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Free irs extension 5. Free irs extension   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. Free irs extension A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. Free irs extension Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. Free irs extension Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. Free irs extension  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. Free irs extension Tax-exempt entities. Free irs extension   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). Free irs extension Religious or apostolic associations or corporations described in section 501(d). Free irs extension Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). Free irs extension Indian tribal governments within the meaning of section 7701(a)(40). Free irs extension Entity manager. Free irs extension    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. Free irs extension Prohibited tax shelter transaction. Free irs extension   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. Free irs extension A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. Free irs extension 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. Free irs extension 6011-4(b)(4). Free irs extension See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. Free irs extension Subsequently listed transaction. Free irs extension   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. Free irs extension Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). Free irs extension The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. Free irs extension The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. Free irs extension To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. Free irs extension For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. Free irs extension Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. Free irs extension The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. Free irs extension To report this tax, file Form 4720. Free irs extension Excess Benefit Transactions Excise tax on excess benefit transactions. Free irs extension   A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. Free irs extension A manager of the organization may also have to pay an excise tax under section 4958. Free irs extension These taxes are reported on Form 4720. Free irs extension   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange. Free irs extension   There are three taxes under section 4958. Free irs extension Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. Free irs extension    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. Free irs extension Tax on Disqualified Persons An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. Free irs extension The disqualified person who benefited from the transaction is liable for the tax. Free irs extension See definition of Disqualified person, later at Disqualified person. Free irs extension Additional tax on the disqualified person. Free irs extension   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. Free irs extension   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. Free irs extension If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. Free irs extension   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. Free irs extension The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. Free irs extension Taxable period. Free irs extension   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. Free irs extension Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. Free irs extension This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. Free irs extension There is also joint and several liability for this tax. Free irs extension A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. Free irs extension Organization Manager. Free irs extension   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. Free irs extension An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. Free irs extension For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. Free irs extension A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. Free irs extension Knowing does not mean having reason to know. Free irs extension The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. Free irs extension Participation by an organization manager is willful if it is voluntary, conscious, and intentional. Free irs extension An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. Free irs extension Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. Free irs extension The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. Free irs extension To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. Free irs extension For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. Free irs extension Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. Free irs extension Donor advised fund transactions occurring after August 17, 2006. Free irs extension   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. Free irs extension   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. Free irs extension For additional information, see the Instructions for Form 4720. Free irs extension Supporting organization transactions occurring after July 25, 2006. Free irs extension   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. Free irs extension   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). Free irs extension   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. Free irs extension For additional information, see the Instructions for Form 4720. Free irs extension   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. Free irs extension Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. Free irs extension However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. Free irs extension In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. Free irs extension In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. Free irs extension Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. Free irs extension Correcting the excess benefit. Free irs extension   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. Free irs extension   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. Free irs extension The correction amount equals the excess benefit plus the interest on the excess benefit. Free irs extension The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. Free irs extension   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. Free irs extension In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. Free irs extension   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. Free irs extension   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. Free irs extension Exception. Free irs extension   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. Free irs extension Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. Free irs extension An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. Free irs extension An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. Free irs extension Disqualified Person A disqualified person is: Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization, A family member of an individual described in 1, and A 35% controlled entity. Free irs extension For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. Free irs extension   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. Free irs extension Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. Free irs extension For certain supporting organization transactions occurring after July 25, 2006. Free irs extension   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. Free irs extension Investment advisor. Free irs extension   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. Free irs extension Substantial contributor. Free irs extension   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. Free irs extension A substantial contributor includes the grantor of a trust. Free irs extension Family members. Free irs extension   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). Free irs extension 35% controlled entity. Free irs extension   A 35% controlled entity is: A corporation in which disqualified persons own more than 35% of the total combined voting power, A partnership in which such persons own more than 35% of the profits interest, or A trust or estate in which such persons own more than 35% of the beneficial interest. Free irs extension   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. Free irs extension Persons having substantial influence. Free irs extension   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. Free irs extension Treasurers and chief financial officers. Free irs extension Persons with a material financial interest in a provider-sponsored organization. Free irs extension Persons not considered to have substantial influence. Free irs extension   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. Free irs extension Facts and circumstances. Free irs extension   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. Free irs extension Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. Free irs extension The person founded the organization. Free irs extension The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. Free irs extension The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. Free irs extension The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. Free irs extension The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Free irs extension The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. Free irs extension The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. Free irs extension   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. Free irs extension The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. Free irs extension The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. Free irs extension Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. Free irs extension The direct supervisor of the person is not a disqualified person. Free irs extension The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Free irs extension   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. Free irs extension A person may be a disqualified person with respect to transactions with more than one organization. Free irs extension Reasonable Compensation. Free irs extension    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Free irs extension The section 162 standard will apply in determining the reasonableness of compensation. Free irs extension The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. Free irs extension   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). Free irs extension Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. Free irs extension    Intent to treat benefits as compensation. Free irs extension An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Free irs extension   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. Free irs extension Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. Free irs extension Exception. Free irs extension   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. Free irs extension Rebuttable presumption that a transaction is not an excess benefit transaction. Free irs extension   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. Free irs extension The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. Free irs extension Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. Free irs extension (There is a special safe harbor for small organizations. Free irs extension If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. Free irs extension ) The authorized body adequately documents the basis for its determination concurrently with making that determination. Free irs extension The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. Free irs extension Disregarded benefits. Free irs extension   The following economic benefits are disregarded for section 4958 purposes. Free irs extension Nontaxable fringe benefits that are excluded from income under section 132. Free irs extension Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. Free irs extension Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. Free irs extension Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. Free irs extension A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. Free irs extension Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. Free irs extension   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. Free irs extension   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). Free irs extension   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. Free irs extension   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. Free irs extension Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. Free irs extension More information. Free irs extension   For more information, see the Instructions to Forms 990 and 4720. Free irs extension Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. Free irs extension They may be subject to an excise tax on the amount of any excess business holdings. Free irs extension For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. Free irs extension Donor advised fund. Free irs extension   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. Free irs extension Supporting organizations. Free irs extension   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. Free irs extension These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. Free irs extension Taxes. Free irs extension   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. Free irs extension The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. Free irs extension The excess holdings are determined on the day during the tax year when they were the largest. Free irs extension   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. Free irs extension   For more information on the tax on excess business holdings, see the Instructions for Form 4720. Free irs extension Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. Free irs extension An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. Free irs extension Taxable distribution. Free irs extension   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). Free irs extension    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. Free irs extension The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. Free irs extension Sponsoring organization. Free irs extension   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. Free irs extension Donor advised fund. Free irs extension    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. Free irs extension Exception. Free irs extension A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. Free irs extension The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). Free irs extension Disqualified supporting organization. Free irs extension   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. Free irs extension Tax on sponsoring organization. Free irs extension   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. Free irs extension Tax on fund manager. Free irs extension   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. Free irs extension Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Free irs extension The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Free irs extension If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Free irs extension   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. Free irs extension Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. Free irs extension   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. Free irs extension The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. Free irs extension Donor advisor. Free irs extension   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. Free irs extension Related party. Free irs extension   A related party includes any family member or 35% controlled entity. Free irs extension See the definition of those terms under Disqualified Person , earlier. Free irs extension Tax on donor, donor advisor, or related person. Free irs extension    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). Free irs extension The advisor and the party who received the benefit are jointly and severally liable for the tax. Free irs extension Tax on fund managers. Free irs extension   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. Free irs extension Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Free irs extension The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Free irs extension If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Free irs extension Exception. Free irs extension   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. Free irs extension   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. Free irs extension Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. Free irs extension Capital gains from appreciation are included in the tax base on private foundation net investment income. Free irs extension This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. Free irs extension Form 990-W is used to calculate the estimated tax. Free irs extension In addition, there are several other rules that apply to excise taxes on private foundations. Free irs extension These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. Free irs extension Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. Free irs extension For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. Free irs extension Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. Free irs extension If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. Free irs extension Both of these excise taxes are reported on Schedule A (Form 990-BL). Free irs extension See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. Free irs extension Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. Free irs extension These entities must meet section 501(r)(3) requirements at all times during their tax year. Free irs extension Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). Free irs extension See Schedule H, Hospitals (Form 990), for details. Free irs extension Prev  Up  Next   Home   More Online Publications
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Free irs extension 12. Free irs extension   Business Deduction for Work-Related Education Table of Contents What's New Introduction Qualifying Work-Related EducationEducation Required by Employer or by Law Education To Maintain or Improve Skills Education To Meet Minimum Requirements Education That Qualifies You for a New Trade or Business What Expenses Can Be DeductedUnclaimed reimbursement. Free irs extension Transportation Expenses Travel Expenses No Double Benefit Allowed How To Treat ReimbursementsAccountable Plans Nonaccountable Plans Deducting Business ExpensesSelf-Employed Persons Employees Performing Artists and Fee-Basis Officials Impairment-Related Work Expenses Recordkeeping Illustrated Example What's New Standard mileage rate. Free irs extension  Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2013 through December 31, 2013, is 56. Free irs extension 5 cents per mile. Free irs extension For more information, see Transportation Expenses under What Expenses Can Be Deducted, later. Free irs extension Introduction This chapter discusses work-related education expenses that you may be able to deduct as business expenses. Free irs extension To claim such a deduction, you must: Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee, File Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming if you are self-employed, and Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education , later. Free irs extension What is the tax benefit of taking a business deduction for work-related education. Free irs extension   If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Free irs extension Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income. Free irs extension An itemized deduction reduces the amount of your income subject to tax. Free irs extension   If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. Free irs extension This reduces the amount of your income subject to both income tax and self-employment tax. Free irs extension   Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits. Free irs extension You may qualify for these other benefits even if you do not meet the requirements listed above. Free irs extension   Also, your work-related education expenses may qualify you to claim more than one tax benefit. Free irs extension Generally, you may claim any number of benefits as long as you use different expenses to figure each one. Free irs extension Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. Free irs extension This is education that meets at least one of the following two tests. Free irs extension The education is required by your employer or the law to keep your present salary, status, or job. Free irs extension The required education must serve a bona fide business purpose of your employer. Free irs extension The education maintains or improves skills needed in your present work. Free irs extension However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. Free irs extension You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree. Free irs extension Use Figure 12-1, Does Your Work-Related Education Qualify as a quick check to see if your education qualifies. Free irs extension Education Required by Employer or by Law Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. Free irs extension This additional education is qualifying work-related education if all three of the following requirements are met. Free irs extension It is required for you to keep your present salary, status, or job, The requirement serves a bona fide business purpose of your employer, and The education is not part of a program that will qualify you for a new trade or business. Free irs extension When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. Free irs extension See Education To Maintain or Improve Skills , later. Free irs extension Example. Free irs extension You are a teacher who has satisfied the minimum requirements for teaching. Free irs extension Your employer requires you to take an additional college course each year to keep your teaching job. Free irs extension If the courses will not qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education. Free irs extension This image is too large to be displayed in the current screen. Free irs extension Please click the link to view the image. Free irs extension Figure 12-1 Education To Maintain or Improve Skills If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. Free irs extension This could include refresher courses, courses on current developments, and academic or vocational courses. Free irs extension Example. Free irs extension You repair televisions, radios, and stereo systems for XYZ Store. Free irs extension To keep up with the latest changes, you take special courses in radio and stereo service. Free irs extension These courses maintain and improve skills required in your work. Free irs extension Maintaining skills vs. Free irs extension qualifying for new job. Free irs extension   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business. Free irs extension Education during temporary absence. Free irs extension   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Free irs extension Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. Free irs extension Example. Free irs extension You quit your biology research job to become a full-time biology graduate student for 1 year. Free irs extension If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer. Free irs extension Education during indefinite absence. Free irs extension   If you stop work for more than a year, your absence from your job is considered indefinite. Free irs extension Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Free irs extension Therefore, it is not qualifying work-related education. Free irs extension Education To Meet Minimum Requirements Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Free irs extension The minimum educational requirements are determined by: Laws and regulations, Standards of your profession, trade, or business, and Your employer. Free irs extension Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. Free irs extension This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education. Free irs extension You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work. Free irs extension Example 1. Free irs extension You are a full-time engineering student. Free irs extension Although you have not received your degree or certification, you work part time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Free irs extension Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. Free irs extension The education is not qualifying work-related education. Free irs extension Example 2. Free irs extension You are an accountant and you have met the minimum educational requirements of your employer. Free irs extension Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. Free irs extension These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired. Free irs extension Requirements for Teachers States or school districts usually set the minimum educational requirements for teachers. Free irs extension The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. Free irs extension If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. Free irs extension The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. Free irs extension You generally will be considered a faculty member when one or more of the following occurs. Free irs extension You have tenure. Free irs extension Your years of service count toward obtaining tenure. Free irs extension You have a vote in faculty decisions. Free irs extension Your school makes contributions for you to a retirement plan other than social security or a similar program. Free irs extension Example 1. Free irs extension The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. Free irs extension In addition, to keep the job a teacher must complete a fifth year of training within 10 years from the date of hire. Free irs extension If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. Free irs extension However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years. Free irs extension Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state. Free irs extension If you have all the required education except the fifth year, you have met the minimum educational requirements. Free irs extension The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business. Free irs extension Example 2. Free irs extension Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. Free irs extension The additional four education courses can be qualifying work-related education. Free irs extension Although you do not have all the required courses, you have already met the minimum educational requirements. Free irs extension Example 3. Free irs extension Assume the same facts as in Example 1 except that you are hired with only 3 years of college. Free irs extension The courses you take that lead to a bachelor's degree (including those in education) are not qualifying work-related education. Free irs extension They are needed to meet the minimum educational requirements for employment as a teacher. Free irs extension Example 4. Free irs extension You have a bachelor's degree and you work as a temporary instructor at a university. Free irs extension At the same time, you take graduate courses toward an advanced degree. Free irs extension The rules of the university state that you can become a faculty member only if you get a graduate degree. Free irs extension Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. Free irs extension You have not met the minimum educational requirements to qualify you as a faculty member. Free irs extension The graduate courses are not qualifying work-related education. Free irs extension Certification in a new state. Free irs extension   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. Free irs extension This is true even if you must get additional education to be certified in another state. Free irs extension Any additional education you need is qualifying work-related education. Free irs extension You have already met the minimum requirements for teaching. Free irs extension Teaching in another state is not a new trade or business. Free irs extension Example. Free irs extension You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. Free irs extension You move to State B and are promptly hired as a teacher. Free irs extension You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. Free irs extension These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A. Free irs extension Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. Free irs extension This is true even if you do not plan to enter that trade or business. Free irs extension If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. Free irs extension Example 1. Free irs extension You are an accountant. Free irs extension Your employer requires you to get a law degree at your own expense. Free irs extension You register at a law school for the regular curriculum that leads to a law degree. Free irs extension Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business. Free irs extension Example 2. Free irs extension You are a general practitioner of medicine. Free irs extension You take a 2-week course to review developments in several specialized fields of medicine. Free irs extension The course does not qualify you for a new profession. Free irs extension It is qualifying work- related education because it maintains or improves skills required in your present profession. Free irs extension Example 3. Free irs extension While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. Free irs extension The program will lead to qualifying you to practice psychoanalysis. Free irs extension The psychoanalytic training does not qualify you for a new profession. Free irs extension It is qualifying work-related education because it maintains or improves skills required in your present profession. Free irs extension Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying work-related education. Free irs extension They are part of a program of study that can qualify you for a new profession. Free irs extension Teaching and Related Duties All teaching and related duties are considered the same general kind of work. Free irs extension A change in duties in any of the following ways is not considered a change to a new business. Free irs extension Elementary school teacher to secondary school teacher. Free irs extension Teacher of one subject, such as biology, to teacher of another subject, such as art. Free irs extension Classroom teacher to guidance counselor. Free irs extension Classroom teacher to school administrator. Free irs extension What Expenses Can Be Deducted If your education meets the requirements described earlier under Qualifying Work-Related Education you can generally deduct your education expenses as business expenses. Free irs extension If you are not self-employed, you can deduct business expenses only if you itemize your deductions. Free irs extension You cannot deduct expenses related to tax-exempt and excluded income. Free irs extension Deductible expenses. Free irs extension   The following education expenses can be deducted. Free irs extension Tuition, books, supplies, lab fees, and similar items. Free irs extension Certain transportation and travel costs. Free irs extension Other education expenses, such as costs of research and typing when writing a paper as part of an educational program. Free irs extension Nondeductible expenses. Free irs extension   You cannot deduct personal or capital expenses. Free irs extension For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. Free irs extension This amount is a personal expense. Free irs extension Unclaimed reimbursement. Free irs extension   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to that unclaimed reimbursement. Free irs extension Example. Free irs extension Your employer agrees to pay your education expenses if you file a voucher showing your expenses. Free irs extension You do not file a voucher and you do not get reimbursed. Free irs extension Because you did not file a voucher, you cannot deduct the expenses on your tax return. Free irs extension Transportation Expenses If your education qualifies, you can deduct local transportation costs of going directly from work to school. Free irs extension If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. Free irs extension Temporary basis. Free irs extension   You go to school on a temporary basis if either of the following situations applies to you. Free irs extension Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less. Free irs extension Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free irs extension Your attendance is temporary up to the date you determine it will last more than 1 year. Free irs extension If you are in either situation (1) or (2) above, your attendance is not temporary if facts and circumstances indicate otherwise. Free irs extension Attendance not on a temporary basis. Free irs extension   You do not go to school on a temporary basis if either of the following situations apply to you. Free irs extension Your attendance at school is realistically expected to last more than 1 year. Free irs extension It does not matter how long you actually attend. Free irs extension Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free irs extension Your attendance is not temporary after the date you determine it will last more than 1 year. Free irs extension Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. Free irs extension This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days. Free irs extension Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Free irs extension Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight. Free irs extension Example 1. Free irs extension You regularly work in a nearby town, and go directly from work to home. Free irs extension You also attend school every work night for 3 months to take a course that improves your job skills. Free irs extension Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. Free irs extension This is true regardless of the distance traveled. Free irs extension Example 2. Free irs extension Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. Free irs extension You can deduct your transportation expenses from your regular work site to school and then home. Free irs extension Example 3. Free irs extension Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. Free irs extension Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school. Free irs extension Example 4. Free irs extension Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. Free irs extension Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. Free irs extension If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. Free irs extension If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school. Free irs extension Using your car. Free irs extension    If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. Free irs extension The standard mileage rate for miles driven from January 1, 2013 through December 31, 2013, is 56. Free irs extension 5 cents per mile. Free irs extension Whichever method you use, you can also deduct parking fees and tolls. Free irs extension See Publication 463, chapter 4, for information on deducting your actual expenses of using a car. Free irs extension Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education. Free irs extension Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. Free irs extension For more information, see chapter 1 of Publication 463. Free irs extension You cannot deduct expenses for personal activities such as sightseeing, visiting, or entertaining. Free irs extension Mainly personal travel. Free irs extension   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. Free irs extension You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities. Free irs extension   Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. Free irs extension An important factor is the comparison of time spent on personal activities with time spent on educational activities. Free irs extension If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location. Free irs extension Example 1. Free irs extension John works in Newark, New Jersey. Free irs extension He traveled to Chicago to take a deductible 1-week course at the request of his employer. Free irs extension His main reason for going to Chicago was to take the course. Free irs extension While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day. Free irs extension Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. Free irs extension He cannot deduct his transportation expenses of going to Pleasantville. Free irs extension He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities. Free irs extension Example 2. Free irs extension Sue works in Boston. Free irs extension She went to a university in Michigan to take a course for work. Free irs extension The course is qualifying work-related education. Free irs extension She took one course, which is one-fourth of a full course load of study. Free irs extension She spent the rest of the time on personal activities. Free irs extension Her reasons for taking the course in Michigan were all personal. Free irs extension Sue's trip is mainly personal because three-fourths of her time is considered personal time. Free irs extension She cannot deduct the cost of her round-trip train ticket to Michigan. Free irs extension She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university. Free irs extension Example 3. Free irs extension Dave works in Nashville and recently traveled to California to take a 2-week seminar. Free irs extension The seminar is qualifying work-related education. Free irs extension While there, he spent an extra 8 weeks on personal activities. Free irs extension The facts, including the extra 8-week stay, show that his main purpose was to take a vacation. Free irs extension Dave cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. Free irs extension He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. Free irs extension Cruises and conventions. Free irs extension   Certain cruises and conventions offer seminars or courses as part of their itinerary. Free irs extension Even if the seminars or courses are work related, your deduction for travel may be limited. Free irs extension This applies to: Travel by ocean liner, cruise ship, or other form of luxury water transportation, and Conventions outside the North American area. Free irs extension   For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Publication 463. Free irs extension 50% limit on meals. Free irs extension   You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. Free irs extension If you were reimbursed for the meals, see How To Treat Reimbursements , later. Free irs extension   Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit. Free irs extension Travel as Education You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business. Free irs extension Example. Free irs extension You are a French language teacher. Free irs extension While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. Free irs extension You chose your itinerary and most of your activities to improve your French language skills. Free irs extension You cannot deduct your travel expenses as education expenses. Free irs extension This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities. Free irs extension No Double Benefit Allowed You cannot do either of the following. Free irs extension Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law, for example, as a tuition and fees deduction. Free irs extension Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. Free irs extension See Adjustments to Qualifying Work-Related Education Expenses, next. Free irs extension Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. Free irs extension You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. Free irs extension Tax-free educational assistance. Free irs extension   This includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Free irs extension Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free irs extension Amounts that do not reduce qualifying work-related education expenses. Free irs extension   Do not reduce the qualifying work-related education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free irs extension Also, do not reduce the qualifying work-related education expenses by any scholarship or fellowship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualifying work-related education expenses. Free irs extension How To Treat Reimbursements How you treat reimbursements depends on the arrangement you have with your employer. Free irs extension There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. Free irs extension You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2. Free irs extension Note. Free irs extension The following rules about reimbursement arrangements also apply to expense allowances received from your employer. Free irs extension Accountable Plans To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules. Free irs extension Your expenses must have a business connection. Free irs extension This means your expenses must be deductible under the rules for qualifying work-related education explained earlier. Free irs extension You must adequately account to your employer for your expenses within a reasonable period of time. Free irs extension You must return any reimbursement or allowance in excess of the expenses accounted for within a reasonable period of time. Free irs extension If you are reimbursed under an accountable plan, your employer should not include any reimbursement in your income in box 1 of your Form W-2. Free irs extension If your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2. Free irs extension Accountable plan rules not met. Free irs extension   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules for accountable plans. Free irs extension Those expenses that fail to meet the three rules are treated as having been reimbursed under a Nonaccountable Plan (discussed later). Free irs extension Expenses equal reimbursement. Free irs extension   Under an accountable plan, if your expenses equal your reimbursement, you do not complete Form 2106 or 2106-EZ. Free irs extension Because your expenses and reimbursements are equal, you do not have a deduction. Free irs extension Excess expenses. Free irs extension   If your expenses are more than your reimbursement, you can deduct your excess expenses. Free irs extension This is discussed later, under Deducting Business Expenses . Free irs extension Allocating your reimbursements for meals. Free irs extension   Because your excess meal expenses are subject to the 50% limit, you must figure them separately from your other expenses. Free irs extension If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. Free irs extension Make the allocation as follows. Free irs extension Divide your meal expenses by your total expenses. Free irs extension Multiply your total reimbursement by the result from (1). Free irs extension This is the allocated reimbursement for your meal expenses. Free irs extension Subtract the amount figured in (2) from your total reimbursement. Free irs extension The difference is the allocated reimbursement for your other expenses of qualifying work-related education. Free irs extension Example. Free irs extension Your employer paid you an expense allowance of $2,000 under an accountable plan. Free irs extension The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. Free irs extension There was no indication of how much of the reimbursement was for each type of expense. Free irs extension Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transportation expenses + $1,225 for books and tuition). Free irs extension Using the steps listed above, allocate the reimbursement between the $425 meal expenses and the $2,075 other expenses. Free irs extension   1. Free irs extension $425 meal expenses  $2,500 total expenses = . Free irs extension 17   2. Free irs extension $2,000 (reimbursement)×. Free irs extension 17     =$340 (allocated reimbursement for meal expenses)   3. Free irs extension $2,000 (reimbursement)−$340 (meals)     = $1,660 (allocated reimbursement for other qualifying work-related education expenses) Your excess meal expenses are $85 ($425 − $340) and your excess other expenses are $415 ($2,075 − $1,660). Free irs extension After you apply the 50% limit to your meals, you have a deduction for work-related education expenses of $458 (($85 × 50%) + $415). Free irs extension Nonaccountable Plans Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay and report the total in box 1 of your Form W-2. Free irs extension You can deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. Free irs extension This is discussed later under Deducting Business Expenses . Free irs extension An illustrated example of a nonaccountable plan, using Form 2106-EZ, is shown at the end of this chapter. Free irs extension Reimbursements for nondeductible expenses. Free irs extension   Reimbursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. Free irs extension You must include them in your income. Free irs extension For example, you must include in your income reimbursements your employer gave you for expenses of education that: You need to meet the minimum educational requirements for your job, or Is part of a program of study that can qualify you for a new trade or business. Free irs extension   For more information on accountable and nonaccountable plans, see chapter 6 of Publication 463. Free irs extension Deducting Business Expenses Self-employed persons and employees report their business expenses differently. Free irs extension The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense. Free irs extension Self-Employed Persons If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040)). Free irs extension If your education expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. Free irs extension See the instructions for the form you file for information on how to complete it. Free irs extension Employees If you are an employee, you can deduct the cost of qualifying work-related education only if you: Did not receive (and were not entitled to receive) any reimbursement from your employer, Were reimbursed under a nonaccountable plan (amount is included in box 1 of Form W-2), or Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement. Free irs extension If either (1) or (2) applies, you can deduct the total qualifying cost. Free irs extension If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement. Free irs extension In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Free irs extension (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Free irs extension ) This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. Free irs extension Form 2106 or 2106-EZ. Free irs extension   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or 2106-EZ. Free irs extension Form not required. Free irs extension   Do not complete either Form 2106 or 2106-EZ if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are not claiming travel, transportation, meal, or entertainment expenses. Free irs extension   If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Free irs extension (Special rules for expenses of certain Performing Artists and Fee-Basis Officials and for Impairment-Related Work Expenses are explained later. Free irs extension ) Using Form 2106-EZ. Free irs extension   This form is shorter and easier to use than Form 2106. Free irs extension Generally, you can use this form if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are using the standard mileage rate if you are claiming vehicle expenses. Free irs extension   If you do not meet both of these requirements, use Form 2106. Free irs extension Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction. Free irs extension Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24, or Form 1040NR, line 35. Free irs extension You do not have to itemize your deductions on Schedule A (Form 1040 or 1040NR), and, therefore, the deduction is not subject to the 2%-of-adjusted-gross-income limit. Free irs extension You must complete Form 2106 or 2106-EZ to figure your deduction even if you meet the requirements described earlier under Form not required . Free irs extension For more information on qualified performing artists, see chapter 6 of Publication 463. Free irs extension Impairment-Related Work Expenses If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. Free irs extension They are not subject to the 2%-of-adjusted-gross-income limit. Free irs extension To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required . Free irs extension For more information on impairment-related work expenses, see chapter 6 of Publication 463. Free irs extension Recordkeeping You must keep records as proof of any deduction claimed on your tax return. Free irs extension Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction. Free irs extension If you are an employee who is reimbursed for expenses and you give your records and documentation to your employer, you do not have to keep duplicate copies of this information. Free irs extension However, you should keep your records for a 3-year period if: You claim deductions for expenses that are more than your reimbursement, Your employer does not use adequate accounting procedures to verify expense accounts, You are related to your employer, or Your expenses are reimbursed under a nonaccountable plan. Free irs extension Examples of records to keep. Free irs extension   If any of the above cases apply to you, you must be able to prove that your expenses are deductible. Free irs extension You should keep adequate records or have sufficient evidence that will support your expenses. Free irs extension Estimates or approximations do not qualify as proof of an expense. Free irs extension Some examples of what can be used to help prove your expenses are: Documents, such as transcripts, course descriptions, catalogs, etc. Free irs extension , showing periods of enrollment in educational institutions, principal subjects studied, and descriptions of educational activity. Free irs extension Canceled checks and receipts to verify amounts you spent for: Tuition and books, Meals and lodging while away from home overnight for educational purposes, Travel and transportation, and Other education expenses. Free irs extension Statements from your employer explaining whether the education was necessary for you to keep your job, salary, or status; how the education helped maintain or improve skills needed in your job; how much reimbursement you received; and, if you are a teacher, the type of certificate and subjects taught. Free irs extension Complete information about any scholarship or fellowship grants, including amounts you received during the year. Free irs extension Illustrated Example Victor Jones teaches math at a private high school in North Carolina. Free irs extension He was selected to attend a 3-week math seminar at a university in California. Free irs extension The seminar will improve his skills in his current job and is qualifying work-related education. Free irs extension He was reimbursed for his expenses under his employer's nonaccountable plan, so his reimbursement of $2,100 is included in the wages shown in box 1 of his Form W-2. Free irs extension Victor will file Form 1040. Free irs extension His actual expenses for the seminar are as follows:   Lodging   $1,050     Meals   526     Airfare   550     Taxi fares   50     Tuition and books   400     Total Expenses   $2,576   Victor files Form 2106-EZ with his tax return. Free irs extension He shows his expenses for the seminar in Part I of the form. Free irs extension He enters $1,650 ($1,050 + $550 + $50) on line 3 to account for his lodging, airfare, and taxi fares. Free irs extension He enters $400 on line 4 for his tuition and books. Free irs extension On the line provided for total meals and entertainment expenses, Victor enters $526 for meal expenses. Free irs extension He multiplies that amount by 50% and enters the result, $263, on line 5. Free irs extension On line 6, Victor totals the amounts from lines 3 through 5. Free irs extension He carries the total, $2,313, to Schedule A (Form 1040), line 21. Free irs extension Since he does not claim any vehicle expenses, Victor leaves Part II blank. Free irs extension His filled-in form is shown on the next page. Free irs extension This image is too large to be displayed in the current screen. Free irs extension Please click the link to view the image. Free irs extension Form 2106-EZ for V. Free irs extension Jones Prev  Up  Next   Home   More Online Publications