocal Employees' Associations (501(c)(4)) Voluntary Employees' Beneficiary Associations (501(c)(9)) Supplemental Unemployment Benefit Trusts (501(c)(17)) 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like OrganizationsMembership. Free federal tax filing Losses and expenses. Free federal tax filing Distributions of proceeds. Free federal tax filing The 85% Requirement Local Life Insurance Associations Mutual or Cooperative Associations 501(c)(13) - Cemetery CompaniesBuying cemetery property. Free federal tax filing Perpetual care organization. Free federal tax filing Care of individual plots. Free federal tax filing 501(c)(14) - Credit Unions and Other Mutual Financial OrganizationsState-Chartered Credit Unions Other Mutual Financial Organizations 501(c)(19) - Veterans' Organizations 501(c)(20) - Group Legal Services Plan Organizations 501(c)(21) - Black Lung Benefit TrustsExcise taxes. Free federal tax filing 501(c)(2) - Title-Holding Corporations for Single Parent CorporationsExpenses. Free federal tax filing Waiver of payment of income. Free federal tax filing 501(c)(25) - Title-Holding Corporations or Trusts for Multiple Parent CorporationsUnrelated Business Income 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations 501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations 501(c)(29) - CO-OP Health Insurance Issuers New Guidance for IRC 501(c)(29) Qualified Nonprofit Health Insurance Issuers General Requirements for Exemption under 501(c)(29) and Annual Filing Requirement Additional Guidance for Prospective 501(c)(29) Organizations Introduction This chapter contains specific information for certain organizations described in section 501(c), other than those organizations that are described in section 501(c)(3). Free federal tax filing Section 501(c)(3) organizations are covered in chapter 3 of this publication. Free federal tax filing The Table of Contents at the beginning of this publication, as well as the Organization Reference Chart, may help you locate at a glance the type of organization discussed in this chapter. Free federal tax filing 501(c)(4) - Civic Leagues and Social Welfare Organizations If your organization is not organized for profit and will be operated primarily to promote social welfare to benefit the community, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4). Free federal tax filing The discussion that follows describes the information you must provide when applying. Free federal tax filing For application procedures, see chapter 1. Free federal tax filing To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted primarily to charitable, educational, or recreational purposes. Free federal tax filing In addition, no part of the organization's net earnings can inure to the benefit of any private shareholder or individual. Free federal tax filing If the organization provides an excess benefit to certain persons, an excise tax may be imposed. Free federal tax filing See Excise tax on excess benefit transactions , under Excess Benefit Transactions in chapter 5 for more information about this tax. Free federal tax filing Examples. Free federal tax filing   Types of organizations that are considered to be social welfare organizations are civic associations and volunteer fire companies. Free federal tax filing Nonprofit operation. Free federal tax filing   You must submit evidence that your organization is organized and will be operated on a nonprofit basis. Free federal tax filing However, such evidence, including the fact that your organization is organized under a state law relating to nonprofit corporations, will not in itself establish a social welfare purpose. Free federal tax filing Social welfare. Free federal tax filing   To establish that your organization is organized primarily to promote social welfare, you should submit evidence with your application showing that your organization will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). Free federal tax filing   An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community. Free federal tax filing It therefore does not qualify as a section 501(c)(4) organization. Free federal tax filing Similarly, an organization formed to represent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the community. Free federal tax filing However, an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization. Free federal tax filing Political activity. Free federal tax filing   Promoting social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Free federal tax filing However, if you submit proof that your organization is organized primarily to promote social welfare, it can obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for public office. Free federal tax filing See the discussion in chapter 2 under Political Organization Income Tax Return . Free federal tax filing Social or recreational activity. Free federal tax filing   If social activities will be the primary purpose of your organization, you should not file an application for exemption as a social welfare organization but should file for exemption as a social club described in section 501(c)(7). Free federal tax filing Retirement benefit program. Free federal tax filing   An organization established by its members that has as its primary activity providing supplemental retirement benefits to its members or death benefits to their beneficiaries does not qualify as an exempt social welfare organization. Free federal tax filing It may qualify under another paragraph of section 501(c) depending on all the facts. Free federal tax filing   However, a nonprofit association that is established, maintained, and funded by a local government to provide the only retirement benefits to a class of employees may qualify as a social welfare organization under section 501(c)(4). Free federal tax filing Tax treatment of donations. Free federal tax filing   Donations to volunteer fire companies are deductible on the donor's federal income tax return, but only if made for exclusively public purposes. Free federal tax filing Contributions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions for federal income tax purposes. Free federal tax filing They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer's business. Free federal tax filing However, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Free federal tax filing for more information. Free federal tax filing For more information on social welfare organizations, see Life Cycle of a Social Welfare Organization at IRS. Free federal tax filing gov. Free federal tax filing Specific Organizations The following information should be contained in the application form and accompanying statements of certain types of civic leagues or social welfare organizations. Free federal tax filing Volunteer fire companies. Free federal tax filing   If your organization wishes to obtain exemption as a volunteer fire company or similar organization, you should submit evidence that its members are actively engaged in fire fighting and similar disaster assistance, whether it actually owns the fire fighting equipment, and whether it provides any assistance for its members, such as death and medical benefits in case of injury to them. Free federal tax filing   If your organization does not have an independent social purpose, such as providing recreational facilities for members, it may be exempt under section 501(c)(3). Free federal tax filing In this event, your organization should file Form 1023. Free federal tax filing Homeowners' associations. Free federal tax filing   A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. Free federal tax filing The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Free federal tax filing Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Free federal tax filing Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community. Free federal tax filing   The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. Free federal tax filing It also must show that it does not engage in exterior maintenance of private homes. Free federal tax filing   A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally can elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income. Free federal tax filing Other organizations. Free federal tax filing   Other nonprofit organizations that qualify as social welfare organizations include: An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and that serves the general public in an area with no other airport, A community association that works to improve public services, housing, and residential parking; publishes a free community newspaper; sponsors a community sports league, holiday programs, and meetings; and contracts with a private security service to patrol the community, A community association devoted to preserving the community's traditions, architecture, and appearance by representing it before the local legislature and administrative agencies in zoning, traffic, and parking matters, An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses so they will relocate to the area, and An organization that holds an annual festival of regional customs and traditions. Free federal tax filing 501(c)(5) - Labor, Agricultural and Horticultural Organizations If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural, or horticultural organization, you should submit an application on Form 1024. Free federal tax filing You must indicate in your application for exemption and accompanying statements that no part of the organization's net earnings will inure to the benefit of any member. Free federal tax filing In addition, you should follow the procedure for obtaining recognition of exempt status described in chapter 1. Free federal tax filing Submit any additional information that may be required, as described in this section. Free federal tax filing Tax treatment of donations. Free federal tax filing   Contributions to labor, agricultural, and horticultural organizations are not deductible as charitable contributions on the donor's federal income tax return. Free federal tax filing However, such payments may be deductible as business expenses if they are ordinary and necessary in the conduct of the taxpayer's trade or business. Free federal tax filing For more information about certain limits affecting the deductibility of these business expenses, see Deduction not allowed for dues used for political or legislative activities , under 501(c)(6) - Business Leagues, etc. Free federal tax filing Labor Organizations A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collectively with their employers to secure better working conditions. Free federal tax filing To show that your organization has the purpose of a labor organization, you should include in the articles of organization or accompanying statements (submitted with your exemption application) information establishing that the organization is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. Free federal tax filing In addition, no net earnings of the organization can inure to the benefit of any member. Free federal tax filing Composition of membership. Free federal tax filing   While a labor organization generally is composed of employees or representatives of the employees (in the form of collective bargaining agents) and similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate an exempt purpose. Free federal tax filing You must show in your application that your organization has the purposes described in the preceding paragraph. Free federal tax filing These purposes can be accomplished by a single labor organization acting alone or by several organizations acting together through a separate organization. Free federal tax filing Benefits to members. Free federal tax filing   The payment by a labor organization of death, sick, accident, and similar benefits to its individual members with funds contributed by its members, if made under a plan to better the conditions of the members, does not preclude exemption as a labor organization. Free federal tax filing However, an organization does not qualify for exemption as a labor organization if it has no authority to represent members in job-related matters, even if it provides weekly income to its members in the event of a lawful strike by the members' union, in return for an annual payment by the member. Free federal tax filing   For more information on labor organizations, see Life Cycle of a Labor Organization at IRS. Free federal tax filing gov. Free federal tax filing Agricultural and Horticultural Organizations Agricultural and horticultural organizations are connected with raising livestock, forestry, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits. Free federal tax filing For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. Free federal tax filing The term harvesting, in this case, includes fishing and related pursuits. Free federal tax filing Agricultural organizations can be quasi-public in character and are often designed to encourage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the necessary expenses of upkeep and operation. Free federal tax filing When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture, the organization must qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6) organizations. Free federal tax filing The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products. Free federal tax filing The following list contains some examples of activities that show an agricultural or horticultural purpose. Free federal tax filing Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state, farm, or home bureau. Free federal tax filing Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture. Free federal tax filing Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations being furnished to the community members to educate them in soil treatment. Free federal tax filing Guarding the purity of a specific breed of livestock. Free federal tax filing Encouraging improvements in the production of fish on privately owned fish farms. Free federal tax filing Negotiating with processors for the price to be paid to members for their crops. Free federal tax filing For more information on agricultural or horticultural organizations, see Life Cycle of an Agricultural or Horticultural Organization at IRS. Free federal tax filing gov. Free federal tax filing 501(c)(6) - Business Leagues, etc. Free federal tax filing If your association wants to apply for recognition of exemption from federal income tax as a nonprofit business league, chamber of commerce, real estate board, or board of trade, it should file Form 1024. Free federal tax filing For a discussion of the procedure to follow, see chapter 1. Free federal tax filing Your organization must indicate in its application form and attached statements that no part of its net earnings will inure to the benefit of any private shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining). Free federal tax filing In addition, your organization must be primarily engaged in activities or functions that are the basis for its exemption. Free federal tax filing It must be primarily supported by membership dues and other income from activities substantially related to its exempt purpose. Free federal tax filing A business league, in general, is an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Free federal tax filing Trade associations and professional associations are considered business leagues. Free federal tax filing Chamber of commerce. Free federal tax filing   A chamber of commerce usually is composed of the merchants and traders of a city. Free federal tax filing Board of trade. Free federal tax filing   A board of trade often consists of persons engaged in similar lines of business. Free federal tax filing For example, a nonprofit organization formed to regulate the sale of a specified agricultural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of trade. Free federal tax filing   Chambers of commerce and boards of trade usually promote the common economic interests of all the commercial enterprises in a given trade community. Free federal tax filing Real estate board. Free federal tax filing   A real estate board consists of members interested in improving the business conditions in the real estate field. Free federal tax filing It is not organized for profit and no part of the net earnings inures to the benefit of any private shareholder or individual. Free federal tax filing Professional football leagues. Free federal tax filing   The Internal Revenue Code specifically defines professional football leagues as exempt organizations under section 501(c)(6). Free federal tax filing They are exempt whether or not they administer a pension fund for football players. Free federal tax filing General purpose. Free federal tax filing   You must indicate in the material submitted with your application that your organization will be devoted to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. Free federal tax filing It must be shown that the conditions of a particular trade or the interests of the community will be advanced. Free federal tax filing Merely indicating the name of the organization or the object of the local statute under which it is created is not enough to demonstrate the required general purpose. Free federal tax filing Line of business. Free federal tax filing   This term generally refers either to an entire industry or to all components of an industry within a geographic area. Free federal tax filing It does not include a group composed of businesses that market a particular brand within an industry. Free federal tax filing Common business interest. Free federal tax filing   A common business interest of all members of the organization must be established by the application documents. Free federal tax filing Examples. Free federal tax filing   Activities that would tend to illustrate a common business interest are: Promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail merchants association, Education of the public in the use of credit, Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated by casualty insurance companies, Establishment and maintenance of the integrity of a local commercial market, Operation of a trade publication primarily intended to benefit an entire industry, and Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main purpose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying basis as a result). Free federal tax filing Improvement of business conditions. Free federal tax filing   Generally, this must be shown to be the purpose of the organization. Free federal tax filing This is not established by evidence of particular services that provide a convenience or economy to individual members in their businesses, such as advertising that carries the name of members, interest-free loans, assigning exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency. Free federal tax filing Stock or commodity exchange. Free federal tax filing   A stock or commodity exchange is not a business league, chamber of commerce, real estate board, or board of trade and is not exempt under section 501(c)(6). Free federal tax filing Legislative activity. Free federal tax filing   An organization that is exempt under section 501(c)(6) can work for the enactment of laws to advance the common business interests of the organization's members. Free federal tax filing Deduction not allowed for dues used for political or legislative activities. Free federal tax filing   A taxpayer cannot deduct the part of dues or other payments to a business league, trade association, labor union, or similar organization that is reported to the taxpayer by the organization as having been used for any of the following activities. Free federal tax filing Influencing legislation. Free federal tax filing Participating or intervening in a political campaign for, or against, any candidate for public office. Free federal tax filing Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or referendums (also known as grass roots lobbying). Free federal tax filing Communicating directly with certain executive branch officials to try to influence their official actions or positions. Free federal tax filing See Dues Used for Lobbying or Political Activities under Required Disclosures in chapter 2 for more information. Free federal tax filing Exception for local legislation. Free federal tax filing   Members can deduct dues (or assessments) to an organization that are for expenses of: Appearing before, submitting statements to, or sending communications to members of a local council or similar governing body with respect to legislation or proposed legislation of direct interest to the member, or Communicating information between the member and the organization with respect to local legislation or proposed legislation of direct interest to the organization or the member. Free federal tax filing Legislation or proposed legislation is of direct interest to a taxpayer if it will, or can reasonably be expected to, affect the taxpayer's trade or business. Free federal tax filing De minimis exception. Free federal tax filing   In-house expenditures of $2,000 or less for the year for activities (1) – (4) listed earlier will not prevent a deduction for dues if the dues meet all other tests to be deductible as a business expense. Free federal tax filing Grass roots lobbying. Free federal tax filing   A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grass roots lobbying if it contacts prospective members or calls upon its own members to contact their employees and customers for the purpose of urging such persons to communicate with their elected state or Congressional representatives to support the promotion, defeat, or repeal of legislation that is of direct interest to the organization. Free federal tax filing Any dues or assessments directly related to such activities are not deductible by the taxpayer, since the individuals being contacted, who are not members of the organization, are a segment of the general public. Free federal tax filing Tax treatment of donations. Free federal tax filing   Contributions to organizations described in this section are not deductible as charitable contributions on the donor's federal income tax return. Free federal tax filing They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer's business. Free federal tax filing   For more information on business leagues, see Life Cycle of a Business League (Trade Association) on IRS. Free federal tax filing gov. Free federal tax filing 501(c)(7) - Social and Recreation Clubs If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax. Free federal tax filing In applying for recognition of exemption, you should submit the information described in this section. Free federal tax filing Also see chapter 1 for the procedures to follow. Free federal tax filing Typical organizations that should file for recognition of exemption as social clubs include: College alumni associations that are not described in chapter 3 under Alumni association , College fraternities or sororities operating chapter houses for students, Country clubs, Amateur hunting, fishing, tennis, swimming, and other sport clubs, Dinner clubs that provide a meeting place, library, and dining room for members, Hobby clubs, Garden clubs, and Variety clubs. Free federal tax filing Discrimination prohibited. Free federal tax filing   Your organization will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any written policy statement provides for discrimination against any person on the basis of race, color, or religion. Free federal tax filing   However, a club that in good faith limits its membership to the members of a particular religion to further the teachings or principles of that religion and not to exclude individuals of a particular race or color will not be considered as discriminating on the basis of religion. Free federal tax filing Also, the restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed later) if that society is described in section 501(c)(8) and exempt from tax under section 501(a) and limits its membership to the members of a particular religion. Free federal tax filing Private benefit prohibited. Free federal tax filing   No part of the organization's net earnings can inure to the benefit of any person having a personal and private interest in the activities of the organization. Free federal tax filing For purposes of this requirement, it is not necessary that net earnings be actually distributed. Free federal tax filing Even undistributed earnings can benefit members. Free federal tax filing Examples of this include a decrease in membership dues or an increase in the services the club provides to its members without a corresponding increase in dues or other fees paid for club support. Free federal tax filing However, fixed-fee payments to members who bring new members into the club are not an inurement of the club's net earnings, if the payments are reasonable compensation for performance of a necessary administrative service. Free federal tax filing Purposes. Free federal tax filing   To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you should submit evidence with your application that personal contact, commingling, and fellowship exist among members. Free federal tax filing You must show that members are bound together by a common objective of pleasure, recreation, and other nonprofitable purposes. Free federal tax filing   Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organization. Free federal tax filing A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group. Free federal tax filing   The term other nonprofitable purposes means other purposes similar to pleasure and recreation. Free federal tax filing For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits is not operating exclusively for pleasure, recreation, and other nonprofitable purposes. Free federal tax filing Limited membership. Free federal tax filing   The membership in a social club must be limited. Free federal tax filing To show that your organization has a purpose that would characterize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club. Free federal tax filing   A social club that issues corporate membership is dealing with the general public in the form of the corporation's employees. Free federal tax filing Corporate members of a club are not the kind of members contemplated by the law. Free federal tax filing Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. Free federal tax filing See Gross receipts from nonmembership sources , later. Free federal tax filing Bona fide individual memberships paid for by a corporation would not have an effect on the gross receipts source. Free federal tax filing   The fact that a social club may have an associate (nonvoting) class of membership will not be, in and of itself, a cause for nonrecognition of exemption. Free federal tax filing However, if one membership class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited class, resulting in a denial of the club's exemption. Free federal tax filing Support. Free federal tax filing   In general, your club should be supported solely by membership fees, dues, and assessments. Free federal tax filing However, if otherwise entitled to exemption, your club will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. Free federal tax filing Business activities. Free federal tax filing   If your club will engage in business, such as selling real estate, timber, or other products or services, it generally will be denied exemption. Free federal tax filing However, evidence submitted with your application form that your organization will provide meals, refreshments, or services related to its exempt purposes only to its own members or their dependents or guests will not cause denial of exemption. Free federal tax filing Facilities open to public. Free federal tax filing   Evidence that your club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. Free federal tax filing This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. Free federal tax filing Gross receipts from nonmembership sources. Free federal tax filing   A section 501(c)(7) organization can receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Free federal tax filing Income from nontraditional business activity with members is not exempt function income, and thus is included as income from sources outside of the membership. Free federal tax filing Of the 35% gross receipts listed above, up to 15% of the gross receipts can be derived from the use of the club's facilities or services by the general public. Free federal tax filing If an organization has outside income that is more than these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. Free federal tax filing Gross receipts. Free federal tax filing   Gross receipts, for this purpose, are receipts from the normal and usual (traditionally conducted) activities of the club. Free federal tax filing These receipts include charges, admissions, membership fees, dues, assessments, investment income, and normal recurring capital gains on investments. Free federal tax filing Receipts do not include initiation fees and capital contributions. Free federal tax filing Unusual amounts of income, such as from the sale of a clubhouse or similar facility, are not included in gross receipts or in figuring the percentage limits. Free federal tax filing Nontraditional activities. Free federal tax filing   Activities conducted by a social club need to further its exempt purposes. Free federal tax filing Traditional business activities are those that further a social club's exempt purposes. Free federal tax filing Nontraditional business activities do not further the exempt purposes of a social club even if conducted solely on a membership basis. Free federal tax filing Nontraditional business activities are prohibited (subject to an insubstantial, trivial, and nonrecurrent test) for businesses conducted with both members and nonmembers. Free federal tax filing Examples of nontraditional business activities include sale of package liquor, take-out food, and long-term room rental. Free federal tax filing Fraternity foundations. Free federal tax filing   If your organization is a foundation formed for the exclusive purpose of acquiring and leasing a chapter house to a local fraternity chapter or sorority chapter maintained at an educational institution and does not engage in any social or recreational activities, it may be a title holding corporation (discussed later under section 501(c)(2) organizations and under section 501(c)(25) organizations) rather than a social club. Free federal tax filing Tax treatment of donations. Free federal tax filing   Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor's federal income tax return. Free federal tax filing 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies This section describes the information to be provided upon application for recognition of exemption by two types of fraternal societies: beneficiary and domestic. Free federal tax filing The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other benefits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather devote their earnings to fraternal, religious, charitable, etc. Free federal tax filing , purposes. Free federal tax filing The procedures to follow in applying for recognition of exemption are described in chapter 1. Free federal tax filing If your organization is controlled by a central organization, you should check with your controlling organization to determine whether your unit has been included in a group exemption letter or can be added. Free federal tax filing If so, your organization need not apply for individual recognition of exemption. Free federal tax filing For more information, see Group Exemption Letter in chapter 1 of this publication. Free federal tax filing Tax treatment of donations. Free federal tax filing   Donations by an individual to a domestic fraternal beneficiary society or a domestic fraternal society operating under the lodge system are deductible as charitable contributions only if used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Free federal tax filing Fraternal Beneficiary Societies (501(c)(8)) A fraternal beneficiary society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Free federal tax filing The application and accompanying statements should establish that the organization: Is a fraternal organization, Operates under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system, and Provides for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or their dependents. Free federal tax filing Lodge system. Free federal tax filing   Operating under the lodge system means carrying on activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. Free federal tax filing Payment of benefits. Free federal tax filing   It is not essential that every member be covered by the society's program of sick, accident, or death benefits. Free federal tax filing An organization can qualify for exemption if most of its members are eligible for benefits, and the benefits are paid from contributions or dues paid by those members. Free federal tax filing   The benefits must be limited to members and their dependents. Free federal tax filing If members will have the ability to confer benefits to other than themselves and their dependents, exemption will not be recognized. Free federal tax filing Whole-life insurance. Free federal tax filing   Whole-life insurance constitutes a life benefit under section 501(c)(8) even though the policy may contain investment features such as a cash surrender value or a policy loan. Free federal tax filing Reinsurance pool. Free federal tax filing   Payments by a fraternal beneficiary society into a state-sponsored reinsurance pool that protects participating insurers against excessive losses on major medical health and accident insurance will not preclude exemption as a fraternal beneficiary society. Free federal tax filing Domestic Fraternal Societies (501(c)(10)) A domestic fraternal society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. Free federal tax filing The application and accompanying statements should establish that the organization: Is a domestic fraternal organization organized in the U. Free federal tax filing S. Free federal tax filing , Operates under the lodge system, Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and Does not provide for the payment of life, sick, accident, or other benefits to its members. Free federal tax filing The organization can arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status. Free federal tax filing 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' Associations This section describes the information to be provided upon application for recognition of exemption by the following types of employees' associations: A voluntary employees' beneficiary association (including federal employees' associations) organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries, if no part of the net earnings of the association inures to the benefit of any private shareholder or individual, and A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemployment benefits. Free federal tax filing Both the application form to file and the information to provide are discussed later under the section that describes your employee association. Free federal tax filing Chapter 1 describes the procedures to follow in applying for exemption. Free federal tax filing Tax treatment of donations. Free federal tax filing   Donations to these organizations are not deductible as charitable contributions on the donor's federal income tax return. Free federal tax filing Local Employees' Associations (501(c)(4)) A local association of employees whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. Free federal tax filing A local employees' association must apply for recognition of exemption by filing Form 1024. Free federal tax filing The organization must submit evidence that: It is of a purely local character, Its membership is limited to employees of a designated person or persons in a particular locality, and Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes. Free federal tax filing A local association of employees that has established a system of paying retirement or death benefits, or both, to its members will not qualify for exemption since the payment of these benefits is not considered as being for charitable, educational, or recreational purposes. Free federal tax filing Similarly, a local association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount prices on merchandise, services, and activities does not qualify for exemption. Free federal tax filing Voluntary Employees' Beneficiary Associations (501(c)(9)) An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. Free federal tax filing The material submitted with the application must show that your organization: Is a voluntary association of employees, Will provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and Will not allow any of its net earnings to inure to the benefit of any private individual or shareholder except in the form of scheduled benefit payments. Free federal tax filing To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Free federal tax filing Note. Free federal tax filing Under section 4976, the reversion of funds from a section 501(c)(9) organization to the employer who created the beneficiary association may subject the employer to a 100% penalty excise tax on the amount of the reversion. Free federal tax filing Notice requirement. Free federal tax filing   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Free federal tax filing The organization gives notice by filing Form 1024. Free federal tax filing If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before notice is given. Free federal tax filing An extension of time for filing the notice can be granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Free federal tax filing Membership. Free federal tax filing   Membership of a section 501(c)(9) organization must consist of individuals who are employees and have an employment-related common bond. Free federal tax filing This common bond can be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. Free federal tax filing   The membership of an association can include some individuals who are not employees, provided they have an employment-related bond with the employee-members. Free federal tax filing For example, the owner of a business whose employees are members of the association can be a member. Free federal tax filing An association will be considered composed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees. Free federal tax filing Employees. Free federal tax filing   Employees include individuals who became entitled to membership because they are or were employees. Free federal tax filing For example, an individual will qualify as an employee even though the individual is on a leave of absence or has been terminated due to retirement, disability, or layoff. Free federal tax filing   Generally, membership is voluntary if an affirmative act is required on the part of an employee to become a member. Free federal tax filing Conversely, membership is involuntary if the designation as a member is due to employee status. Free federal tax filing However, an association will be considered voluntary if employees are required to be members of the organization as a condition of their employment and they do not incur a detriment (such as a payroll deduction) as a result of their membership. Free federal tax filing An employer has not imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization. Free federal tax filing Payment of benefits. Free federal tax filing   The information submitted with your application must show that your organization will pay life, sick, accident, supplemental unemployment, or other similar benefits. Free federal tax filing The benefits can be provided directly by your association or indirectly by your association through the payments of premiums to an insurance company (or fees to a medical clinic). Free federal tax filing Benefits can be in the form of medical, clinical, or hospital services, transportation furnished for medical care, or money payments. Free federal tax filing Nondiscrimination requirements. Free federal tax filing   An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. Free federal tax filing However, if the organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between employee organizations and employers, the plan need not meet these requirements for the organization to qualify as tax exempt. Free federal tax filing   A plan meets the nondiscrimination requirements only if both of the following statements are true. Free federal tax filing Each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and does not discriminate in favor of employees who are highly compensated individuals. Free federal tax filing The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals. Free federal tax filing A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor of highly compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan. Free federal tax filing   For purposes of determining whether a plan meets the nondiscrimination requirements, the employer can elect to exclude all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. Free federal tax filing This will not apply to any increase in such payment by any plan amendment adopted after June 22, 1984. Free federal tax filing   If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal Revenue Code as a condition of that benefit being excluded from gross income, these nondiscrimination requirements do not apply. Free federal tax filing The benefit will be considered nondiscriminatory only if it meets the nondiscrimination provision of the applicable Code section. Free federal tax filing For example, benefits provided under a medical reimbursement plan would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimination requirements of section 105(h)(3) and 105(h)(4). Free federal tax filing Excluded employees. Free federal tax filing   Certain employees who are not covered by a plan can be excluded from consideration in applying these requirements. Free federal tax filing These include employees: Who have not completed 3 years of service, Who have not attained age 21, Who are seasonal or less than half-time employees, Who are not in the plan and who are included in a unit of employees covered by a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining, or Who are nonresident aliens and who receive no earned income from the employer that has United States source income. Free federal tax filing Highly compensated individual. Free federal tax filing   A highly compensated individual is one who: Owned 5 percent or more of the employer at any time during the current year or the preceding year, Received more than $115,000 in compensation from the employer for the preceding year (the amount is annualized for inflation. Free federal tax filing Go to IRS. Free federal tax filing gov, and search “Pension Plan Limitation” for the year), and Was among the top 20% of employees by compensation for the preceding year. Free federal tax filing However, the employer can choose not to have (3) apply. Free federal tax filing Aggregation rules. Free federal tax filing   The employer can choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination requirements. Free federal tax filing Employees of controlled groups of corporations, trades, or businesses under common control, or members of an affiliated service group, are treated as employees of a single employer. Free federal tax filing Leased employees are treated as employees of the recipient. Free federal tax filing One employee. Free federal tax filing   A trust created to provide benefits to one employee will not qualify as a voluntary employees' beneficiary association under section 501(c)(9). Free federal tax filing Supplemental Unemployment Benefit Trusts (501(c)(17)) A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. Free federal tax filing The trust must be a valid, existing trust under local law and must be evidenced by an executed document. Free federal tax filing A conformed copy of the plan of which the trust is a part should be attached to the application. Free federal tax filing To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement. Free federal tax filing Note. Free federal tax filing Under section 4976, the reversion of funds from a section 501(c)(17) organization to the employer who created the supplemental unemployment benefit trust may subject the employer to a 100% penalty excise tax on the amount of the reversion. Free federal tax filing Notice requirement. Free federal tax filing   An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt status. Free federal tax filing The organization gives notice by filing Form 1024. Free federal tax filing If the notice is not given by 15 months after the end of the month in which the organization was created, the organization will not be exempt for any period before such notice is given. Free federal tax filing An extension of time for filing the notice is granted under the same procedures as those described for section 501(c)(3) organizations in chapter 3 under Application for Recognition of Exemption . Free federal tax filing Types of payments. Free federal tax filing   You must show that the supplemental unemployment compensation benefits will be benefits paid to an employee because of the employee's involuntary separation from employment (whether or not the separation is temporary) resulting directly from a reduction-in-force, discontinuance of a plant or operation, or other similar conditions. Free federal tax filing In addition, sickness and accident benefits (but not vacation, retirement, or death benefits) may be included in the plan if these are subordinate to the unemployment compensation benefits. Free federal tax filing Diversion of funds. Free federal tax filing   It must be impossible under the plan (at any time before the satisfaction of all liabilities with respect to employees under the plan) to use or to divert any of the corpus or income of the trust to any purpose other than the payment of supplemental unemployment compensation benefits (or sickness or accident benefits to the extent just explained). Free federal tax filing Discrimination in benefits. Free federal tax filing   Neither the terms of the plan nor the actual payment of benefits can be discriminatory in favor of the company's officers, stockholders, supervisors, or highly paid employees. Free federal tax filing However, a plan is not discriminatory merely because benefits bear a uniform relationship to compensation or the rate of compensation. Free federal tax filing Prohibited transactions and exemption. Free federal tax filing   If your organization is a supplemental unemployment benefit trust and has received a denial of exemption because it engaged in a prohibited transaction, as defined by section 503(b), it can file a claim for exemption in any tax year following the tax year in which the notice of denial was issued. Free federal tax filing It must file the claim on Form 1024. Free federal tax filing The organization must include a written declaration that it will not knowingly again engage in a prohibited transaction. Free federal tax filing An authorized principal officer of your organization must make this declaration under the penalties of perjury. Free federal tax filing   If your organization has satisfied all requirements as a supplemental unemployment benefit trust described in section 501(c)(17), it will be notified in writing that it has been recognized as exempt. Free federal tax filing However, the organization will be exempt only for those tax years after the tax year in which the claim for exemption (Form 1024) is filed. Free federal tax filing Tax year in this case means the established annual accounting period of the organization or, if the organization has not established an annual accounting period, the calendar year. Free federal tax filing For more information about the requirements for reestablishing an exemption previously denied, contact the IRS. Free federal tax filing 501(c)(12) - Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations Each of the following organizations apply for recognition of exemption from federal income tax by filing Form 1024. Free federal tax filing Benevolent life insurance associations of a purely local character and like organizations. Free federal tax filing Mutual ditch or irrigation companies and like organizations. Free federal tax filing Mutual or cooperative telephone companies and like organizations. Free federal tax filing A like organization is an organization that performs a service comparable to that performed by any one of the above organizations. Free federal tax filing The information to be provided upon application by each of these organizations is described in this section. Free federal tax filing For information as to the procedures to follow in applying for exemption, see chapter 1. Free federal tax filing General requirements. Free federal tax filing   These organizations must use their income solely to cover losses and expenses, with any excess being returned to members or retained to cover future losses and expenses. Free federal tax filing They must collect at least 85% of their income from members for the sole purpose of meeting losses and expenses. Free federal tax filing Mutual character. Free federal tax filing   These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual or cooperative basis. Free federal tax filing They are associations of persons or organizations, or both, banded together to provide themselves a mutually desirable service approximately at cost and on a mutual basis. Free federal tax filing To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated that their members have the right to choose the management, to receive services at cost, to receive a return of any excess of payments over losses and expenses, and to share in any assets upon dissolution. Free federal tax filing   The rights and interests of members in the annual savings of the organization must be determined in proportion to their business with the organization. Free federal tax filing Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members during the period the assets were owned by the organization in proportion to the amount of business done during that period. Free federal tax filing The bylaws must not provide for forfeiture of a member's rights and interest upon withdrawal or termination. Free federal tax filing Membership. Free federal tax filing   Membership of a mutual organization consists of those who join the organization to obtain its services, and have a voice in its management. Free federal tax filing In a stock company, the stockholders are members. Free federal tax filing However, a mutual life insurance organization cannot have policyholders other than its members. Free federal tax filing Losses and expenses. Free federal tax filing   In furnishing services substantially at cost, an organization must use its income solely for paying losses and expenses. Free federal tax filing Any excess income not retained in reasonable reserves for future losses and expenses belongs to members in proportion to their patronage or business done with the organization. Free federal tax filing If such patronage refunds are retained in reasonable amounts for purposes of expanding and improving facilities, retiring capital indebtedness, acquiring other assets, and unexpected expenses, the organization must maintain records sufficient to reflect the equity of each member in the assets acquired with the funds. Free federal tax filing Distributions of proceeds. Free federal tax filing   The cooperative may distribute the unexpended balance of collections or assessments remaining on hand at the end of the year to members or patrons prorated on the basis of their patronage or business done with the cooperative. Free federal tax filing Such distribution represents a refund in the costs of services rendered to the member. Free federal tax filing The 85% Requirement All of the organizations listed above must submit evidence with their application that they receive 85% or more of their gross income from their members for the sole purpose of meeting losses and expenses. Free federal tax filing Nevertheless, certain items of income are excluded from the computation of the 85% requirement if the organization is a mutual or cooperative telephone or electric company. Free federal tax filing Mutual or cooperative telephone company. Free federal tax filing   A mutual or cooperative telephone company will exclude from the computation of the 85% requirement any income received or accrued from: A nonmember telephone company for the performance of communication services involving the completion of long distance calls to, from, or between members of the mutual or cooperative telephone company, Qualified pole rentals, The sale of display listings in a directory furnished to its members, or The prepayment of a loan created in 1987, 1988, or 1989, under section 306A, 306B, or 311 of the Rural Electrification Act of 1936. Free federal tax filing Mutual or cooperative electric company. Free federal tax filing   A mutual or cooperative electric company will exclude from the computation of the 85% requirement any income received or accrued from: Qualified pole rentals, Any provision or sale of electric energy transmission services or ancillary service if the services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by the Federal Energy Regulatory Commission (FERC) or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member), The provision or sale of electric energy distribution services or ancillary services if the services are provided on a nondiscriminatory open-access basis to distribute electric energy not owned by the mutual or electric cooperative company: To end-users who are served by distribution facilities not owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), or Generated by a generation facility not owned or leased by the company or any of its members and which is directly connected to distribution facilities owned by the company or any of its members (other than income received or accrued directly or indirectly from a member), Any nuclear decommissioning transaction, or Any asset exchange or conversion transaction. Free federal tax filing   An electric cooperative's sale of excess fuel at cost in the year of purchase is not income for purposes of determining compliance with the 85% requirement. Free federal tax filing Qualified pole rental. Free federal tax filing   The term qualified pole rental means any rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that are used by the company in providing telephone or electric services to its members, and Pursuant to the rental to support one or more wires (in addition to wires described in (1)) for use in connection with the transmission by wire of electricity or of telephone or other communications. Free federal tax filing   The term rental, for this purpose, includes any sale of the right to use the pole (or other structure). Free federal tax filing The 85% requirement is applied on the basis of an annual accounting period. Free federal tax filing Failure of an organization to meet the requirement in a particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement is met. Free federal tax filing Gain from the sale or conversion of the organization's property is not considered an amount received from members in determining whether the organization's income consists of amounts collected from members. Free federal tax filing Because the 85% income test is based on gross income, capital losses cannot be used to reduce capital gains for purposes of this test. Free federal tax filing Example. Free federal tax filing   The books of an organization reflect the following for the calendar year. Free federal tax filing Collections from members $2,400 Short-term capital gains 600 Short-term capital losses 400 Other income None Gross income ($2,400 + $600 =$3000) 100% Collected from members ($2,400) 80%   Since amounts collected from members do not constitute at least 85% of gross income, the organization is not entitled to exemption from federal income tax for the year. Free federal tax filing   Voluntary contributions in the nature of gifts are not taken into account for purposes of the 85% computation. Free federal tax filing   Other tax-exempt income besides gifts is considered as income received from other than members in applying the 85% test. Free federal tax filing   If the 85% test is not met, your organization, if classifiable under this section, will not qualify for exemption as any other type of organization described in this publication. Free federal tax filing Tax treatment of donations. Free federal tax filing   Donations to an organization described in this section are not deductible as charitable contributions on the donor's federal income tax return. Free federal tax filing Local Life Insurance Associations A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a benevolent life insurance association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that its excess funds will be refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income requirement. Free federal tax filing If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15% of its income is derived, it will not be entitled to exemption. Free federal tax filing To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular community, place, or district irrespective of political subdivisions. Free federal tax filing If the activities of an organization are limited only by the borders of a state, it cannot be purely local in character. Free federal tax filing A benevolent life insurance association that does not terminate membership when a member moves from the local area in which the association operates will qualify for exemption if it meets the other requirements. Free federal tax filing A copy of each type of policy issued by your organization should be included with the application for recognition of exemption. Free federal tax filing Organizations similar to local benevolent life insurance companies. Free federal tax filing   These organizations include those that in addition to paying death benefits also provide for the payment of sick, accident, or health benefits. Free federal tax filing However, an organization that pays only sick, accident, or health benefits, but not life insurance benefits, is not an organization similar to a benevolent life insurance association and should not apply for recognition of exemption as described in this section. Free federal tax filing Burial and funeral benefit insurance organization. Free federal tax filing   This type of organization can apply for recognition of exemption as an organization similar to a benevolent life insurance company if it establishes that the benefits are paid in cash and if it is not engaged directly in the manufacture of funeral supplies or the performance of funeral services. Free federal tax filing An organization that provides its benefits in the form of supplies and service is not a life insurance company. Free federal tax filing Such an organization can seek recognition of exemption from federal income tax, however, as a mutual insurance company other than life. Free federal tax filing Mutual or Cooperative Associations Mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations need not establish that they are of a purely local character. Free federal tax filing They can serve noncontiguous areas. Free federal tax filing Like organization. Free federal tax filing   A like organization is a cooperative or mutual organization that performs a service similar to mutual ditch, irrigation, telephone, or electric companies. Free federal tax filing Examples include the following: cooperatives that provide protection of river banks to prevent erosion, water and sewer services, cable television, satellite, television, cellular phone services, two-way radio service, or natural gas services. Free federal tax filing 501(c)(13) - Cemetery Companies If your organization wishes to obtain recognition of exemption from federal income tax as a cemetery company or a corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, it must file an application on Form 1024. Free federal tax filing For the procedure to follow to file an application, see Application, Approval, and Appeal Procedures in chapter 1. Free federal tax filing A nonprofit mutual cemetery company that seeks recognition of exemption should submit evidence with its application that it is owned and operated exclusively for the benefit of its lot owners who hold lots for bona fide burial purposes and not for purposes of resale. Free federal tax filing A mutual cemetery company that also engages in charitable activities, such as the burial of paupers, will be regarded as operating within this standard. Free federal tax filing The fact that a mutual cemetery company limits its membership to a particular class of individuals, such as members of a family, will not affect its status as mutual so long as all the other requirements of section 501(c)(13) are met. Free federal tax filing If your organization is a nonprofit corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, you should show that it is not permitted by its charter to engage in any business not necessarily incident to that purpose. Free federal tax filing Operating a mortuary is not permitted. Free federal tax filing However, selling monuments, markers, vaults, and flowers solely for use in the cemetery is permitted if the profits from these sales are used to maintain the cemetery as a whole. Free federal tax filing How income can be used. Free federal tax filing   You should show that your organization's earnings are or will be used only in one or more of the following ways. Free federal tax filing To pay the ordinary and necessary expenses of operating, maintaining, and improving the cemetery or crematorium. Free federal tax filing To buy cemetery property. Free federal tax filing To create a fund that will provide a source of income for the perpetual care of the cemetery or a reasonable reserve for any ordinary or necessary purpose. Free federal tax filing No part of the net earnings of your organization can inure to the benefit of any private shareholder or individual. Free federal tax filing Ordinary and necessary expenses in connection with the operation, management, maintenance, and improvement of the cemetery are permitted, as are reasonable fees for the services of a manager. Free federal tax filing Buying cemetery property. Free federal tax filing   Payments can be made to amortize debt incurred to buy land, but cannot be in the nature of profit distributions. Free federal tax filing You must show the method used to finance the purchase of the cemetery property and that the purchase price of the land at the time of its sale to the cemetery was not unreasonable. Free federal tax filing   Except for holders of preferred stock (discussed later), no person can have any interest in the net earnings of a tax-exempt cemetery company or crematorium. Free federal tax filing Therefore, if property is transferred to the organization in exchange for an interest in the organization's net earnings, the organization will not
 
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Page Last Reviewed or Updated: 19-Mar-2014

The Free Federal Tax Filing

Free federal tax filing Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Free federal tax filing Property not disposed of or abandoned. Free federal tax filing Special rule for normal retirements from item accounts. Free federal tax filing Abandoned property. Free federal tax filing Single item accounts. Free federal tax filing Multiple property account. Free federal tax filing Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Free federal tax filing If your property qualified for MACRS, you must depreciate it under MACRS. Free federal tax filing See Publication 946. Free federal tax filing However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Free federal tax filing Also, you can elect to exclude certain property from being depreciated under MACRS. Free federal tax filing Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Free federal tax filing Intangible property. Free federal tax filing   You cannot depreciate intangible property under ACRS or MACRS. Free federal tax filing You depreciate intangible property using any other reasonable method, usually, the straight line method. Free federal tax filing Note. Free federal tax filing The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Free federal tax filing For more information, see chapter 12 of Publication 535. Free federal tax filing Public utility property. Free federal tax filing   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Free federal tax filing This type of property is subject to depreciation under a special rule. Free federal tax filing Videocassettes. Free federal tax filing   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Free federal tax filing You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Free federal tax filing The straight line method, salvage value, and useful life are discussed later under Methods To Use. Free federal tax filing You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Free federal tax filing How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Free federal tax filing These methods are straight line and declining balance. Free federal tax filing To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Free federal tax filing They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Free federal tax filing The amount of the deduction in any year also depends on which method of depreciation you choose. Free federal tax filing Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Free federal tax filing The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Free federal tax filing Your original basis is usually the purchase price. Free federal tax filing However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Free federal tax filing Adjusted basis. Free federal tax filing   Events will often change the basis of property. Free federal tax filing When this occurs, the changed basis is called the adjusted basis. Free federal tax filing Some events, such as improvements you make, increase basis. Free federal tax filing Events such as deducting casualty losses and depreciation decrease basis. Free federal tax filing If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Free federal tax filing   Publication 551 explains how to figure basis for property acquired in different ways. Free federal tax filing It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Free federal tax filing Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Free federal tax filing It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Free federal tax filing It is how long it will continue to be useful to you, not how long the property will last. Free federal tax filing Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Free federal tax filing The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Free federal tax filing Consider all these factors before you arrive at a useful life for your property. Free federal tax filing The useful life of the same type of property varies from user to user. Free federal tax filing When you determine the useful life of your property, keep in mind your own experience with similar property. Free federal tax filing You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Free federal tax filing Change in useful life. Free federal tax filing   You base your estimate of useful life on certain facts. Free federal tax filing If these facts change significantly, you can adjust your estimate of the remaining useful life. Free federal tax filing However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Free federal tax filing Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Free federal tax filing You generally cannot depreciate property below a reasonable salvage value. Free federal tax filing Determining salvage value. Free federal tax filing   Salvage value is the estimated value of property at the end of its useful life. Free federal tax filing It is what you expect to get for the property if you sell it after you can no longer use it productively. Free federal tax filing You must estimate the salvage value of a piece of property when you first acquire it. Free federal tax filing   Salvage value is affected both by how you use the property and how long you use it. Free federal tax filing If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Free federal tax filing However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Free federal tax filing Changing salvage value. Free federal tax filing   Once you determine the salvage value for property, you should not change it merely because prices have changed. Free federal tax filing However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Free federal tax filing When you redetermine the salvage value, take into account the facts that exist at the time. Free federal tax filing Net salvage. Free federal tax filing   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Free federal tax filing You can choose either salvage value or net salvage when you figure depreciation. Free federal tax filing You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Free federal tax filing However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Free federal tax filing Your salvage value can never be less than zero. Free federal tax filing Ten percent rule. Free federal tax filing   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Free federal tax filing You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Free federal tax filing If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Free federal tax filing Methods To Use Two methods of depreciation are the straight line and declining balance methods. Free federal tax filing If ACRS or MACRS does not apply, you can use one of these methods. Free federal tax filing The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Free federal tax filing Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Free federal tax filing One of these methods was the straight line method. Free federal tax filing This method was also used for intangible property. Free federal tax filing It lets you deduct the same amount of depreciation each year. Free federal tax filing To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Free federal tax filing Subtract the salvage value, if any, from the adjusted basis. Free federal tax filing The balance is the total amount of depreciation you can take over the useful life of the property. Free federal tax filing Divide the balance by the number of years remaining in the useful life. Free federal tax filing This gives you the amount of your yearly depreciation deduction. Free federal tax filing Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Free federal tax filing If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Free federal tax filing Example. Free federal tax filing In April 1994, Frank bought a franchise for $5,600. Free federal tax filing It expires in 10 years. Free federal tax filing This property is intangible property that cannot be depreciated under MACRS. Free federal tax filing Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Free federal tax filing He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Free federal tax filing He must prorate the $560 for his 9 months of use in 1994. Free federal tax filing This gives him a deduction of $420 ($560 ÷ 9/12). Free federal tax filing In 1995, Frank can deduct $560 for the full year. Free federal tax filing Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Free federal tax filing The rate cannot be more than twice the straight line rate. Free federal tax filing Rate of depreciation. Free federal tax filing   Under this method, you must determine your declining balance rate of depreciation. Free federal tax filing The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Free federal tax filing (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Free federal tax filing ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Free federal tax filing Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Free federal tax filing Depreciation deductions. Free federal tax filing   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Free federal tax filing This gives you the amount of your deduction. Free federal tax filing For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Free federal tax filing To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Free federal tax filing Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Free federal tax filing Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Free federal tax filing Your depreciation deduction for the second year is $1,600. Free federal tax filing   As you can see from this example, your adjusted basis in the property gets smaller each year. Free federal tax filing Also, under this method, deductions are larger in the earlier years and smaller in the later years. Free federal tax filing You can make a change to the straight line method without consent. Free federal tax filing Salvage value. Free federal tax filing   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Free federal tax filing However, you cannot depreciate the property below its reasonable salvage value. Free federal tax filing Determine salvage value using the rules discussed earlier, including the special 10% rule. Free federal tax filing Example. Free federal tax filing If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Free federal tax filing But if your estimate of salvage value was $900, you can only deduct $100. Free federal tax filing This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Free federal tax filing Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Free federal tax filing You can group the videocassettes by title for making this projection. Free federal tax filing You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Free federal tax filing The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Free federal tax filing For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Free federal tax filing How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Free federal tax filing If you change your method of depreciation, it is generally a change in your method of accounting. Free federal tax filing You must get IRS consent before making the change. Free federal tax filing However, you do not need permission for certain changes in your method of depreciation. Free federal tax filing The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Free federal tax filing For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Free federal tax filing Change to the straight line method. Free federal tax filing   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Free federal tax filing However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Free federal tax filing When the change is made, figure depreciation based on your adjusted basis in the property at that time. Free federal tax filing Your adjusted basis takes into account all previous depreciation deductions. Free federal tax filing Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Free federal tax filing   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Free federal tax filing You cannot make the change on an amended return filed after the due date of the original return (including extensions). Free federal tax filing   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Free federal tax filing   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Free federal tax filing Changes that require permission. Free federal tax filing   For most other changes in method of depreciation, you must get permission from the IRS. Free federal tax filing To request a change in method of depreciation, file Form 3115. Free federal tax filing File the application within the first 180 days of the tax year the change is to become effective. Free federal tax filing In most cases, there is a user fee that must accompany Form 3115. Free federal tax filing See the instructions for Form 3115 to determine if a fee is required. Free federal tax filing Changes granted automatically. Free federal tax filing   The IRS automatically approves certain changes of a method of depreciation. Free federal tax filing But, you must file Form 3115 for these automatic changes. Free federal tax filing   However, IRS can deny permission if Form 3115 is not filed on time. Free federal tax filing For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Free federal tax filing B. Free federal tax filing 420. Free federal tax filing Changes for which approval is not automatic. Free federal tax filing   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Free federal tax filing   You must request and receive permission for these changes. Free federal tax filing To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Free federal tax filing Change from an improper method. Free federal tax filing   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Free federal tax filing You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Free federal tax filing If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Free federal tax filing However, you must file the amended return before the filing date for the next tax year. Free federal tax filing Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Free federal tax filing You can do this by selling, exchanging, or abandoning the item of property. Free federal tax filing You can also withdraw it from use without disposing of it. Free federal tax filing For example, you could place it in a supplies or scrap account. Free federal tax filing Retirements can be either normal or abnormal depending on all facts and circumstances. Free federal tax filing The rules discussed next do not apply to MACRS and ACRS property. Free federal tax filing Normal retirement. Free federal tax filing   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Free federal tax filing A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Free federal tax filing Abnormal retirement. Free federal tax filing   A retirement can be abnormal if you withdraw the property early or under other circumstances. Free federal tax filing For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Free federal tax filing Gain or loss on retirement. Free federal tax filing   There are special rules for figuring the gain or loss on retirement of property. Free federal tax filing The gain or loss will depend on several factors. Free federal tax filing These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Free federal tax filing A single property account contains only one item of property. Free federal tax filing A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Free federal tax filing Sale or exchange. Free federal tax filing   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Free federal tax filing See Publication 544. Free federal tax filing Property not disposed of or abandoned. Free federal tax filing   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Free federal tax filing You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Free federal tax filing However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Free federal tax filing   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Free federal tax filing Special rule for normal retirements from item accounts. Free federal tax filing   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Free federal tax filing However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Free federal tax filing   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Free federal tax filing Abandoned property. Free federal tax filing   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Free federal tax filing However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Free federal tax filing Basis of property retired. Free federal tax filing   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Free federal tax filing Single item accounts. Free federal tax filing   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Free federal tax filing This is generally the cost or other basis of the item of property less depreciation. Free federal tax filing See Publication 551. Free federal tax filing Multiple property account. Free federal tax filing   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Free federal tax filing If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Free federal tax filing   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Free federal tax filing The method of depreciation used for the multiple property account is used. Free federal tax filing You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Free federal tax filing Prev  Up  Next   Home   More Online Publications