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Myfreetaxes com 9. Myfreetaxes com   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Myfreetaxes com Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Myfreetaxes com Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Myfreetaxes com Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Myfreetaxes com It also covers the following topics. Myfreetaxes com Personal use of dwelling unit (including vacation home). Myfreetaxes com Depreciation. Myfreetaxes com Limits on rental losses. Myfreetaxes com How to report your rental income and expenses. Myfreetaxes com If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Myfreetaxes com If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Myfreetaxes com If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Myfreetaxes com See Publication 527, Residential Rental Property, for more information. Myfreetaxes com Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Myfreetaxes com Rental income is any payment you receive for the use or occupation of property. Myfreetaxes com In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Myfreetaxes com When to report. Myfreetaxes com   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Myfreetaxes com You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Myfreetaxes com You constructively receive income when it is made available to you, for example, by being credited to your bank account. Myfreetaxes com   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Myfreetaxes com Advance rent. Myfreetaxes com   Advance rent is any amount you receive before the period that it covers. Myfreetaxes com Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Myfreetaxes com Example. Myfreetaxes com You sign a 10-year lease to rent your property. Myfreetaxes com In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Myfreetaxes com You must include $10,000 in your income in the first year. Myfreetaxes com Canceling a lease. Myfreetaxes com   If your tenant pays you to cancel a lease, the amount you receive is rent. Myfreetaxes com Include the payment in your income in the year you receive it regardless of your method of accounting. Myfreetaxes com Expenses paid by tenant. Myfreetaxes com   If your tenant pays any of your expenses, the payments are rental income. Myfreetaxes com Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Myfreetaxes com See Rental Expenses , later, for more information. Myfreetaxes com Property or services. Myfreetaxes com   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Myfreetaxes com   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Myfreetaxes com Security deposits. Myfreetaxes com   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Myfreetaxes com But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Myfreetaxes com   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Myfreetaxes com Include it in your income when you receive it. Myfreetaxes com Part interest. Myfreetaxes com   If you own a part interest in rental property, you must report your part of the rental income from the property. Myfreetaxes com Rental of property also used as your home. Myfreetaxes com   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Myfreetaxes com However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Myfreetaxes com See Personal Use of Dwelling Unit (Including Vacation Home) , later. Myfreetaxes com Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Myfreetaxes com It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Myfreetaxes com Depreciation , which you can also deduct from your rental income, is discussed later. Myfreetaxes com Personal use of rental property. Myfreetaxes com   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Myfreetaxes com Also, your rental expense deductions may be limited. Myfreetaxes com See Personal Use of Dwelling Unit (Including Vacation Home) , later. Myfreetaxes com Part interest. Myfreetaxes com   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Myfreetaxes com When to deduct. Myfreetaxes com   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Myfreetaxes com Depreciation. Myfreetaxes com   You can begin to depreciate rental property when it is ready and available for rent. Myfreetaxes com See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Myfreetaxes com Pre-rental expenses. Myfreetaxes com   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Myfreetaxes com Uncollected rent. Myfreetaxes com   If you are a cash-basis taxpayer, do not deduct uncollected rent. Myfreetaxes com Because you have not included it in your income, it is not deductible. Myfreetaxes com Vacant rental property. Myfreetaxes com   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Myfreetaxes com However, you cannot deduct any loss of rental income for the period the property is vacant. Myfreetaxes com Vacant while listed for sale. Myfreetaxes com   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Myfreetaxes com If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Myfreetaxes com Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Myfreetaxes com Improvements. Myfreetaxes com   You must capitalize any expense you pay to improve your rental property. Myfreetaxes com An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Myfreetaxes com Betterments. Myfreetaxes com   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Myfreetaxes com Restoration. Myfreetaxes com   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Myfreetaxes com Adaptation. Myfreetaxes com   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Myfreetaxes com Separate the costs of repairs and improvements, and keep accurate records. Myfreetaxes com You will need to know the cost of improvements when you sell or depreciate your property. Myfreetaxes com The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Myfreetaxes com Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Myfreetaxes com Insurance premiums paid in advance. Myfreetaxes com   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Myfreetaxes com You cannot deduct the total premium in the year you pay it. Myfreetaxes com Legal and other professional fees. Myfreetaxes com   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Myfreetaxes com For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Myfreetaxes com You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Myfreetaxes com Local benefit taxes. Myfreetaxes com   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Myfreetaxes com These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Myfreetaxes com However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Myfreetaxes com Local transportation expenses. Myfreetaxes com    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Myfreetaxes com However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Myfreetaxes com See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Myfreetaxes com   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Myfreetaxes com For 2013, the standard mileage rate for business use is 56. Myfreetaxes com 5 cents per mile. Myfreetaxes com For more information, see chapter 26. Myfreetaxes com    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Myfreetaxes com In addition, you must complete Form 4562, Part V, and attach it to your tax return. Myfreetaxes com Rental of equipment. Myfreetaxes com   You can deduct the rent you pay for equipment that you use for rental purposes. Myfreetaxes com However, in some cases, lease contracts are actually purchase contracts. Myfreetaxes com If so, you cannot deduct these payments. Myfreetaxes com You can recover the cost of purchased equipment through depreciation. Myfreetaxes com Rental of property. Myfreetaxes com   You can deduct the rent you pay for property that you use for rental purposes. Myfreetaxes com If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Myfreetaxes com Travel expenses. Myfreetaxes com   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Myfreetaxes com You must properly allocate your expenses between rental and nonrental activities. Myfreetaxes com You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Myfreetaxes com You recover the cost of improvements by taking depreciation. Myfreetaxes com For information on travel expenses, see chapter 26. Myfreetaxes com    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Myfreetaxes com   See Rental Expenses in Publication 527 for more information. Myfreetaxes com Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Myfreetaxes com You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Myfreetaxes com You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Myfreetaxes com However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Myfreetaxes com Example. Myfreetaxes com Your tax year is the calendar year. Myfreetaxes com You moved from your home in May and started renting it out on June 1. Myfreetaxes com You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Myfreetaxes com Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Myfreetaxes com Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Myfreetaxes com You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Myfreetaxes com You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. Myfreetaxes com There is no change in the types of expenses deductible for the personal-use part of your property. Myfreetaxes com Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Myfreetaxes com You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Myfreetaxes com You do not have to divide the expenses that belong only to the rental part of your property. Myfreetaxes com For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Myfreetaxes com If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Myfreetaxes com You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Myfreetaxes com How to divide expenses. Myfreetaxes com   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. Myfreetaxes com You can use any reasonable method for dividing the expense. Myfreetaxes com It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Myfreetaxes com The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Myfreetaxes com Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Myfreetaxes com You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Myfreetaxes com For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Myfreetaxes com Where to report. Myfreetaxes com   Report your not-for-profit rental income on Form 1040, line 21. Myfreetaxes com For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Myfreetaxes com   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. Myfreetaxes com You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Myfreetaxes com Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Myfreetaxes com In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Myfreetaxes com Only your rental expenses may be deducted on Schedule E (Form 1040). Myfreetaxes com Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Myfreetaxes com You must also determine if the dwelling unit is considered a home. Myfreetaxes com The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Myfreetaxes com Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Myfreetaxes com There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Myfreetaxes com Dwelling unit. Myfreetaxes com   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Myfreetaxes com It also includes all structures or other property belonging to the dwelling unit. Myfreetaxes com A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Myfreetaxes com   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Myfreetaxes com Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Myfreetaxes com Example. Myfreetaxes com   You rent a room in your home that is always available for short-term occupancy by paying customers. Myfreetaxes com You do not use the room yourself, and you allow only paying customers to use the room. Myfreetaxes com The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Myfreetaxes com Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Myfreetaxes com When dividing your expenses, follow these rules. Myfreetaxes com Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Myfreetaxes com This rule does not apply when determining whether you used the unit as a home. Myfreetaxes com Any day that the unit is available for rent but not actually rented is not a day of rental use. Myfreetaxes com Example. Myfreetaxes com Your beach cottage was available for rent from June 1 through August 31 (92 days). Myfreetaxes com During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Myfreetaxes com The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Myfreetaxes com Your family also used the cottage during the last 2 weeks of May (14 days). Myfreetaxes com The cottage was not used at all before May 17 or after August 31. Myfreetaxes com You figure the part of the cottage expenses to treat as rental expenses as follows. Myfreetaxes com The cottage was used for rental a total of 85 days (92 − 7). Myfreetaxes com The days it was available for rent but not rented (7 days) are not days of rental use. Myfreetaxes com The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Myfreetaxes com You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Myfreetaxes com The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Myfreetaxes com Your rental expenses are 85/99 (86%) of the cottage expenses. Myfreetaxes com Note. Myfreetaxes com When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Myfreetaxes com Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Myfreetaxes com Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Myfreetaxes com If you have a net loss, you may not be able to deduct all of the rental expenses. Myfreetaxes com See Dwelling Unit Used as a Home, next. Myfreetaxes com Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Myfreetaxes com You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Myfreetaxes com See What is a day of personal use , later. Myfreetaxes com Fair rental price. Myfreetaxes com   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Myfreetaxes com The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Myfreetaxes com   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Myfreetaxes com Instead, count it as a day of personal use in applying both (1) and (2) above. Myfreetaxes com What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Myfreetaxes com You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Myfreetaxes com However, see Days used as a main home before or after renting , later. Myfreetaxes com A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Myfreetaxes com Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Myfreetaxes com ), and lineal descendants (children, grandchildren, etc. Myfreetaxes com ). Myfreetaxes com Anyone under an arrangement that lets you use some other dwelling unit. Myfreetaxes com Anyone at less than a fair rental price. Myfreetaxes com Main home. Myfreetaxes com   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Myfreetaxes com Shared equity financing agreement. Myfreetaxes com   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Myfreetaxes com Donation of use of property. Myfreetaxes com   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Myfreetaxes com Examples. Myfreetaxes com   The following examples show how to determine days of personal use. Myfreetaxes com Example 1. Myfreetaxes com You and your neighbor are co-owners of a condominium at the beach. Myfreetaxes com Last year, you rented the unit to vacationers whenever possible. Myfreetaxes com The unit was not used as a main home by anyone. Myfreetaxes com Your neighbor used the unit for 2 weeks last year; you did not use it at all. Myfreetaxes com Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Myfreetaxes com Example 2. Myfreetaxes com You and your neighbors are co-owners of a house under a shared equity financing agreement. Myfreetaxes com Your neighbors live in the house and pay you a fair rental price. Myfreetaxes com Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Myfreetaxes com This is because your neighbors rent the house as their main home under a shared equity financing agreement. Myfreetaxes com Example 3. Myfreetaxes com You own a rental property that you rent to your son. Myfreetaxes com Your son does not own any interest in this property. Myfreetaxes com He uses it as his main home and pays you a fair rental price. Myfreetaxes com Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Myfreetaxes com Example 4. Myfreetaxes com You rent your beach house to Joshua. Myfreetaxes com Joshua rents his cabin in the mountains to you. Myfreetaxes com You each pay a fair rental price. Myfreetaxes com You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Myfreetaxes com Days used for repairs and maintenance. Myfreetaxes com   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Myfreetaxes com Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Myfreetaxes com Days used as a main home before or after renting. Myfreetaxes com   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Myfreetaxes com Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Myfreetaxes com You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Myfreetaxes com However, this special rule does not apply when dividing expenses between rental and personal use. Myfreetaxes com Examples. Myfreetaxes com   The following examples show how to determine whether you used your rental property as a home. Myfreetaxes com Example 1. Myfreetaxes com You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Myfreetaxes com You rented the basement apartment at a fair rental price to college students during the regular school year. Myfreetaxes com You rented to them on a 9-month lease (273 days). Myfreetaxes com You figured 10% of the total days rented to others at a fair rental price is 27 days. Myfreetaxes com During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Myfreetaxes com Your basement apartment was used as a home because you used it for personal purposes for 30 days. Myfreetaxes com Rent-free use by your brothers is considered personal use. Myfreetaxes com Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Myfreetaxes com Example 2. Myfreetaxes com You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Myfreetaxes com Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Myfreetaxes com You figured 10% of the total days rented to others at a fair rental price is 3 days. Myfreetaxes com The room was used as a home because you used it for personal purposes for 21 days. Myfreetaxes com That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Myfreetaxes com Example 3. Myfreetaxes com You own a condominium apartment in a resort area. Myfreetaxes com You rented it at a fair rental price for a total of 170 days during the year. Myfreetaxes com For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Myfreetaxes com Your family actually used the apartment for 10 of those days. Myfreetaxes com Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Myfreetaxes com You figured 10% of the total days rented to others at a fair rental price is 16 days. Myfreetaxes com Your family also used the apartment for 7 other days during the year. Myfreetaxes com You used the apartment as a home because you used it for personal purposes for 17 days. Myfreetaxes com That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Myfreetaxes com Minimal rental use. Myfreetaxes com   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Myfreetaxes com See Used as a home but rented less than 15 days , later, for more information. Myfreetaxes com Limit on deductions. Myfreetaxes com   Renting a dwelling unit that is considered a home is not a passive activity. Myfreetaxes com Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Myfreetaxes com The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Myfreetaxes com Any expenses carried forward to the next year will be subject to any limits that apply for that year. Myfreetaxes com This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Myfreetaxes com   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Myfreetaxes com Reporting Income and Deductions Property not used for personal purposes. Myfreetaxes com   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Myfreetaxes com Property used for personal purposes. Myfreetaxes com   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Myfreetaxes com Not used as a home. Myfreetaxes com   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Myfreetaxes com Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Myfreetaxes com The expenses for personal use are not deductible as rental expenses. Myfreetaxes com   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Myfreetaxes com Used as a home but rented less than 15 days. Myfreetaxes com   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Myfreetaxes com You are not required to report the rental income and rental expenses from this activity. Myfreetaxes com The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Myfreetaxes com See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Myfreetaxes com Used as a home and rented 15 days or more. Myfreetaxes com   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Myfreetaxes com Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Myfreetaxes com The expenses for personal use are not deductible as rental expenses. Myfreetaxes com   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Myfreetaxes com You do not need to use Worksheet 9-1. Myfreetaxes com   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Myfreetaxes com To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Myfreetaxes com Depreciation You recover the cost of income-producing property through yearly tax deductions. Myfreetaxes com You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Myfreetaxes com Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Myfreetaxes com You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Myfreetaxes com You can deduct depreciation only on the part of your property used for rental purposes. Myfreetaxes com Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Myfreetaxes com You may have to use Form 4562 to figure and report your depreciation. Myfreetaxes com See How To Report Rental Income and Expenses , later. Myfreetaxes com Alternative minimum tax (AMT). Myfreetaxes com    If you use accelerated depreciation, you may be subject to the AMT. Myfreetaxes com Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Myfreetaxes com Claiming the correct amount of depreciation. Myfreetaxes com   You should claim the correct amount of depreciation each tax year. Myfreetaxes com If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Myfreetaxes com   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Myfreetaxes com S Individual Income Tax Return. Myfreetaxes com If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Myfreetaxes com See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Myfreetaxes com Changing your accounting method to deduct unclaimed depreciation. Myfreetaxes com   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Myfreetaxes com In some instances, that consent is automatic. Myfreetaxes com For more information, see chapter 1 of Publication 946. Myfreetaxes com Land. Myfreetaxes com   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Myfreetaxes com The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Myfreetaxes com More information. Myfreetaxes com   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Myfreetaxes com Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Myfreetaxes com You must consider these rules in the order shown below. Myfreetaxes com At-risk rules. Myfreetaxes com These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Myfreetaxes com This applies only if the real property was placed in service after 1986. Myfreetaxes com Passive activity limits. Myfreetaxes com Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Myfreetaxes com However, there are exceptions. Myfreetaxes com At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Myfreetaxes com Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Myfreetaxes com In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Myfreetaxes com You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Myfreetaxes com See Publication 925 for more information. Myfreetaxes com Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Myfreetaxes com For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Myfreetaxes com Limits on passive activity deductions and credits. Myfreetaxes com    Deductions or losses from passive activities are limited. Myfreetaxes com You generally cannot offset income, other than passive income, with losses from passive activities. Myfreetaxes com Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Myfreetaxes com Any excess loss or credit is carried forward to the next tax year. Myfreetaxes com   For a detailed discussion of these rules, see Publication 925. Myfreetaxes com    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Myfreetaxes com Real estate professionals. Myfreetaxes com   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Myfreetaxes com For a detailed discussion of the requirements, see Publication 527. Myfreetaxes com For a detailed discussion of material participation, see Publication 925. Myfreetaxes com Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Myfreetaxes com Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Myfreetaxes com Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Myfreetaxes com This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Myfreetaxes com Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Myfreetaxes com Active participation. Myfreetaxes com   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Myfreetaxes com Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Myfreetaxes com Maximum special allowance. Myfreetaxes com   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Myfreetaxes com   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Myfreetaxes com If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Myfreetaxes com   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Myfreetaxes com More information. Myfreetaxes com   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Myfreetaxes com How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Myfreetaxes com However, do not use that schedule to report a not-for-profit activity. Myfreetaxes com See Not Rented for Profit, earlier. Myfreetaxes com Providing substantial services. Myfreetaxes com   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Myfreetaxes com Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Myfreetaxes com For information, see Publication 334, Tax Guide for Small Business. Myfreetaxes com You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Myfreetaxes com   Use Form 1065, U. Myfreetaxes com S. Myfreetaxes com Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Myfreetaxes com Qualified joint venture. Myfreetaxes com   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Myfreetaxes com This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Myfreetaxes com For more information, see Publication 527. Myfreetaxes com Form 1098, Mortgage Interest Statement. Myfreetaxes com    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Myfreetaxes com If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Myfreetaxes com Attach a statement to your return showing the name and address of the other person. Myfreetaxes com In the left margin of Schedule E, next to line 13, enter “See attached. Myfreetaxes com ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Myfreetaxes com , you normally report your rental income and expenses on Schedule E, Part I. Myfreetaxes com List your total income, expenses, and depreciation for each rental property. Myfreetaxes com Be sure to enter the number of fair rental and personal use days on line 2. Myfreetaxes com If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Myfreetaxes com Complete lines 1 and 2 for each property. Myfreetaxes com However, fill in lines 23a through 26 on only one Schedule E. Myfreetaxes com On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Myfreetaxes com To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Myfreetaxes com If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Myfreetaxes com Form 6198, At-Risk Limitations. Myfreetaxes com See At-Risk Rules , earlier. Myfreetaxes com Also see Publication 925. Myfreetaxes com Form 8582, Passive Activity Loss Limitations. Myfreetaxes com See Passive Activity Limits , earlier. Myfreetaxes com Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Myfreetaxes com If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Myfreetaxes com Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Myfreetaxes com Worksheet 9-1. Myfreetaxes com Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Myfreetaxes com Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Myfreetaxes com ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Myfreetaxes com Rental Use Percentage A. Myfreetaxes com Total days available for rent at fair rental price A. Myfreetaxes com       B. Myfreetaxes com Total days available for rent (line A) but not rented B. Myfreetaxes com       C. Myfreetaxes com Total days of rental use. Myfreetaxes com Subtract line B from line A C. Myfreetaxes com       D. Myfreetaxes com Total days of personal use (including days rented at less than fair rental price) D. Myfreetaxes com       E. Myfreetaxes com Total days of rental and personal use. Myfreetaxes com Add lines C and D E. Myfreetaxes com       F. Myfreetaxes com Percentage of expenses allowed for rental. Myfreetaxes com Divide line C by line E     F. Myfreetaxes com   PART II. Myfreetaxes com Allowable Rental Expenses 1. Myfreetaxes com Enter rents received 1. Myfreetaxes com   2a. Myfreetaxes com Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Myfreetaxes com       b. Myfreetaxes com Enter the rental portion of real estate taxes b. Myfreetaxes com       c. Myfreetaxes com Enter the rental portion of deductible casualty and theft losses (see instructions) c. Myfreetaxes com       d. Myfreetaxes com Enter direct rental expenses (see instructions) d. Myfreetaxes com       e. Myfreetaxes com Fully deductible rental expenses. Myfreetaxes com Add lines 2a–2d. Myfreetaxes com Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Myfreetaxes com   3. Myfreetaxes com Subtract line 2e from line 1. Myfreetaxes com If zero or less, enter -0- 3. Myfreetaxes com   4a. Myfreetaxes com Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Myfreetaxes com       b. Myfreetaxes com Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Myfreetaxes com       c. Myfreetaxes com Carryover of operating expenses from 2012 worksheet c. Myfreetaxes com       d. Myfreetaxes com Add lines 4a–4c d. Myfreetaxes com       e. Myfreetaxes com Allowable expenses. Myfreetaxes com Enter the smaller of line 3 or line 4d (see instructions) 4e. Myfreetaxes com   5. Myfreetaxes com Subtract line 4e from line 3. Myfreetaxes com If zero or less, enter -0- 5. Myfreetaxes com   6a. Myfreetaxes com Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Myfreetaxes com       b. Myfreetaxes com Enter the rental portion of depreciation of the dwelling unit b. Myfreetaxes com       c. Myfreetaxes com Carryover of excess casualty losses and depreciation from 2012 worksheet c. Myfreetaxes com       d. Myfreetaxes com Add lines 6a–6c d. Myfreetaxes com       e. Myfreetaxes com Allowable excess casualty and theft losses and depreciation. Myfreetaxes com Enter the smaller of  line 5 or line 6d (see instructions) 6e. Myfreetaxes com   PART III. Myfreetaxes com Carryover of Unallowed Expenses to Next Year 7a. Myfreetaxes com Operating expenses to be carried over to next year. Myfreetaxes com Subtract line 4e from line 4d 7a. Myfreetaxes com   b. Myfreetaxes com Excess casualty and theft losses and depreciation to be carried over to next year. Myfreetaxes com  Subtract line 6e from line 6d b. Myfreetaxes com   Worksheet 9-1 Instructions. Myfreetaxes com Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Myfreetaxes com Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Myfreetaxes com Line 2a. Myfreetaxes com Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Myfreetaxes com Do not include interest on a loan that did not benefit the dwelling unit. Myfreetaxes com For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Myfreetaxes com Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Myfreetaxes com Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Myfreetaxes com   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Myfreetaxes com See the Schedule A instructions. Myfreetaxes com However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Myfreetaxes com See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Myfreetaxes com Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Myfreetaxes com   Note. Myfreetaxes com Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Myfreetaxes com Instead, figure the personal portion on a separate Schedule A. Myfreetaxes com If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Myfreetaxes com           Line 2c. Myfreetaxes com Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Myfreetaxes com To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Myfreetaxes com If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Myfreetaxes com On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Myfreetaxes com Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Myfreetaxes com   Note. Myfreetaxes com Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Myfreetaxes com Instead, figure the personal portion on a separate Form 4684. Myfreetaxes com           Line 2d. Myfreetaxes com Enter the total of your rental expenses that are directly related only to the rental activity. Myfreetaxes com These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Myfreetaxes com Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Myfreetaxes com           Line 2e. Myfreetaxes com You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Myfreetaxes com Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Myfreetaxes com           Line 4b. Myfreetaxes com On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Myfreetaxes com If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Myfreetaxes com Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Myfreetaxes com           Line 4e. Myfreetaxes com You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Myfreetaxes com *           Line 6a. Myfreetaxes com To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Myfreetaxes com   A. Myfreetaxes com Enter the amount from Form 4684, line 10       B. Myfreetaxes com Enter the rental portion of line A       C. Myfreetaxes com Enter the amount from line 2c of this worksheet       D. Myfreetaxes com Subtract line C from line B. Myfreetaxes com Enter the result here and on line 6a of this worksheet               Line 6e. Myfreetaxes com You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Myfreetaxes com * *Allocating the limited deduction. Myfreetaxes com If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Myfreetaxes com Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Myfreetaxes com Prev  Up  Next   Home   More Online Publications
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How Do You Report Suspected Tax Fraud Activity?

If You…

Then

And

… suspect or know of an individual or a business that is not complying with the tax laws on issues such as

  • False Exemptions or Deductions
  • Kickbacks
  • False/Altered Document
  • Failure to Pay Tax
  • Unreported Income
  • Organized Crime
  • Failure to Withhold
Use Form 3949-A,
Information Referral

CAUTION: Do NOT use Form 3949-A to report the  issues below

Print the form and mail to:

  • Internal Revenue Service
  • Fresno, CA 93888

 

or, order the form by mail or by calling the Tax Fraud Hotline recording at 1-800-829-0433. Note: we don't accept alleged tax law violation referrals over the phone.

 

You may also send a letter to the address above instead of using Form 3949-A. Please include as much information as possible, such as these important points: 

  1. Name and Address of person or business you are reporting
  2. The individual’s social security number or the business’ employer identification number
  3. A brief description of the alleged violation(s), including how you became aware or obtained information about  the violation(s)
  4. The years involved
  5. The estimated dollar amount of any unreported income
  6. Your name, address and telephone number*

 

*Although you are not required to identify yourself, it is helpful to do so. Your identity will be kept confidential.

…suspect someone stole your identity and used your SSN for employment purposes or could use your SSN to file a tax return

Use Form 14039*

 

*Spanish version: Form 14039SP

Complete the form online, print it and mail or fax to the appropriate office using the options listed on page 2 of the form. Include photocopies of at least one of the documents listed on the form to verify your identity.  For additional information, refer to the Taxpayer Guide to Identity Theft

…suspect fraudulent activity or an abusive tax scheme by a tax return preparer or tax preparation company

Use Form 14157**

 

**Form 14157-A (see below) may also be required

You may complete the form online, print it and mail it to the IRS address on the form.

 

…suspect  a tax return preparer filed a return or altered your return without your consent and you are seeking a change to your account

Use  Form 14157

AND

Form 14157-A

Send BOTH forms (Form 14157 and Form 14157-A) to the address shown in the Instructions for Form 14157-A.

…suspect an abusive tax promotion or promoter

Use Form 14242

The form can be mailed or faxed to the IRS address or fax number on the form.

…suspect misconduct or wrongdoing by an exempt organization or employee plan

Use Form 13909

Mail it to the address provided on the form.

…have information and want to claim a reward

Use Form 211

Mail it to the address in the Instructions for the form.

…suspect you received or are aware of fraudulent IRS

e-mails and websites

Please let us know! See our Phishing web page.

Page Last Reviewed or Updated: 20-Nov-2013

The Myfreetaxes Com

Myfreetaxes com 1. Myfreetaxes com   Application, Approval, and Appeal Procedures Table of Contents Introduction Topics - This chapter discusses: Application ProceduresForms Required Required Inclusions Miscellaneous Procedures Rulings and Determination LettersEffective Date of Exemption Revocation or Modification of Exemption Appeal ProceduresAppeals Office Consideration EO Technical Consideration Administrative Remedies Appeal to Courts Group Exemption LetterCentral Organization Application Procedure Keeping the Group Exemption Letter in Force Events Causing Loss of Group Exemption Introduction If your organization is one of the organizations described in this publication and is seeking recognition of tax-exempt status from the IRS, you should follow the procedures described in this chapter and the instructions that accompany the appropriate application forms. Myfreetaxes com For information on section 501(c)(3) organizations, go to Section 501(c)(3) Organizations chapter 3. Myfreetaxes com If your organization is seeking exemption under one of the other paragraphs of section 501(c), see chapter 4. Myfreetaxes com Topics - This chapter discusses: Application procedures that generally apply to all organizations discussed in this publication, including the application forms; Rulings and determination letters (approvals/disapprovals); Appeal procedures available if an adverse determination letter is proposed; and Group exemption letters. Myfreetaxes com Application Procedures Oral requests for recognition of exemption will not be considered by the IRS. Myfreetaxes com Your application for tax-exempt status must be in writing using the appropriate forms as discussed below. Myfreetaxes com Forms Required If your organization is seeking recognition of exemption from federal income tax, it must use a specific application prescribed by the IRS in Revenue Procedure 2013–9, sec. Myfreetaxes com 3. Myfreetaxes com If your organization is a central organization with exempt status, see Group Exemption Letter , later. Myfreetaxes com All applications must be signed by an authorized individual. Myfreetaxes com Form 1023, Application for Recognition of Exemption. Myfreetaxes com   File Form 1023 if you are seeking recognition of exemption under section: 501(c)(3) Corporations, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports, or prevention of cruelty for children or animals, 501(e) Cooperative hospital service organization, 501(f) Cooperative service organization of operating educational organizations, 501(k) Certain organizations providing child care, 501(n) Charitable risk pools, and 501(q) Credit counseling organizations. Myfreetaxes com Form 1024, Application for Recognition of Exemption Under Section 501(a). Myfreetaxes com    File Form 1024 if you are seeking recognition of exemption under section: 501(c)(2) Title holding corporations, 501(c)(4) Civic leagues, social welfare organizations, 501(c)(5) Labor, agricultural, or horticultural organizations, 501(c)(6) Business leagues, chambers of commerce, etc. Myfreetaxes com , 501(c)(7) Social clubs, 501(c)(8) Fraternal beneficiary societies, orders, or associations, 501(c)(9) Voluntary employees’ beneficiary associations, 501(c)(10) Domestic fraternal societies, orders, etc. Myfreetaxes com , 501(c)(12) Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies, 501(c)(13) Cemetery companies, 501(c)(15) Mutual insurance companies or associations, 501(c)(17) Trusts providing for the payment of supplemental unemployment compensation benefits, 501(c)(19) A post, organization, auxiliary unit, etc. Myfreetaxes com of past or present members of the Armed Forces of the United States, and 501(c)(25) Title holding corporations or trusts. Myfreetaxes com  Form 8718, User Fee for Exempt Organization Determination Letter Request, must also be sent along with Form 1024. Myfreetaxes com Letter application. Myfreetaxes com   If your organization is seeking recognition of exemption under section 501(c)(11), (14), (16), (18), (21), (22), (23), (26), (27), (28), or (29), submit a letter application with Form 8718. Myfreetaxes com See Required Inclusions for the information to include with the letter application. Myfreetaxes com Form 1028. Myfreetaxes com   Use Form 1028 if your organization is a farmers’ cooperative seeking recognition of exemption under section 521. Myfreetaxes com You must also submit Form 8718. Myfreetaxes com Form 8871. Myfreetaxes com    Use Form 8871 if you are a political party or campaign committee for a candidate for federal, state or local office seeking to be treated as tax-exempt under section 527. Myfreetaxes com See Political Organization Income Tax Return , later. Myfreetaxes com    Some organizations do not have to use specific application forms. Myfreetaxes com The application your organization must use is specified in the chapter in this publication dealing with your kind of organization. Myfreetaxes com It is also shown in the Organization Reference Chart, later. Myfreetaxes com Power of attorney. Myfreetaxes com   If your organization expects to be represented by an individual such as an attorney, CPA, officer or other person authorized to practice before the IRS, whether in person or by correspondence, you must file a Form 2848 with your exemption application. Myfreetaxes com The power of attorney must specifically authorize an individual to represent your organization. Myfreetaxes com You cannot name an organization, firm, etc. Myfreetaxes com as your representative. Myfreetaxes com Form 2848, Power of Attorney and Declaration of Representative, can be used for this purpose. Myfreetaxes com The categories of individuals who can represent you before the IRS are listed on the form. Myfreetaxes com Non-exemption for terrorist organizations. Myfreetaxes com   An organization that is identified or designated as a terrorist organization within the meaning of section 501(p)(2) is not eligible to apply for recognition of exemption. Myfreetaxes com User fee. Myfreetaxes com   The law requires the payment of a user fee for determination letter requests such as your application for recognition of tax-exempt status. Myfreetaxes com If you are filing Form 1023, user fee information is included in Part XI. Myfreetaxes com If you are required to apply for recognition of exemption by submitting Form 1024, a letter application, etc. Myfreetaxes com and you must pay a user fee, you should use Form 8718 to figure the amount of your user fee and to pay it. Myfreetaxes com Your payment must accompany your request. Myfreetaxes com The IRS will not process a request unless the fee has been paid. Myfreetaxes com    For the current user fee amount and processing time for applications go to IRS. Myfreetaxes com gov and select “Charities and Non-Profits” from the buttons near the top. Myfreetaxes com Then select the underlined link “How to Apply To Be Tax-Exempt” for the latest user fees or I want to check the status of my application for more information. Myfreetaxes com You can also call 1-877-829-5500. Myfreetaxes com Required Inclusions Employer identification number (EIN). Myfreetaxes com   Every exempt organization must have an EIN, whether or not it has any employees. Myfreetaxes com An EIN is required before an exemption application is submitted. Myfreetaxes com Information on how to apply for an EIN by using one of the following methods can be found at Employer ID Numbers (EIN): Online— This is the preferred method for requesting an EIN. Myfreetaxes com The EIN is issued immediately once the application information is validated. Myfreetaxes com By telephone at 1-800-829-4933, from 7:00 a. Myfreetaxes com m. Myfreetaxes com to 7:00 p. Myfreetaxes com m. Myfreetaxes com local time, Monday through Friday. Myfreetaxes com The EIN is provided over the phone to an authorized individual. Myfreetaxes com By mailing or faxing Form SS-4, Application for Employer Identification Number. Myfreetaxes com If the faxed Form SS-4 includes the taxpayer's fax number, a fax will be sent back with the EIN within four (4) business days. Myfreetaxes com    Use only one method for each entity so you do not receive more than one EIN for an entity. Myfreetaxes com   If you previously applied for an EIN and have not yet received it, or you are unsure whether you have an EIN, please call our toll-free customer account services number, 1-877-829-5500, for assistance. Myfreetaxes com Organizing documents. Myfreetaxes com   Your application should include a copy of the organizing or enabling document that is signed by a principal officer or is accompanied by a written declaration signed by an authorized individual certifying that the document is a complete and accurate copy of the original or meets the requirements of a conformed copy. Myfreetaxes com   If your organizing or enabling document are articles of incorporation, include evidence that it was filed and approved by a state official. Myfreetaxes com (For example, a stamped “Filed” copy dated by the Secretary of State is prima facie evidence that it was filed and approved by a state official. Myfreetaxes com ) A copy of the articles of incorporation can also be submitted with a written declaration signed by an authorized individual indicating the copy is complete and was filed and approved by the state, including the date filed. Myfreetaxes com Bylaws. Myfreetaxes com   Bylaws alone are not organizing documents. Myfreetaxes com However, if your organization has adopted bylaws, include a current copy. Myfreetaxes com The bylaws need not be signed if submitted as an attachment. Myfreetaxes com   If your organization's name has been officially changed by an amendment to your organizing instruments, you should also attach a conformed copy of that amendment to your application. Myfreetaxes com    Bylaws may be considered an organizing document only if they are properly structured (includes name, purpose, signatures, and intent to form an organization). Myfreetaxes com Conformed copy. Myfreetaxes com   A conformed copy is a copy that agrees with the original and all amendments to it. Myfreetaxes com If the original document required a signature, the copy should either be signed by a principal officer or, if not signed, be accompanied by a written declaration signed by an authorized officer of the organization. Myfreetaxes com With either option, the officer must certify that the document is a complete and accurate copy of the original. Myfreetaxes com A certificate of incorporation should be approved and dated by an appropriate state official. Myfreetaxes com Attachments. Myfreetaxes com    When submitting attachments, every attachment should show your organization's name and EIN. Myfreetaxes com It should also state that it is an attachment to your application form and identify the part and line item number to which it applies. Myfreetaxes com Original documents. Myfreetaxes com   Do not submit original documents because they become part of the IRS file and cannot be returned. Myfreetaxes com Description of activities. Myfreetaxes com   Your application must include a full description of the proposed activities of your organization, including each of the fundraising activities of a section 501(c)(3) organization and a narrative description of anticipated receipts and contemplated expenditures. Myfreetaxes com When describing the activities in which your organization expects to engage, you must include the standards, criteria, procedures, or other means that your organization adopted or planned for carrying out those activities. Myfreetaxes com   To determine the information you need to provide, you should study the part of this publication that applies to your organization. Myfreetaxes com The appropriate chapter will describe the purposes and activities that your organization must pursue, engage in, and include in your application in order to achieve exempt status. Myfreetaxes com   Often, your organization's articles of organization (or other organizing instruments) contain descriptions of your organization's purposes and activities. Myfreetaxes com   Your application should describe completely and in detail your past, present, and planned activities. Myfreetaxes com Financial data. Myfreetaxes com   You must include in your application financial statements showing your receipts and expenditures and a balance sheet for the current year and the 3 preceding years (or for the number of years your organization was in existence, if less than 4 years). Myfreetaxes com For each accounting period, you must describe the sources of your receipts and the nature of your expenditures. Myfreetaxes com   If you have not yet begun operations, or have operated for less than 1 year, a proposed budget for 2 full accounting periods and a current statement of assets and liabilities will be acceptable. Myfreetaxes com Exempt status established in application. Myfreetaxes com   If your application and its supporting documents show that your organization meets the requirements for tax-exempt status under the Code section you applied, the IRS will issue a favorable determination letter or ruling. Myfreetaxes com Miscellaneous Procedures To help in processing your application, be sure to attach all schedules, statements, and other documents required by the application form. Myfreetaxes com If you do not attach them, you may have to resubmit your application or you may otherwise encounter a delay in processing your application. Myfreetaxes com Incomplete application. Myfreetaxes com   If an application is not complete and does not contain all the required attachments found under Required Inclusions, the IRS may return it to you for completion. Myfreetaxes com The IRS may keep the application and send a letter requesting the missing information if most of the information has been received. Myfreetaxes com   If the IRS returns the application or requests additional information from you, that application will be considered filed on the date the substantially completed application is postmarked, or if no postmark, received at the IRS. Myfreetaxes com   Generally, the user fee will not be refunded if an incomplete application is filed. Myfreetaxes com   Additional information may be requested if necessary to clarify the nature of your organization. Myfreetaxes com Application made under wrong paragraph of section 501(c). Myfreetaxes com   Occasionally, an organization appears to qualify for exemption under a paragraph of section 501(c) that is different from the one for which the organization applied. Myfreetaxes com If the application was made on Form 1024, which applies to more than one paragraph of section 501(c), the organization can be recognized as exempt under any paragraph to which the form applies if the organization has agreed to have its application considered under that paragraph. Myfreetaxes com It must also supply any additional information required for the application under the new paragraph. Myfreetaxes com Different application form needed. Myfreetaxes com   If a different application form is required for your organization, the IRS will so advise your organization and will provide the appropriate application form for your convenience in reapplying under that paragraph, if you wish to do so. Myfreetaxes com Although supporting information previously furnished need not be duplicated, you must provide any necessary additional information required for the application. Myfreetaxes com If your reply is not received within a limited time, your application will be processed only for the paragraph under which you originally applied. Myfreetaxes com   When a specific application form is needed for the paragraph under which your organization qualifies, that form is required before a letter recognizing exemption can be issued. Myfreetaxes com This includes cases in which a determination letter is modified to recognize an organization's exempt status under a paragraph other than the paragraph under which it originally established exemption. Myfreetaxes com IRS responses. Myfreetaxes com   Organizations that submit a complete application will receive an acknowledgment from the IRS. Myfreetaxes com Others will receive a letter requesting more information or returning an incomplete application. Myfreetaxes com Applicants also will be notified if the application is forwarded to EO Technical Office for consideration. Myfreetaxes com These letters will be sent out as soon as possible after receipt of the organization's application. Myfreetaxes com Withdrawal of application. Myfreetaxes com   An application may be withdrawn at any time before the issuance of a ruling or determination letter upon the written request of a principal officer or authorized representative of your organization. Myfreetaxes com However, the withdrawal will not prevent the information contained in the application from being used by the IRS in any subsequent examination of your organization's returns. Myfreetaxes com The information forwarded with an application will not be returned to your organization and, generally, when an application is withdrawn, the user fee paid will not be refunded. Myfreetaxes com Requests for withholding of information from the public. Myfreetaxes com   The law requires many exempt organizations and private foundations to make their application forms and annual information returns available for public inspection. Myfreetaxes com The law also requires the IRS to make available for public inspection, in accordance with section 6104 and the related regulations, your approved application for recognition of exemption (including any papers submitted in support of the application) and the ruling or determination letter (discussed later, under Rulings and Determination Letters . Myfreetaxes com )   Any information submitted in the application or in support of it that relates to any trade secret, patent, process, style of work, or apparatus, upon request, can be withheld from public inspection if the IRS determines that the disclosure of such information would adversely affect the organization. Myfreetaxes com Your request must: Identify the material to be withheld (the document, page, paragraph, and line) by clearly marking it “Not Subject To Public Inspection. Myfreetaxes com ” Include the reasons for your organization's position that the information is of the type that can be withheld from public inspection. Myfreetaxes com Be filed with the office where your organization files the documents in which the material to be withheld is contained. Myfreetaxes com Where to file. Myfreetaxes com   Send your application for exempt status and Form 8718, (if required) to: Internal Revenue Service PO Box 12192 Covington, KY 41012-0192   Your application will be considered by EO Determinations, who will either issue a favorable determination letter to your organization, issue an adverse determination letter denying the exempt status claimed in the application, or refer the case to the Exempt Organizations Technical Office (EO Technical). Myfreetaxes com    Form 8940, Request for Miscellaneous Determination. Myfreetaxes com You can request miscellaneous determinations under sections 507, 509(a), 4940, 4942, 4945, and 6033 with Form 8940. Myfreetaxes com Nonexempt charitable trusts also file Form 8940 for an initial determination of section 509(a)(3) status or change to their type. Myfreetaxes com See Form 8940 and instructions for more information. Myfreetaxes com Requests other than applications. Myfreetaxes com Requests other than applications for recognition of exemption or Form 8940 (for example, requests for rulings involving feeder organizations, application of excise taxes to activities of private foundations, taxation of unrelated business income, etc. Myfreetaxes com ) should be sent to: Internal Revenue Service  Attention: EO Letter Rulings PO Box 27720 McPherson Station Washington, DC 20038 These requests, similar to applications for recognition of exemption previously discussed, must be accompanied by the appropriate user fee. Myfreetaxes com The schedule for user fees, including those for requests other than applications, can be found in Revenue Procedure 2013-8, 2013-1 I. Myfreetaxes com R. Myfreetaxes com B. Myfreetaxes com 237. Myfreetaxes com Referral to EO Technical. Myfreetaxes com   EO Determinations will refer to EO Technical any exempt organization issue concerning qualification for exemption or foundation status for which there is no published precedent or for which there is reason to believe that nonuniformity exists. Myfreetaxes com EO Determinations can request technical advice on any technical or procedural question that cannot be resolved on the basis of law, regulations, or a clearly applicable revenue ruling or other published precedent. Myfreetaxes com An organization can request that an issue be referred to EO Technical for technical advice if it feels that a lack of uniformity exists as to the disposition of the issue or if an issue is so unusual or complex as to warrant consideration by EO Technical. Myfreetaxes com If a determination letter is issued based on technical advice from EO Technical regarding qualification for exemption or foundation status, no further administrative appeal is available on the issue that was the subject of technical advice. Myfreetaxes com Reminder. Myfreetaxes com   The law requires payment of a user fee for determination letter requests. Myfreetaxes com Go to IRS. Myfreetaxes com gov/Charities and select Current User Fees-Exempt Organizations to find the required payment. Myfreetaxes com Payment must accompany each request. Myfreetaxes com Rulings and Determination Letters Elimination of the advance public charity status. Myfreetaxes com   New regulations eliminate the advance ruling process for a section 501(c)(3) organization. Myfreetaxes com Under the new regulations, a new section 501(c)(3) organization will be classified as a publicly supported organization and not a private foundation if it can show when it applies for tax-exempt status that it reasonably can be expected to be publicly supported. Myfreetaxes com The new rules no longer require the organization to file Form 8734, Support Schedule for Advance Ruling Period, after completing its first 5 tax years. Myfreetaxes com See Elimination of the Advance Ruling Process . Myfreetaxes com An organization must describe fully the activities in which it expects to engage. Myfreetaxes com This includes standards, procedures, or other means adopted or planned by the organization for carrying out its activities, expected sources of funds, and the nature of its contemplated expenses. Myfreetaxes com When an organization does not supply the information previously mentioned under Application Procedures , or fails to furnish a sufficiently detailed description of its proposed activities to permit a conclusion that it will clearly be exempt, a proposed adverse determination letter or ruling may be issued. Myfreetaxes com Adverse determination. Myfreetaxes com   A proposed adverse ruling or determination letter will be issued to an organization that has not provided sufficiently detailed information to establish that it qualifies for exemption or if the information provided establishes that it does not qualify for exemption. Myfreetaxes com An organization can appeal a proposed adverse ruling or determination letter. Myfreetaxes com See Appeal Procedures , later. Myfreetaxes com Effective Date of Exemption A ruling or determination letter recognizing exemption is usually effective as of the date of formation of an organization if, during the period before the date of the ruling or determination letter, its purposes and activities were those required by the law. Myfreetaxes com (See Application for Recognition of Exemption in chapter 3 for the special rule for organizations applying for recognition of exemption under section 501(c)(3). Myfreetaxes com ) Upon obtaining recognition of exemption, the organization can file a claim for a refund of income taxes paid for the period for which its exempt status is recognized. Myfreetaxes com If an organization is required to alter its activities or substantially amend its charter to qualify, the ruling or determination letter recognizing exemption will be effective as of the date specified in the letter. Myfreetaxes com If a nonsubstantive amendment is made, such as correction of a clerical error in the enabling instrument or the addition of a dissolution clause, exemption will ordinarily be recognized as of the date of formation if the activities of the organization before the ruling or determination are consistent with the exemption requirements. Myfreetaxes com A ruling or determination letter recognizing exemption cannot be relied on if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization. Myfreetaxes com Also, a ruling or determination letter cannot be relied on if it is based on any inaccurate material factual representations. Myfreetaxes com Revocation or Modification of Exemption A ruling or determination letter recognizing exemption may be revoked or modified by: A notice to the organization to which the ruling or determination letter originally was issued, Enactment of legislation or ratification of a tax treaty, A decision of the United States Supreme Court, Issuance of temporary or final regulations, or Issuance of a revenue ruling, a revenue procedure, or other statement published in the Internal Revenue Bulletin or Cumulative Bulletin. Myfreetaxes com When revocation takes effect. Myfreetaxes com   If the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or, with regard to organizations to which section 503 applies, engaged in a prohibited transaction (such as diverting corpus or income from its exempt purpose), the revocation or modification may be retroactive. Myfreetaxes com Material change in organization. Myfreetaxes com   If there is a material change, inconsistent with exemption, in the character, purpose, or method of operation of the organization, revocation or modification will ordinarily take effect as of the date of that material change. Myfreetaxes com Relief from retroactivity. Myfreetaxes com   If a ruling or determination letter was issued in error or the IRS changed its position after issuing a letter or ruling, and if section 7805(b) relief is granted, retroactivity of the revocation or modification ordinarily will be limited to a date not earlier than that on which the original ruling or determination letter was modified or revoked. Myfreetaxes com For more information on requesting section 7805(b) relief, see Revenue Procedure 2013-4, 2013-1 I. Myfreetaxes com R. Myfreetaxes com B. Myfreetaxes com 126, sec. Myfreetaxes com 13 (or later update). Myfreetaxes com Foundations. Myfreetaxes com   The determination of the effective date is the same for the revocation or modification of foundation status or operating foundation status unless the effective date is expressly covered by statute or regulations. Myfreetaxes com Written notice. Myfreetaxes com   If an EO area manager concludes, as a result of examining an information return or considering information from any other source, that a ruling or determination letter should be revoked or modified, the organization will be advised in writing of the proposed action and the reasons for it. Myfreetaxes com   The organization will also be advised of its right to protest the proposed action by requesting Appeals Office consideration. Myfreetaxes com The appeal procedures are discussed next. Myfreetaxes com Appeal Procedures If your organization applies for tax-exempt status and EO Determination decides your organization does not qualify, your organization will be advised of its rights to protest the determination by requesting Appeals Office consideration. Myfreetaxes com This process does not apply to determinations issued by EO Technical. Myfreetaxes com Your organization must submit a statement of its views fully explaining its reasoning. Myfreetaxes com The statement must be submitted within 30 days from the date of the adverse determination letter and must state whether it wishes Appeals Office consideration. Myfreetaxes com Representation. Myfreetaxes com   A principal officer or trustee can represent an organization at any level of appeal within the IRS. Myfreetaxes com Also, an attorney, certified public accountant, or individual enrolled to practice before the IRS can represent the organization. Myfreetaxes com   If the organization's representative attends a conference without a principal officer or trustee, the representative must file a proper power of attorney or a tax information authorization before receiving or inspecting confidential information. Myfreetaxes com Form 2848 or Form 8821, Tax Information Authorization, as appropriate (or any other properly written power of attorney or authorization), can be used for this purpose. Myfreetaxes com These forms can be obtained from the IRS. Myfreetaxes com For more information, see Publication 947, Practice Before the IRS and Power of Attorney. Myfreetaxes com Appeals Office Consideration EO Determinations will consider the statement protesting and appealing (hereinafter appealing) the adverse determination and decide if the information affects its determination. Myfreetaxes com If the appeal does not provide a basis to reconsider its adverse determination, it will forward the appeal and case file to the Appeals Office. Myfreetaxes com For more information about the role of the Appeals Office, see Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. Myfreetaxes com The appeal should include the following information. Myfreetaxes com The organization's name, address, daytime telephone number, and employer identification number. Myfreetaxes com A statement that the organization wants to protest the determination. Myfreetaxes com A copy of the letter showing the determination you disagree with, or the date and symbols on the determination letter. Myfreetaxes com A statement of facts supporting the organization's position in any contested factual issue. Myfreetaxes com A statement outlining the law or other authority the organization is relying on. Myfreetaxes com A statement as to whether a conference at the Appeals Office is desired. Myfreetaxes com The statement of facts in item 4 must be declared true under penalties of perjury. Myfreetaxes com This may be done by adding to the protest the following signed declaration:   “Under penalties of perjury, I declare that I have examined the statement of facts presented in this protest and in any accompanying schedules and statements and, to the best of my knowledge and belief, it is true, correct, and complete. Myfreetaxes com ”           Signature. Myfreetaxes com   If the organization's representative submits the appeal, a substitute declaration must be included, stating: That the representative prepared the appeal and accompanying documents, and Whether the representative knows personally that the statements of fact contained in the appeal and accompanying documents are true and correct. Myfreetaxes com Be sure the appeal contains all of the information requested. Myfreetaxes com Incomplete appeals will be returned for completion. Myfreetaxes com If a conference is requested, it will be held at the Appeals Office, unless the organization requests that the meeting be held at a field office convenient to both parties. Myfreetaxes com The Appeals Office, after considering the organization's appeal as well as information presented in any conference held, will notify the organization of its decision and issue an appropriate determination letter. Myfreetaxes com An adverse decision can be appealed to the courts (discussed later). Myfreetaxes com The Appeals Office must request technical advice from EO Technical on any exempt organization issue concerning qualification for exemption or foundation status for which there is no published precedent or for which there is reason to believe that nonuniformity exists. Myfreetaxes com If an organization believes that its case involves such an issue, it should ask the Appeals Office to request technical advice. Myfreetaxes com Any determination letter issued on the basis of technical advice from EO Technical cannot be appealed to the Appeals Office for those issues that were the subject of the technical advice from EO Technical. Myfreetaxes com EO Technical Consideration If an application is referred to EO Technical for issuance of a ruling and an adverse ruling is issued, the organization will be informed of the basis for the conclusion, its right to file a protest within 30 days, and its right to have a conference with EO Technical. Myfreetaxes com Administrative Remedies In the case of an application under section 501(c)(3), all of the following actions, called administrative remedies, must be completed by your organization before an unfavorable ruling or determination letter from the IRS can be appealed to the courts. Myfreetaxes com The filing of a substantially completed application Form 1023 or group exemption request under section 501(c)(3) (described earlier in this chapter) or the filing of a request for a determination of foundation status (see Private Foundations and Public Charities in chapter 3). Myfreetaxes com In the case of a late-filed application, requesting relief under Regulations section 301. Myfreetaxes com 9100 regarding applications for extensions of time for making an election or application for relief from tax (see Application for Recognition of Exemption in chapter 3). Myfreetaxes com The timely submission of all additional information requested to perfect an exemption application or request for determination of private foundation status. Myfreetaxes com Exhaustion of all administrative appeals available within the IRS, including protest of an adverse ruling issued by EO Technical in the case of an exemption application. Myfreetaxes com The actions just described will not be considered completed until the IRS has had a reasonable time to act upon the appeal or protest, as the case may be. Myfreetaxes com An organization will not be considered to have exhausted its administrative remedies before the earlier of: The completion of the steps just listed and the sending by certified or registered mail of a notice of final determination, or The expiration of the 270-day period in which the IRS has not issued a notice of final determination and the organization has taken, in a timely manner, all reasonable steps to secure a ruling or determination. Myfreetaxes com 270-day period. Myfreetaxes com   The 270-day period will be considered by the IRS to begin on the date a substantially completed Form 1023 or group exemption request is sent to the IRS. Myfreetaxes com See Application Procedures , earlier, for information needed to complete Form 1023. Myfreetaxes com   If the application does not contain all of the required items, it will not be further processed and may be returned to the applicant for completion. Myfreetaxes com The 270-day period, in this event, will not be considered as starting until the date the application is remailed to the IRS with the requested information, or, if a postmark is not evident, on the date the IRS receives a substantially completed application. Myfreetaxes com Appeal to Courts If the IRS issues an unfavorable determination letter or ruling to your organization and you have exhausted all the administrative remedies just discussed, your organization can seek judicial remedies. Myfreetaxes com For example, if your organization has paid the tax resulting from the adverse determination and met all other statutory prerequisites, it can file suit for a refund in a U. Myfreetaxes com S. Myfreetaxes com District Court or the U. Myfreetaxes com S. Myfreetaxes com Court of Federal Claims. Myfreetaxes com Or, if your organization elected not to pay the tax deficiency resulting from the adverse determination and met all other statutory prerequisites, it can file suit for a redetermination of the tax deficiencies in the United States Tax Court. Myfreetaxes com For more information on these types of suits, get Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. Myfreetaxes com In certain situations, your organization can file suit for a declaratory judgment in the U. Myfreetaxes com S. Myfreetaxes com District Court for the District of Columbia, the U. Myfreetaxes com S. Myfreetaxes com Court of Federal Claims, or the U. Myfreetaxes com S. Myfreetaxes com Tax Court. Myfreetaxes com This remedy is available if your organization received an adverse notice of final determination, or if the IRS failed to make a timely determination on your initial or continuing qualification or classification as an exempt organization. Myfreetaxes com However, your exempt status claim must be as: An organization qualifying under section 501(c)(3), An organization to which a deduction for a contribution is allowed under section 170(c)(2), An organization that is a private foundation under section 509(a), A private operating foundation under section 4942(j)(3), or A cooperative organization that is exempt from tax under section 521. Myfreetaxes com Adverse notice of final determination. Myfreetaxes com   The adverse notice of final determination referred to above is a ruling or determination letter sent by certified or registered mail holding that your organization: Is not described in section 501(c)(3) or section 170(c)(2), Is a private foundation as defined in section 4942(j)(3), or Is a public charity described in a part of section 509(a) or section 170(b)(1)(A) other than the part under which your organization requested classification. Myfreetaxes com Favorable court rulings - IRS procedure. Myfreetaxes com   If a suit results in a final determination that your organization is exempt from tax, the IRS will issue a favorable ruling or determination letter, provided your organization has filed an application for exemption and submitted a statement that the underlying facts and applicable law are the same as in the period considered by the court. Myfreetaxes com Group Exemption Letter A group exemption letter is a ruling or determination letter issued to a central organization recognizing on a group basis the exemption under section 501(c) of subordinate organizations on whose behalf the central organization has applied for recognition of exemption. Myfreetaxes com A central organization is an organization that has one or more subordinates under its general supervision or control. Myfreetaxes com A subordinate organization is a chapter, local, post, or unit of a central organization. Myfreetaxes com A central organization may be a subordinate itself, such as a state organization that has subordinate units and is itself affiliated with a national (central) organization. Myfreetaxes com A subordinate organization may or may not be incorporated, but it must have an organizing document. Myfreetaxes com A subordinate that is organized and operated in a foreign country cannot be included in a group exemption letter. Myfreetaxes com A subordinate described in section 501(c)(3) cannot be included in a group exemption letter if it is a private foundation described in section 509(a). Myfreetaxes com If your organization is a subordinate controlled by a central organization (for example, a church, a veterans' organization, or a fraternal organization), you should check with the central organization to see if it has been issued a group exemption letter that covers your organization. Myfreetaxes com If it has, you do not have to file a separate application unless your organization no longer wants to be included in the group exemption letter. Myfreetaxes com If the group exemption letter does not cover your organization, ask your central organization about being included in the next annual group ruling update that it submits to the IRS. Myfreetaxes com Central Organization Application Procedure If your organization is a central organization with affiliated subordinates under its control, it can apply for a group exemption letter for its subordinates, provided it has obtained recognition of its own exemption before or concurrently with the group exemption. Myfreetaxes com You should make the application for such subordinates by letter instead of submitting either Form 1023 or 1024. Myfreetaxes com This procedure relieves each of the subordinates covered by a group exemption letter from filing its own application. Myfreetaxes com A central organization obtains its own recognition of exemption by sending its application to the IRS address shown on Form 8718 or Form 1023. Myfreetaxes com If the central organization has previously obtained recognition of its own exemption, it must indicate its employer identification number and the date of the letter recognizing its exemption. Myfreetaxes com It need not forward documents already submitted. Myfreetaxes com However, if it has not already done so, the central organization must submit a copy of any amendment to its governing instruments or internal regulations as well as any information about changes in its character, purposes, or method of operation. Myfreetaxes com Employer identification number. Myfreetaxes com   The central organization must have an EIN before it submits a completed exemption or group exemption application. Myfreetaxes com Each subordinate must have its own EIN, even if it has no employees. Myfreetaxes com When submitting its group exemption application, the central organization must provide an EIN for each subordinate organization. Myfreetaxes com Information required for subordinate organizations. Myfreetaxes com   In addition to the information required to obtain recognition of its own exemption, the central organization must submit information for those subordinates to be included in the group exemption letter. Myfreetaxes com The information should be forwarded in a letter signed by a principal officer of the central organization setting forth or including as attachments the following. Myfreetaxes com Information verifying that the subordinates: Are affiliated with the central organization at the close of its annual accounting period; Are subject to its general supervision or control; Are all eligible to qualify for exemption under the same paragraph of section 501(c), though not necessarily the paragraph under which the central organization itself is exempt; Are not private foundations if the application for a group exemption letter involves section 501(c)(3); Are all on the same accounting period as the central organization if they are to be included in group returns; and Are organizations that have been formed within the 15-month period preceding the date of submission of the group exemption application if they are claiming section 501(c)(3) status and are subject to the requirements of section 508(a) and wish to be recognized as exempt from their dates of creation (a group exemption letter may be issued covering subordinates, one or more of which have not been organized within the 15-month period preceding the date of submission, if all subordinates are willing to be recognized as exempt only from the date of application). Myfreetaxes com A detailed description of the purposes and activities of the subordinates, including the sources of receipts and the nature of expenditures. Myfreetaxes com A sample copy of a uniform governing instrument (such as a charter or articles of association) adopted by the subordinates, or, in its absence, copies of representative instruments. Myfreetaxes com An affirmation to the effect that, to the best of the officer's knowledge, the purposes and activities of the subordinates are as stated in (2) and (3), above. Myfreetaxes com A statement that each of the subordinates has provided a written authorization to the central organization, signed by an authorized officer of the subordinate, agreeing to be included in the group exemption (see also New 501(c)(3) organizations that want to be included , later in this section). Myfreetaxes com A list of subordinates to be included in the group exemption letter to which the IRS has issued an outstanding ruling or determination letter relating to exemption. Myfreetaxes com If the application for a group exemption letter involves section 501(c)(3) and is subject to the provisions of the Code requiring that it give timely notice that it is not a private foundation (see Private Foundations in chapter 3), an affirmation to the effect that, to the best of the officer's knowledge and belief, no subordinate to be included in the group exemption letter is a private foundation as defined in section 509(a). Myfreetaxes com For each subordinate that is a school claiming exemption under section 501(c)(3), the information required by Revenue Ruling 71-447, 1971-2 C. Myfreetaxes com B. Myfreetaxes com 230 and Revenue Procedure 75-50, 1975-2 C. Myfreetaxes com B. Myfreetaxes com 587 (these requirements are fully described in chapter 3, under Private Schools ; see also Schedule B, Form 1023). Myfreetaxes com For any school affiliated with a church, the information to show that the provisions of Revenue Ruling 75-231, 1975-1 C. Myfreetaxes com B. Myfreetaxes com 158, have been met. Myfreetaxes com A list of the names, mailing addresses, actual addresses if different, and EINs of subordinates to be included in the group exemption letter. Myfreetaxes com A current directory of subordinates may be furnished instead of the list if it includes the required information and if the subordinates not to be included in the group exemption letter are identified. Myfreetaxes com New 501(c)(3) organizations that want to be included. Myfreetaxes com   A new organization, described in section 501(c)(3), that wants to be included in a group exemption letter must submit its authorization (as explained in item number 5, earlier, under Information required for subordinate organizations ) to the central organization before the end of the 15th month after it was formed in order to satisfy the requirement of section 508(a). Myfreetaxes com The central organization must also include this subordinate in its next annual submission of information, as discussed later, under Information Required Annually . Myfreetaxes com Keeping the Group Exemption Letter in Force Continued effectiveness of a group exemption letter is based on the following conditions. Myfreetaxes com The continued existence of the central organization. Myfreetaxes com The continued qualification of the central organization for exemption under section 501(c). Myfreetaxes com The submission by the central organization of the information regarding its subordinate organizations that is required annually (described under Information Required Annually). Myfreetaxes com The annual filing of an information return (Form 990, for example) by the central organization if required. Myfreetaxes com The continued effectiveness of a group exemption letter as to a particular subordinate is based on these four conditions, as well as on the continued conformity by the subordinate to the requirements for inclusion in a group exemption letter, the authorization for inclusion, and the annual filing of any required information return for the subordinate. Myfreetaxes com Information Required Annually To maintain a group exemption letter, the central organization must submit annually, at least 90 days before the close of its annual accounting period, all of the following information. Myfreetaxes com Information about all changes in the purposes, character, or method of operation of the subordinates included in the group exemption letter. Myfreetaxes com A separate list (that includes the names, mailing addresses, actual addresses if different, and EINs of the affected subordinates) for each of the three following categories. Myfreetaxes com Subordinates that have changed their names or addresses during the year. Myfreetaxes com Subordinates no longer to be included in the group exemption letter because they no longer exist or have disaffiliated from or withdrawn their authorization to the central organization. Myfreetaxes com Subordinates to be added to the group exemption letter because they are newly organized or affiliated or because they have recently authorized the central organization to include them. Myfreetaxes com An annotated directory of subordinates will not be accepted for this purpose. Myfreetaxes com If there were none of the above changes, the central organization must submit a statement to that effect. Myfreetaxes com The same information about new subordinates that was required in the initial application for group exemption. Myfreetaxes com (This information is listed in items 1 through 10, under Information required for subordinate organizations. Myfreetaxes com , earlier. Myfreetaxes com ) If a new subordinate does not differ in any material respects from the subordinates included in the application for group exemption, however, a statement to this effect may be submitted in lieu of detailed information. Myfreetaxes com The organization should send this information to:   Ogden Service Center  Mail Stop 6271 Ogden, UT 84404-4749 Submitting the required information annually does not relieve the central organization or any of its subordinates of the duty to submit any other information that may be required by an EO area manager to determine whether the conditions for continued exemption are being met. Myfreetaxes com Events Causing Loss of Group Exemption A group exemption letter no longer has effect, for either a particular subordinate or the group as a whole, when: The central organization notifies the IRS that it is going out of existence, The central organization notifies the IRS, by its annual submission or otherwise, that any of its subordinates will no longer fulfill the conditions for continued effectiveness, explained earlier, or The IRS notifies the central organization or the affected subordinate that the group exemption letter will no longer have effect for some or all of the group because the conditions for continued effectiveness of a group exemption letter have not been fulfilled. Myfreetaxes com When notice is given under any of these three conditions, the IRS will no longer recognize the exempt status of the affected subordinates until they file separate applications on their own behalf or the central organization files complete supporting information for their reinclusion in the group exemption at the time of its annual submission. Myfreetaxes com However, when the notice is given by the IRS and the withdrawal of recognition is based on the failure of the organization to comply with the requirements for recognition of tax-exempt status under the particular subsection of section 501(c), the revocation will ordinarily take effect as of the date of that failure. Myfreetaxes com The notice, however, will be given only after the appeal procedures described earlier in this chapter are completed. Myfreetaxes com Prev  Up  Next   Home   More Online Publications