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Free tax usa com 5. Free tax usa com   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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. Free tax usa com Tax-exempt entities. Free tax usa com   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 tax usa com Religious or apostolic associations or corporations described in section 501(d). Free tax usa com 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 tax usa com Indian tribal governments within the meaning of section 7701(a)(40). Free tax usa com Entity manager. Free tax usa com    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 tax usa com Prohibited tax shelter transaction. Free tax usa com   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. Free tax usa com A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. Free tax usa com 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. Free tax usa com 6011-4(b)(4). Free tax usa com See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. Free tax usa com Subsequently listed transaction. Free tax usa com   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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. Free tax usa com 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 tax usa com 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 tax usa com To report this tax, file Form 4720. Free tax usa com Excess Benefit Transactions Excise tax on excess benefit transactions. Free tax usa com   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 tax usa com A manager of the organization may also have to pay an excise tax under section 4958. Free tax usa com These taxes are reported on Form 4720. Free tax usa com   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 tax usa com   There are three taxes under section 4958. Free tax usa com Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. Free tax usa com    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 tax usa com 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 tax usa com The disqualified person who benefited from the transaction is liable for the tax. Free tax usa com See definition of Disqualified person, later at Disqualified person. Free tax usa com Additional tax on the disqualified person. Free tax usa com   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 tax usa com   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 tax usa com 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 tax usa com   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. Free tax usa com 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 tax usa com Taxable period. Free tax usa com   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 tax usa com 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 tax usa com This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. Free tax usa com There is also joint and several liability for this tax. Free tax usa com 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 tax usa com Organization Manager. Free tax usa com   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 tax usa com 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 tax usa com For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. Free tax usa com 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 tax usa com Knowing does not mean having reason to know. Free tax usa com 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 tax usa com Participation by an organization manager is willful if it is voluntary, conscious, and intentional. Free tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com Donor advised fund transactions occurring after August 17, 2006. Free tax usa com   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 tax usa com   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. Free tax usa com For additional information, see the Instructions for Form 4720. Free tax usa com Supporting organization transactions occurring after July 25, 2006. Free tax usa com   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 tax usa com   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 tax usa com   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 tax usa com For additional information, see the Instructions for Form 4720. Free tax usa com   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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com Correcting the excess benefit. Free tax usa com   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 tax usa com   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 tax usa com The correction amount equals the excess benefit plus the interest on the excess benefit. Free tax usa com The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. Free tax usa com   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 tax usa com 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 tax usa com   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 tax usa com   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 tax usa com Exception. Free tax usa com   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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. Free tax usa com   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. Free tax usa com 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 tax usa com For certain supporting organization transactions occurring after July 25, 2006. Free tax usa com   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 tax usa com Investment advisor. Free tax usa com   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 tax usa com Substantial contributor. Free tax usa com   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 tax usa com A substantial contributor includes the grantor of a trust. Free tax usa com Family members. Free tax usa com   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 tax usa com 35% controlled entity. Free tax usa com   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 tax usa com   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. Free tax usa com Persons having substantial influence. Free tax usa com   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 tax usa com Treasurers and chief financial officers. Free tax usa com Persons with a material financial interest in a provider-sponsored organization. Free tax usa com Persons not considered to have substantial influence. Free tax usa com   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 tax usa com Facts and circumstances. Free tax usa com   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. Free tax usa com 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 tax usa com The person founded the organization. Free tax usa com 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 tax usa com The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. Free tax usa com 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 tax usa com 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 tax usa com The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. Free tax usa com The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. Free tax usa com   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 tax usa com The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. Free tax usa com 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 tax usa com 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 tax usa com The direct supervisor of the person is not a disqualified person. Free tax usa com 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 tax usa com   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 tax usa com A person may be a disqualified person with respect to transactions with more than one organization. Free tax usa com Reasonable Compensation. Free tax usa com    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Free tax usa com The section 162 standard will apply in determining the reasonableness of compensation. Free tax usa com The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. Free tax usa com   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 tax usa com 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 tax usa com    Intent to treat benefits as compensation. Free tax usa com 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 tax usa com   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 tax usa com 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 tax usa com Exception. Free tax usa com   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 tax usa com Rebuttable presumption that a transaction is not an excess benefit transaction. Free tax usa com   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 tax usa com 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 tax usa com Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. Free tax usa com (There is a special safe harbor for small organizations. Free tax usa com 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 tax usa com ) The authorized body adequately documents the basis for its determination concurrently with making that determination. Free tax usa com 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 tax usa com Disregarded benefits. Free tax usa com   The following economic benefits are disregarded for section 4958 purposes. Free tax usa com Nontaxable fringe benefits that are excluded from income under section 132. Free tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. Free tax usa com   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 tax usa com   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 tax usa com   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 tax usa com   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 tax usa com 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 tax usa com More information. Free tax usa com   For more information, see the Instructions to Forms 990 and 4720. Free tax usa com Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. Free tax usa com They may be subject to an excise tax on the amount of any excess business holdings. Free tax usa com 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 tax usa com Donor advised fund. Free tax usa com   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 tax usa com Supporting organizations. Free tax usa com   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. Free tax usa com 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 tax usa com Taxes. Free tax usa com   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 tax usa com 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 tax usa com The excess holdings are determined on the day during the tax year when they were the largest. Free tax usa com   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 tax usa com   For more information on the tax on excess business holdings, see the Instructions for Form 4720. Free tax usa com 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 tax usa com 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 tax usa com Taxable distribution. Free tax usa com   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 tax usa com    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 tax usa com The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. Free tax usa com Sponsoring organization. Free tax usa com   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 tax usa com Donor advised fund. Free tax usa com    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 tax usa com Exception. Free tax usa com 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 tax usa com The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). Free tax usa com Disqualified supporting organization. Free tax usa com   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 tax usa com Tax on sponsoring organization. Free tax usa com   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. Free tax usa com Tax on fund manager. Free tax usa com   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 tax usa com Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Free tax usa com The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Free tax usa com 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 tax usa com   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. Free tax usa com Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. Free tax usa com   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 tax usa com The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. Free tax usa com Donor advisor. Free tax usa com   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 tax usa com Related party. Free tax usa com   A related party includes any family member or 35% controlled entity. Free tax usa com See the definition of those terms under Disqualified Person , earlier. Free tax usa com Tax on donor, donor advisor, or related person. Free tax usa com    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 tax usa com The advisor and the party who received the benefit are jointly and severally liable for the tax. Free tax usa com Tax on fund managers. Free tax usa com   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 tax usa com Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Free tax usa com The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Free tax usa com 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 tax usa com Exception. Free tax usa com   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 tax usa com   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. Free tax usa com Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. Free tax usa com Capital gains from appreciation are included in the tax base on private foundation net investment income. Free tax usa com 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 tax usa com Form 990-W is used to calculate the estimated tax. Free tax usa com In addition, there are several other rules that apply to excise taxes on private foundations. Free tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com 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 tax usa com Both of these excise taxes are reported on Schedule A (Form 990-BL). Free tax usa com 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 tax usa com 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 tax usa com These entities must meet section 501(r)(3) requirements at all times during their tax year. Free tax usa com Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). Free tax usa com See Schedule H, Hospitals (Form 990), for details. Free tax usa com Prev  Up  Next   Home   More Online Publications
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Understanding Your CP291 Notice

We're revoking your Electing Small Business Trust (ESBT) election.


What you need to do

  • Timely file Form 1041
  • Keep this notice in your permanent records.

You may want to

  • Keep this notice in your permanent records.

Understanding your notice

Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

Notice CP291, Page 1

 

Page Last Reviewed or Updated: 16-Jan-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Free Tax Usa Com

Free tax usa com Listed Property Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Listed Property DefinedPassenger Automobile Defined Dwelling Unit Other Property Used for Transportation Computers and Related Peripheral Equipment Predominant Use TestMeeting the Predominant Use Test Qualified Business Use Method of Allocating Use Applying the Predominant Use Test Deductions After Recovery Period Leased PropertyLessor Lessee What Records Must Be KeptAdequate Records Reporting Information on Form 4562 Deductions in Later Years Appendix Topics - This chapter discusses: Listed property defined The predominant use test What records must be kept Useful Items - You may want to see: Publication 463 Travel, Entertainment, and Gift Expenses 587 Business Use of Your Home (Including Use by Day-Care Providers) 917 Business Use of a Car 946 How To Depreciate Property Form (and Instructions) 2106–EZ Unreimbursed Employee Business Expenses 2106 Employee Business Expenses 4255 Recapture of Investment Credit 4562 Depreciation and Amortization This chapter discusses some special rules and recordkeeping requirements for listed property. Free tax usa com For complete coverage of the rules, including the rules concerning passenger automobiles, see Publication 946. Free tax usa com If listed property is not used predominantly (more than 50%) in a qualified business use as discussed inPredominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method. Free tax usa com Listed Property Defined Listed property is any of the following: Any passenger automobile (defined later), Any other property used for transportation, Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment), Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. Free tax usa com A regular business establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Publication 587. Free tax usa com Any cellular telephone (or similar telecommunication equipment) placed in service or leased in a tax year beginning after 1989. Free tax usa com Passenger Automobile Defined A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). Free tax usa com It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. Free tax usa com A passenger automobile does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business, and A vehicle used directly in the trade or business of transporting persons or property for compensation or hire. Free tax usa com Dwelling Unit A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Free tax usa com It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis. Free tax usa com Other Property Used for Transportation Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods. Free tax usa com Listed property does not include: Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes, Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks, Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses, Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized, and Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons. Free tax usa com Computers and Related Peripheral Equipment A computer is a programmable electronically activated device that: Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention, and Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Free tax usa com Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Free tax usa com Computer or peripheral equipment does not include: Any equipment which is an integral part of property which is not a computer, Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games. Free tax usa com Predominant Use Test If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year: The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method. Free tax usa com Listed property placed in service before 1987. Free tax usa com   For listed property placed in service before 1987, depreciate the property over the following period: Class of Property Listed Property Recovery Period 3-year property 5 years 5-year property 12 years 10-year property 25 years 18-year real property 40 years 19-year real property 40 years If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Predominantly (Other Than 18- or 19-year Real Property), and Table 17 for 18- or 19-year real property, near the end of this publication in the Appendix. Free tax usa com Listed property placed in service after 1986. Free tax usa com   For information on listed property placed in service after 1986, see Publication 946. Free tax usa com Meeting the Predominant Use Test Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. Free tax usa com You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. Free tax usa com The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. Free tax usa com However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property. Free tax usa com Note: Property does not stop being predominantly used in a qualified business use because of a transfer at death. Free tax usa com Example. Free tax usa com Sarah Bradley uses a home computer 50% of the time to manage her investments. Free tax usa com She also uses the computer 40% of the time in her part-time consumer research business. Free tax usa com Sarah's home computer is listed property because it is not used at a regular business establishment. Free tax usa com Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. Free tax usa com Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Free tax usa com Her combined rate of business/investment use for determining her depreciation deduction is 90%. Free tax usa com Qualified Business Use A qualified business use is any use in your trade or business. Free tax usa com However, it does not include: The use of property held merely to produce income (investment use), The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property), The use of property as compensation for the performance of services by a 5% owner or related person, or The use of property as compensation for the performance of services by any person (other than a5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. Free tax usa com See Employees, later. Free tax usa com 5% owner. Free tax usa com   A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business. Free tax usa com   A 5% owner of a corporation is any person who owns, or is considered to own: More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Free tax usa com Related person. Free tax usa com   A related person is anyone related to a taxpayer as discussed under Related persons, in chapter 2 under Nonqualifying Property in Publication 946. Free tax usa com Entertainment Use The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. Free tax usa com See Publication 463. Free tax usa com Leasing or Compensatory Use of Aircraft If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use. Free tax usa com Commuting The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip. Free tax usa com Use of Your Passenger Automobile by Another Person If someone else uses your automobile, that use is not business use unless: That use is directly connected with your business, The value of the use is property reported by you as income to the other person and tax is withheld on the income where required, or The value of the use results in a payment of fair market rent. Free tax usa com Any payment to you for the use of the automobile is treated as a rent payment for 3). Free tax usa com Employees Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless: The use is for the employer's convenience, and The use is required as a condition of employment. Free tax usa com Use for the employer's convenience. Free tax usa com   Whether the use of listed property is for the employer's convenience must be determined from all the facts. Free tax usa com The use is for the employer's convenience if it is for a substantial business reason of the employer. Free tax usa com The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience. Free tax usa com Use required as a condition of employment. Free tax usa com   Whether the use of listed property is a condition of employment depends on all the facts and circumstances. Free tax usa com The use of property must be required for the employee to perform duties properly. Free tax usa com The employer need not explicitly require the employee to use the property. Free tax usa com A mere statement by the employer that the use of the property is a condition of employment is not sufficient. Free tax usa com Example 1. Free tax usa com Virginia Sycamore is employed as a courier with We Deliver which provides local courier services. Free tax usa com She owns and uses a motorcycle to deliver packages to downtown offices. Free tax usa com We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. Free tax usa com The company reimburses delivery persons for their costs. Free tax usa com Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Free tax usa com Example 2. Free tax usa com Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Free tax usa com He must travel to these sites on a regular basis. Free tax usa com Uplift does not furnish an automobile or explicitly require him to use his own automobile. Free tax usa com However, it reimburses him for any costs he incurs in traveling to the various sites. Free tax usa com The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Free tax usa com Method of Allocating Use For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Free tax usa com You determine the percentage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year. Free tax usa com For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. Free tax usa com For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year. Free tax usa com Applying the Predominant Use Test You must apply the predominant use test for an item of listed property each year of the recovery period. Free tax usa com First Recovery Year If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service: The property is not eligible for a section 179 deduction, and The depreciation deduction must be figured using the straight line method. Free tax usa com Note: The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. Free tax usa com It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Free tax usa com Years After the First Recovery Year If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply: Figure depreciation using the straight line method. Free tax usa com Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use, and Figure any excess depreciation on the property and add it to: Your gross income, and The adjusted basis of your property. Free tax usa com See Recapture of excess depreciation, next. Free tax usa com Recapture of excess depreciation. Free tax usa com   You must include any excess depreciation in your gross income for the first tax year the property is not predominantly used in a qualified business use. Free tax usa com Any excess depreciation must also be added to the adjusted basis of your property. Free tax usa com Excess depreciation is the excess (if any) of: The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. Free tax usa com This means you figure your depreciation using the percentages fromTable 16 or 17. Free tax usa com For information on investment credit recapture, see the instructions for Form 4255. Free tax usa com Deductions After Recovery Period When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. Free tax usa com In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. Free tax usa com To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. Free tax usa com See Car Used 50% or Less for Business in Publication 917. Free tax usa com Leased Property The limitations on cost recovery deductions apply to the rental of listed property. Free tax usa com The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). Free tax usa com SeeLeasing a Car in Publication 917 for a discussion of leased passenger automobiles. Free tax usa com Lessor The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Free tax usa com A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. Free tax usa com This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Free tax usa com Occasional or incidental leasing activity is insufficient. Free tax usa com For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. Free tax usa com An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Free tax usa com Lessee A lessee of listed property (other than passenger automobiles), must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use. Free tax usa com Inclusion amount for property leased before 1987. Free tax usa com   You determine the inclusion amount for property leased after June 18, 1984 and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. Free tax usa com You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Tables 19 or 20 in Appendix A of Publication 946. Free tax usa com   The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. Free tax usa com For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. Free tax usa com You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease. Free tax usa com Special rules. Free tax usa com   The lessee adds the inclusion amount to gross income in the next tax year if: The lease term begins within 9 months before the close of the lessee's tax year, The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and The lease term continues into the lessee's next tax year. Free tax usa com The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins. Free tax usa com   If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365. Free tax usa com Maximum inclusion amount. Free tax usa com   The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income. Free tax usa com What Records Must Be Kept You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements. Free tax usa com How long to keep records. Free tax usa com   For listed property, records must be kept for as long as any excess depreciation can be recaptured (included in income). Free tax usa com Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Free tax usa com It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. Free tax usa com However, your records should back up your receipts in an orderly manner. Free tax usa com Elements of Expenditure or Use The records or other documentary evidence must support: The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses, The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year, The date of the expenditure or use, and The business or investment purpose for the expenditure or use. Free tax usa com Written documents of your expenditure or use are generally better evidence than oral statements alone. Free tax usa com A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. Free tax usa com A daily log is not required. Free tax usa com However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later. Free tax usa com Timeliness The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. Free tax usa com An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business: The statement is submitted by an employee to the employer, or The statement is submitted by an independent contractor to the client or customer. Free tax usa com For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use. Free tax usa com Business Purpose Supported An adequate record of business purpose must generally be in the form of a written statement. Free tax usa com However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. Free tax usa com A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Free tax usa com For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Free tax usa com Business Use Supported An adequate record contains enough information on each element of every business or investment use. Free tax usa com The amount of detail required to support the use depends on the facts and circumstances. Free tax usa com For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Free tax usa com Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program. Free tax usa com Separate or Combined Expenditures or Uses Each use by you is normally considered a separate use. Free tax usa com However, repeated uses can be combined as a single item. Free tax usa com Each expenditure is recorded as a separate item and not combined with other expenditures. Free tax usa com If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. Free tax usa com If these expenses are combined, you do not need to support the business purpose of each expense. Free tax usa com Instead, you can divide the expenses based on the total business use of the listed property. Free tax usa com Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. Free tax usa com For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Free tax usa com Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Free tax usa com Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Free tax usa com Confidential Information If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. Free tax usa com It must be kept elsewhere and made available as support to the district director on request. Free tax usa com Substantial Compliance If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate. Free tax usa com If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element: By your own oral or written statement containing detailed information as to the element, and By other evidence sufficient to establish the element. Free tax usa com If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Free tax usa com If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Free tax usa com Sampling You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year. Free tax usa com Loss of Records When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Free tax usa com Reporting Information on Form 4562 If you claim a deduction for any listed property, you must provide the requested information on page 2, Section B of Form 4562. Free tax usa com If you claim a deduction for any vehicle, you must answer certain questions onpage 2 of Form 4562 to provide information about the vehicle use. Free tax usa com Employees. Free tax usa com   Employees claiming the standard mileage rate or actual expenses (including depreciation) must use Form 2106 instead of Part V of Form 4562. Free tax usa com Employees claiming the standard mileage rate may be able to use Form 2106–EZ. Free tax usa com Employer who provides vehicles to employees. Free tax usa com   An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information onForm 4562. Free tax usa com   An employer who provides more than five vehicles to employees need not include any information on his or her tax return. Free tax usa com Instead, the employer must obtain the information from his or her employees and indicate on his or her return that the information was obtained and is being retained. Free tax usa com   You do not need to provide the information requested on page 2 of Form 4562 if, as an employer: You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting, or You treat all vehicle use by employees as personal use. Free tax usa com See the instructions for Form 4562. Free tax usa com Deductions in Later Years When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. Free tax usa com In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. Free tax usa com In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment. Free tax usa com For more information about deductions after the recovery period for automobiles, see Publication 917. Free tax usa com Appendix The following tables are for use in figuring depreciation deductions under the ACRS system. Free tax usa com Table 1. Free tax usa com 15-Year Real Property* (Other Than Low-Inclome Housing) Table 3. Free tax usa com Low-Income Housing* Table 6 - Table 9 Table 6 - Table 9 Table 10 - Table 13 Table 14 - Table 17 Prev  Up  Next   Home   More Online Publications