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Mypay dfas mil login 9. Mypay dfas mil login   Tax Treaty Benefits Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Treaty Income Some Typical Tax Treaty BenefitsPersonal Services Teachers, Professors, and Researchers Employees of Foreign Governments Students, Apprentices, and Trainees Capital Gains Resident Aliens Reporting Treaty Benefits Claimed Introduction A nonresident alien (and certain resident aliens) from a country with which the United States has an income tax treaty may qualify for certain benefits. Mypay dfas mil login Most treaties require that the nonresident alien be a resident of the treaty country to qualify. Mypay dfas mil login However, some treaties require that the nonresident alien be a national or a citizen of the treaty country. Mypay dfas mil login See Table 9-1 for a list of tax treaty countries. Mypay dfas mil login You can generally arrange to have withholding tax reduced or eliminated on wages and other income that are eligible for tax treaty benefits. Mypay dfas mil login See Income Entitled to Tax Treaty Benefits in chapter 8. Mypay dfas mil login Topics - This chapter discusses: Typical tax treaty benefits, How to obtain copies of tax treaties, and How to claim tax treaty benefits on your tax return. Mypay dfas mil login Useful Items - You may want to see: Publication 901 U. Mypay dfas mil login S. Mypay dfas mil login Tax Treaties Form (and Instructions) 1040NR U. Mypay dfas mil login S. Mypay dfas mil login Nonresident Alien Income Tax Return 1040NR-EZ U. Mypay dfas mil login S. Mypay dfas mil login Income Tax Return for Certain Nonresident Aliens With No Dependents 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) See chapter 12 for information about getting these publications and forms. Mypay dfas mil login Treaty Income A nonresident alien's treaty income is the gross income on which the tax is limited by a tax treaty. Mypay dfas mil login Treaty income includes, for example, dividends from sources in the United States that are subject to tax at a tax treaty rate not to exceed 15%. Mypay dfas mil login Nontreaty income is the gross income of a nonresident alien on which the tax is not limited by a tax treaty. Mypay dfas mil login Figure the tax on treaty income on each separate item of income at the reduced rate that applies to that item under the treaty. Mypay dfas mil login To determine tax on nontreaty income, figure the tax at either the flat 30% rate or the graduated rate, depending upon whether or not the income is effectively connected with your trade or business in the United States. Mypay dfas mil login Your tax liability is the sum of the tax on treaty income plus the tax on nontreaty income, but cannot be more than the tax liability figured as if the tax treaty had not come into effect. Mypay dfas mil login Example. Mypay dfas mil login Arthur Banks is a nonresident alien who is single and a resident of a foreign country that has a tax treaty with the United States. Mypay dfas mil login He received gross income of $25,850 during the tax year from sources within the United States, consisting of the following items: Dividends on which the tax is limited to a 15% rate by the tax treaty $1,400 Compensation for personal services on which the tax is not limited by the tax treaty 24,450 Total gross income $25,850 Arthur was engaged in business in the United States during the tax year. Mypay dfas mil login His dividends are not effectively connected with that business. Mypay dfas mil login He has no deductions other than his own personal exemption. Mypay dfas mil login His tax liability, figured as though the tax treaty had not come into effect, is $3,060 determined as follows: Total compensation $24,450 Less: Personal exemption 3,900 Taxable income $20,550 Tax determined by graduated rate (Tax Table column for single taxpayers) $2,640 Plus: Tax on gross dividends ($1,400 × 30%) 420 Tax determined as though treaty had not come into effect $3,060 Arthur's tax liability, figured by taking into account the reduced rate on dividend income as provided by the tax treaty, is $2,850 determined as follows: Tax determined by graduated rate (same as figured above) $2,640 Plus: Tax on gross dividends ($1,400 × 15%) 210 Tax on compensation and dividends $2,850 His tax liability, therefore, is limited to $2,850, the tax liability figured using the tax treaty rate on the dividends. Mypay dfas mil login Some Typical Tax Treaty Benefits The following paragraphs briefly explain the exemptions that are available under tax treaties for personal services income, remittances, scholarships, fellowships, and capital gain income. Mypay dfas mil login The conditions for claiming the exemptions vary under each tax treaty. Mypay dfas mil login For more information about the conditions under a particular tax treaty, see Publication 901. Mypay dfas mil login Or, you may download the complete text of most U. Mypay dfas mil login S. Mypay dfas mil login tax treaties at IRS. Mypay dfas mil login gov. Mypay dfas mil login Technical explanations for many of those treaties are also available at that site. Mypay dfas mil login Tax treaty benefits also cover income such as dividends, interest, rentals, royalties, pensions, and annuities. Mypay dfas mil login These types of income may be exempt from U. Mypay dfas mil login S. Mypay dfas mil login tax or may be subject to a reduced rate of tax. Mypay dfas mil login For more information, see Publication 901 or the applicable tax treaty. Mypay dfas mil login Personal Services Nonresident aliens from treaty countries who are in the United States for a short stay and also meet certain other requirements may be exempt from tax on their compensation received for personal services performed in the United States. Mypay dfas mil login Many tax treaties require that the nonresident alien claiming this exemption be present in the United States for a total of not more than 183 days during the tax year. Mypay dfas mil login Other tax treaties specify different periods of maximum presence in the United States, such as 180 days or 90 days. Mypay dfas mil login Spending part of a day in the United States counts as a day of presence. Mypay dfas mil login Tax treaties may also require that: The compensation cannot be more than a specific amount (frequently $3,000), and The individual have a foreign employer; that is, an individual, corporation, or entity of a foreign country. Mypay dfas mil login Note. Mypay dfas mil login Under most treaties, income received as an employee (generally designated as dependent personal services) and income received as a self-employed person (generally designated as independent personal services or business income) are treated differently. Mypay dfas mil login Teachers, Professors, and Researchers Under many income tax treaties, nonresident alien teachers or professors who temporarily visit the United States for the primary purpose of teaching at a university or other accredited educational institution are not subject to U. Mypay dfas mil login S. Mypay dfas mil login income tax on compensation received for teaching for the first 2 or 3 years after their arrival in the United States. Mypay dfas mil login Many treaties also provide an exemption for engaging in research. Mypay dfas mil login Generally, the teacher or professor must be in the United States primarily to teach, lecture, instruct, or engage in research. Mypay dfas mil login A substantial part of that person's time must be devoted to those duties. Mypay dfas mil login The normal duties of a teacher or professor include not only formal classroom work involving regularly scheduled lectures, demonstrations, or other student-participation activities, but also the less formal method of presenting ideas in seminars or other informal groups and in joint efforts in the laboratory. Mypay dfas mil login If you entered the United States as a nonresident alien, but are now a resident alien, the treaty exemption may still apply. Mypay dfas mil login See Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens later under Resident Aliens. Mypay dfas mil login Employees of Foreign Governments All treaties have provisions for the exemption of income earned by certain employees of foreign governments. Mypay dfas mil login However, a difference exists among treaties as to who qualifies for this benefit. Mypay dfas mil login Under many treaties, aliens admitted to the United States for permanent residence do not qualify. Mypay dfas mil login Under most treaties, aliens who are not nationals or subjects of the foreign country do not qualify. Mypay dfas mil login Employees of foreign governments should read the pertinent treaty carefully to determine whether they qualify for benefits. Mypay dfas mil login Chapter 10 of this publication also has information for employees of foreign governments. Mypay dfas mil login Students, Apprentices, and Trainees Under some income tax treaties, students, apprentices, and trainees are exempt from tax on remittances received from abroad for study and maintenance. Mypay dfas mil login Also, under some treaties, scholarship and fellowship grants, and a limited amount of compensation received by students, apprentices, and trainees may be exempt from tax. Mypay dfas mil login If you entered the United States as a nonresident alien, but are now a resident alien, the treaty exemption may still apply. Mypay dfas mil login See Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens , later, under Resident Aliens. Mypay dfas mil login Capital Gains Most treaties provide for the exemption of gains from the sale or exchange of personal property. Mypay dfas mil login Generally, gains from the sale or exchange of real property located in the United States are taxable. Mypay dfas mil login Resident Aliens Resident aliens may qualify for tax treaty benefits in the situations discussed below. Mypay dfas mil login U. Mypay dfas mil login S. Mypay dfas mil login Residency Under Tax Treaty “Tie-Breaker” Rule In certain circumstances, individuals who are treated as residents of the United States under an income tax treaty (after application of the so-called “tie-breaker” rule) will be entitled to treaty benefits. Mypay dfas mil login (The “tie-breaker” rule is explained in chapter 1 under Effect of Tax Treaties. Mypay dfas mil login ) If this applies to you, you generally will not need to file a Form 8833 for the income for which treaty benefits are claimed. Mypay dfas mil login This is because the income will typically be of a category for which disclosure on a Form 8833 is waived. Mypay dfas mil login See Reporting Treaty Benefits Claimed . Mypay dfas mil login In most cases, you also will not need to report the income on your Form 1040 because the income will be exempt from U. Mypay dfas mil login S. Mypay dfas mil login tax under the treaty. Mypay dfas mil login However, if the income has been reported as taxable income on a Form W-2, Form 1042-S, Form 1099, or other information return, you should report it on the appropriate line of Form 1040 (for example, line 7 in the case of wages or salaries). Mypay dfas mil login Enter the amount for which treaty benefits are claimed in parentheses on Form 1040, line 21. Mypay dfas mil login Next to the amount write “Exempt income,” the name of the treaty country, and the treaty article that provides the exemption. Mypay dfas mil login On Form 1040, subtract this amount from your income to arrive at total income on Form 1040, line 22. Mypay dfas mil login Also follow the above procedure for income that is subject to a reduced rate of tax, instead of an exemption, under the treaty. Mypay dfas mil login Attach a statement to Form 1040 showing a computation of the tax at the reduced rate, the name of the treaty country, and the treaty article that provides for the reduced tax rate. Mypay dfas mil login Include this tax on Form 1040, line 61. Mypay dfas mil login On the dotted line next to line 61, write “Tax from attached statement” and the amount of the tax. Mypay dfas mil login Example. Mypay dfas mil login Jacques Dubois, who is a resident of the United States under Article 4 of the U. Mypay dfas mil login S. Mypay dfas mil login -France income tax treaty, receives French social security benefits. Mypay dfas mil login Under Article 18(1) of the treaty, French social security benefits are not taxable by the United States. Mypay dfas mil login Mr. Mypay dfas mil login Dubois is not required to file a Form 8833 for his French social security benefits or report the benefits on Form 1040. Mypay dfas mil login Special Rule for Canadian and German Social Security Benefits Under income tax treaties with Canada and Germany, if a U. Mypay dfas mil login S. Mypay dfas mil login resident receives social security benefits from Canada or Germany, those benefits are treated for U. Mypay dfas mil login S. Mypay dfas mil login income tax purposes as if they were received under the social security legislation of the United States. Mypay dfas mil login If you receive social security benefits from Canada or Germany, include them on line 1 of your Social Security Benefits Worksheet for purposes of determining the taxable amount to be reported on Form 1040, line 20b or Form 1040A, line 14b. Mypay dfas mil login You are not required to file a Form 8833 for those benefits. Mypay dfas mil login Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens Generally, you must be a nonresident alien student, apprentice, trainee, teacher, professor, or researcher in order to claim a tax treaty exemption for remittances from abroad for study and maintenance in the United States, for scholarship, fellowship, and research grants, and for wages or other personal service compensation. Mypay dfas mil login Once you become a resident alien, you generally can no longer claim a tax treaty exemption for this income. Mypay dfas mil login However, if you entered the United States as a nonresident alien, but you are now a resident alien for U. Mypay dfas mil login S. Mypay dfas mil login tax purposes, the treaty exemption will continue to apply if the tax treaty's saving clause (explained later) provides an exception for it and you otherwise meet the requirements for the treaty exemption (including any time limit, explained later). Mypay dfas mil login This is true even if you are a nonresident alien electing to file a joint return as explained in chapter 1. Mypay dfas mil login Some exceptions to the saving clause apply to all resident aliens (for example, under the U. Mypay dfas mil login S. Mypay dfas mil login -People's Republic of China treaty); others apply only to resident aliens who are not lawful permanent residents of the United States (green card holders). Mypay dfas mil login If you qualify under an exception to the treaty's saving clause, you can avoid income tax withholding by giving the payor a Form W-9 with the statement required by the Form W-9 instructions. Mypay dfas mil login Saving clause. Mypay dfas mil login   Most tax treaties have a saving clause. Mypay dfas mil login A saving clause preserves or “saves” the right of each country to tax its own residents as if no tax treaty were in effect. Mypay dfas mil login Thus, once you become a resident alien of the United States, you generally lose any tax treaty benefits that relate to your income. Mypay dfas mil login However, many tax treaties have exceptions to the saving clause, which may allow you to continue to claim certain treaty benefits when you become a resident alien. Mypay dfas mil login Read the treaty to find out if it has a saving clause and an exception to it. Mypay dfas mil login Time limit for claiming treaty exemptions. Mypay dfas mil login   Many treaties limit the number of years you can claim a treaty exemption. Mypay dfas mil login For students, apprentices, and trainees, the limit is usually 4–5 years; for teachers, professors, and researchers, the limit is usually 2–3 years. Mypay dfas mil login Once you reach this limit, you can no longer claim the treaty exemption. Mypay dfas mil login See the treaty or Publication 901 for the time limits that apply. Mypay dfas mil login How to report income on your tax return. Mypay dfas mil login   In most cases, you also will not need to report the income on your Form 1040 because the income will be exempt from U. Mypay dfas mil login S. Mypay dfas mil login tax under the treaty. Mypay dfas mil login However, if the income has been reported as taxable income on a Form W-2, Form 1042-S, Form 1099, or other information return, you should report it on the appropriate line of Form 1040 (for example, line 7 in the case of wages, salaries, scholarships, or fellowships). Mypay dfas mil login Enter the amount for which treaty benefits are claimed in parentheses on Form 1040, line 21. Mypay dfas mil login Next to the amount write “Exempt income,” the name of the treaty country, and the treaty article that provides the exemption. Mypay dfas mil login On Form 1040, subtract this amount from your income to arrive at total income on Form 1040, line 22. Mypay dfas mil login Example. Mypay dfas mil login Mr. Mypay dfas mil login Yu, a citizen of the People's Republic of China, entered the United States as a nonresident alien student on January 1, 2009. Mypay dfas mil login He remained a nonresident alien through 2013 and was able to exclude his scholarship from U. Mypay dfas mil login S. Mypay dfas mil login tax in those years under Article 20 of the U. Mypay dfas mil login S. Mypay dfas mil login -People's Republic of China income tax treaty. Mypay dfas mil login On January 1, 2014, he became a resident alien under the substantial presence test because his stay in the United States exceeded 5 years. Mypay dfas mil login Even though Mr. Mypay dfas mil login Yu is now a resident alien, the provisions of Article 20 still apply because of the exception to the saving clause in paragraph 2 of the Protocol to the U. Mypay dfas mil login S. Mypay dfas mil login -People's Republic of China treaty dated April 30, 1984. Mypay dfas mil login Mr. Mypay dfas mil login Yu should submit Form W-9 and the required statement to the payor. Mypay dfas mil login Reporting Treaty Benefits Claimed If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is, or might be, reduced, you must attach a fully completed Form 8833 to your tax return. Mypay dfas mil login See below, for the situations where you are not required to file Form 8833. Mypay dfas mil login You must file a U. Mypay dfas mil login S. Mypay dfas mil login tax return and Form 8833 if you claim the following treaty benefits. Mypay dfas mil login You claim a reduction or modification in the taxation of gain or loss from the disposition of a U. Mypay dfas mil login S. Mypay dfas mil login real property interest based on a treaty. Mypay dfas mil login You claim a credit for a specific foreign tax for which foreign tax credit would not be allowed by the Internal Revenue Code. Mypay dfas mil login You receive payments or income items totaling more than $100,000 and you determine your country of residence under a treaty and not under the rules for residency discussed in chapter 1. Mypay dfas mil login These are the more common situations for which Form 8833 is required. Mypay dfas mil login Exceptions. Mypay dfas mil login   You do not have to file Form 8833 for any of the following situations. Mypay dfas mil login You claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate. Mypay dfas mil login You claim a treaty reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. Mypay dfas mil login This includes taxable scholarship and fellowship grants. Mypay dfas mil login You claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement. Mypay dfas mil login You are a partner in a partnership or a beneficiary of an estate or trust and the partnership, estate, or trust reports the required information on its return. Mypay dfas mil login The payments or items of income that are otherwise required to be disclosed total no more than $10,000. Mypay dfas mil login You are claiming treaty benefits for amounts that are: Reported to you on Form 1042-S and Received by you: As a related party from a reporting corporation within the meaning of Internal Revenue Code section 6038A (relating to information returns on Form 5472 filed by U. Mypay dfas mil login S. Mypay dfas mil login corporations that are 25-percent owned by a foreign person), or As a beneficial owner that is a direct account holder of a U. Mypay dfas mil login S. Mypay dfas mil login financial institution or qualified intermediary, or a direct partner, beneficiary, or owner of a withholding foreign partnership or trust, from that U. Mypay dfas mil login S. Mypay dfas mil login financial institution, qualified intermediary, or withholding foreign partnership or trust. Mypay dfas mil login The exception described in (6) above does not apply to any amounts for which a treaty-based return disclosure is specifically required by the Form 8833 instructions. Mypay dfas mil login Penalty for failure to provide required information on Form 8833. Mypay dfas mil login   If you are required to report the treaty benefits but do not, you may be subject to a penalty of $1,000 for each failure. Mypay dfas mil login Additional information. Mypay dfas mil login   For additional information, see section 301. Mypay dfas mil login 6114-1(c) of the Income Tax Regulations. Mypay dfas mil login Table 9-1. Mypay dfas mil login Table of Tax Treaties (Updated through December 31, 2013) Country Official Text  Symbol1 General  Effective Date Citation Applicable Treasury Explanations  or Treasury Decision (T. Mypay dfas mil login D. Mypay dfas mil login ) Australia TIAS 10773 Dec. Mypay dfas mil login 1, 1983 1986-2 C. Mypay dfas mil login B. Mypay dfas mil login 220 1986-2 C. Mypay dfas mil login B. Mypay dfas mil login 246 Protocol TIAS Jan. Mypay dfas mil login 1, 2004     Austria TIAS Jan. Mypay dfas mil login 1, 1999     Bangladesh TIAS Jan. Mypay dfas mil login 1, 2007     Barbados TIAS 11090 Jan. Mypay dfas mil login 1, 1984 1991-2 C. Mypay dfas mil login B. Mypay dfas mil login 436 1991-2 C. Mypay dfas mil login B. Mypay dfas mil login 466 Protocol TIAS Jan. Mypay dfas mil login 1, 1994     Protocol TIAS Jan. Mypay dfas mil login 1, 2005     Belgium TIAS Jan. Mypay dfas mil login 1, 2008     Bulgaria TIAS Jan. Mypay dfas mil login 1, 2009     Canada2 TIAS 11087 Jan. Mypay dfas mil login 1, 1985 1986-2 C. Mypay dfas mil login B. Mypay dfas mil login 258 1987-2 C. Mypay dfas mil login B. Mypay dfas mil login 298 Protocol TIAS Jan. Mypay dfas mil login 1, 1996     Protocol TIAS Dec. Mypay dfas mil login 16, 1997     Protocol TIAS Jan. Mypay dfas mil login 1, 2009     China, People's Republic of TIAS 12065 Jan. Mypay dfas mil login 1, 1987 1988-1 C. Mypay dfas mil login B. Mypay dfas mil login 414 1988-1 C. Mypay dfas mil login B. Mypay dfas mil login 447 Commonwealth of Independent States3 TIAS 8225 Jan. Mypay dfas mil login 1, 1976 1976-2 C. Mypay dfas mil login B. Mypay dfas mil login 463 1976-2 C. Mypay dfas mil login B. Mypay dfas mil login 475 Cyprus TIAS 10965 Jan. Mypay dfas mil login 1, 1986 1989-2 C. Mypay dfas mil login B. Mypay dfas mil login 280 1989-2 C. Mypay dfas mil login B. Mypay dfas mil login 314 Czech Republic TIAS Jan. Mypay dfas mil login 1, 1993     Denmark TIAS Jan. Mypay dfas mil login 1, 2001     Protocol TIAS Jan. Mypay dfas mil login 1, 2008     Egypt TIAS 10149 Jan. Mypay dfas mil login 1, 1982 1982-1 C. Mypay dfas mil login B. Mypay dfas mil login 219 1982-1 C. Mypay dfas mil login B. Mypay dfas mil login 243 Estonia TIAS Jan. Mypay dfas mil login 1, 2000     Finland TIAS 12101 Jan. Mypay dfas mil login 1, 1991     Protocol TIAS Jan. Mypay dfas mil login 1, 2008     France TIAS Jan. Mypay dfas mil login 1, 1996     Protocol TIAS Jan. Mypay dfas mil login 1, 2007     Protocol TIAS Jan. Mypay dfas mil login 1, 2010     Germany TIAS Jan. Mypay dfas mil login 1, 1990     Protocol TIAS Jan. Mypay dfas mil login 1, 2008     Greece TIAS 2902 Jan. Mypay dfas mil login 1, 1953 1958-2 C. Mypay dfas mil login B. Mypay dfas mil login 1054 T. Mypay dfas mil login D. Mypay dfas mil login 6109, 1954-2 C. Mypay dfas mil login B. Mypay dfas mil login 638 Hungary TIAS 9560 Jan. Mypay dfas mil login 1, 1980 1980-1 C. Mypay dfas mil login B. Mypay dfas mil login 333 1980-1 C. Mypay dfas mil login B. Mypay dfas mil login 354 Iceland TIAS Jan. Mypay dfas mil login 1, 2009     India TIAS Jan. Mypay dfas mil login 1, 1991     Indonesia TIAS 11593 Jan. Mypay dfas mil login 1, 1990     Ireland TIAS Jan. Mypay dfas mil login 1, 1998     Israel TIAS Jan. Mypay dfas mil login 1, 1995     Italy TIAS Jan. Mypay dfas mil login 1, 2010     Jamaica TIAS 10207 Jan. Mypay dfas mil login 1, 1982 1982-1 C. Mypay dfas mil login B. Mypay dfas mil login 257 1982-1 C. Mypay dfas mil login B. Mypay dfas mil login 291 Japan TIAS Jan. Mypay dfas mil login 1, 2005     Kazakhstan TIAS Jan. Mypay dfas mil login 1, 1996     Korea, South TIAS 9506 Jan. Mypay dfas mil login 1, 1980 1979-2 C. Mypay dfas mil login B. Mypay dfas mil login 435 1979-2 C. Mypay dfas mil login B. Mypay dfas mil login 458 Latvia TIAS Jan. Mypay dfas mil login 1, 2000     Lithuania TIAS Jan. Mypay dfas mil login 1, 2000     Luxembourg TIAS Jan. Mypay dfas mil login 1, 2001     Malta TIAS Jan. Mypay dfas mil login 1, 2011     Mexico TIAS Jan. Mypay dfas mil login 1, 1994 1994-2 C. Mypay dfas mil login B. Mypay dfas mil login 424 1994-2 C. Mypay dfas mil login B. Mypay dfas mil login 489 Protocol TIAS Oct. Mypay dfas mil login 26, 1995     Protocol TIAS Jan. Mypay dfas mil login 1, 2004     Morocco TIAS 10195 Jan. Mypay dfas mil login 1, 1981 1982-2 C. Mypay dfas mil login B. Mypay dfas mil login 405 1982-2 C. Mypay dfas mil login B. Mypay dfas mil login 427 Netherlands TIAS Jan. Mypay dfas mil login 1, 1994     Protocol TIAS Jan. Mypay dfas mil login 1, 2005     New Zealand TIAS 10772 Nov. Mypay dfas mil login 2, 1983 1990-2 C. Mypay dfas mil login B. Mypay dfas mil login 274 1990-2 C. Mypay dfas mil login B. Mypay dfas mil login 303 Protocol TIAS Jan. Mypay dfas mil login 1, 2011     Norway TIAS 7474 Jan. Mypay dfas mil login 1, 1971 1973-1 C. Mypay dfas mil login B. Mypay dfas mil login 669 1973-1 C. Mypay dfas mil login B. Mypay dfas mil login 693 Protocol TIAS 10205 Jan. Mypay dfas mil login 1, 1982 1982-2 C. Mypay dfas mil login B. Mypay dfas mil login 440 1982-2 C. Mypay dfas mil login B. Mypay dfas mil login 454 Pakistan TIAS 4232 Jan. Mypay dfas mil login 1, 1959 1960-2 C. Mypay dfas mil login B. Mypay dfas mil login 646 T. Mypay dfas mil login D. Mypay dfas mil login 6431, 1960-1 C. Mypay dfas mil login B. Mypay dfas mil login 755 Philippines TIAS 10417 Jan. Mypay dfas mil login 1, 1983 1984-2 C. Mypay dfas mil login B. Mypay dfas mil login 384 1984-2 C. Mypay dfas mil login B. Mypay dfas mil login 412 Poland TIAS 8486 Jan. Mypay dfas mil login 1, 1974 1977-1 C. Mypay dfas mil login B. Mypay dfas mil login 416 1977-1 C. Mypay dfas mil login B. Mypay dfas mil login 427 Portugal TIAS Jan. Mypay dfas mil login 1, 1996     Romania TIAS 8228 Jan. Mypay dfas mil login 1, 1974 1976-2 C. Mypay dfas mil login B. Mypay dfas mil login 492 1976-2 C. Mypay dfas mil login B. Mypay dfas mil login 504 Russia TIAS Jan. Mypay dfas mil login 1, 1994     Slovak Republic TIAS Jan. Mypay dfas mil login 1, 1993     Slovenia TIAS Jan. Mypay dfas mil login 1, 2002     South Africa TIAS Jan. Mypay dfas mil login 1, 1998     Spain TIAS Jan. Mypay dfas mil login 1, 1991     Sri Lanka TIAS Jan. Mypay dfas mil login 1, 2004     Sweden TIAS Jan. Mypay dfas mil login 1, 1996     Protocol TIAS Jan. Mypay dfas mil login 1, 2007     Switzerland TIAS Jan. Mypay dfas mil login 1, 1998     Thailand TIAS Jan. Mypay dfas mil login 1, 1998     Trinidad and Tobago TIAS 7047 Jan. Mypay dfas mil login 1, 1970 1971-2 C. Mypay dfas mil login B. Mypay dfas mil login 479   Tunisia TIAS Jan. Mypay dfas mil login 1, 1990     Turkey TIAS Jan. Mypay dfas mil login 1, 1998     Ukraine TIAS Jan. Mypay dfas mil login 1, 2001     United Kingdom TIAS Jan. Mypay dfas mil login 1, 2004     Venezuela TIAS Jan. Mypay dfas mil login 1, 2000     1(TIAS) Treaties and Other International Act Series 2Information on the treaty can be found in Publication 597, Information on the United States-Canada Income Tax Treaty. Mypay dfas mil login 3The U. Mypay dfas mil login S. Mypay dfas mil login -U. Mypay dfas mil login S. Mypay dfas mil login S. Mypay dfas mil login R. Mypay dfas mil login income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. Mypay dfas mil login Prev  Up  Next   Home   More Online Publications
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Mypay dfas mil login 4. Mypay dfas mil login   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Mypay dfas mil login Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Mypay dfas mil login Net unrelated income. Mypay dfas mil login Net unrelated loss. Mypay dfas mil login Control. Mypay dfas mil login Income from property financed with qualified 501(c)(3) bonds. Mypay dfas mil login Disposition of property received from taxable subsidiary and used in unrelated business. Mypay dfas mil login Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Mypay dfas mil login If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Mypay dfas mil login In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Mypay dfas mil login Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Mypay dfas mil login For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Mypay dfas mil login Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Mypay dfas mil login Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Mypay dfas mil login Dividends, interest, annuities and other investment income. Mypay dfas mil login   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Mypay dfas mil login Exception for insurance activity income of a controlled foreign corporation. Mypay dfas mil login   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Mypay dfas mil login The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Mypay dfas mil login Certain exceptions to this rule apply. Mypay dfas mil login For more information, see section 512(b)(17). Mypay dfas mil login Other exceptions. Mypay dfas mil login   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Mypay dfas mil login Income from lending securities. Mypay dfas mil login   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Mypay dfas mil login   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Mypay dfas mil login The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Mypay dfas mil login Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Mypay dfas mil login Royalties. Mypay dfas mil login   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Mypay dfas mil login   To be considered a royalty, a payment must relate to the use of a valuable right. Mypay dfas mil login Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Mypay dfas mil login Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Mypay dfas mil login However, royalties do not include payments for personal services. Mypay dfas mil login Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Mypay dfas mil login   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Mypay dfas mil login   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Mypay dfas mil login However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Mypay dfas mil login To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Mypay dfas mil login To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Mypay dfas mil login Exceptions. Mypay dfas mil login   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Mypay dfas mil login Rents. Mypay dfas mil login   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Mypay dfas mil login Rents from personal property are not excluded. Mypay dfas mil login However, special rules apply to “mixed leases” of both real and personal property. Mypay dfas mil login Mixed leases. Mypay dfas mil login   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Mypay dfas mil login If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Mypay dfas mil login If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Mypay dfas mil login   Property is placed in service when the lessee first may use it under the terms of a lease. Mypay dfas mil login For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Mypay dfas mil login   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Mypay dfas mil login   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Mypay dfas mil login Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Mypay dfas mil login Exception for rents based on net profit. Mypay dfas mil login   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Mypay dfas mil login Exception for income from personal services. Mypay dfas mil login   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Mypay dfas mil login Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Mypay dfas mil login Other exceptions. Mypay dfas mil login   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Mypay dfas mil login ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Mypay dfas mil login See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Mypay dfas mil login Income from research. Mypay dfas mil login   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Mypay dfas mil login However, the extent of the exclusion depends on the nature of the organization and the type of research. Mypay dfas mil login   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Mypay dfas mil login   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Mypay dfas mil login   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Mypay dfas mil login   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Mypay dfas mil login In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Mypay dfas mil login Gains and losses from disposition of property. Mypay dfas mil login   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Mypay dfas mil login   It should be noted that the last exception relates only to cut timber. Mypay dfas mil login The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Mypay dfas mil login Lapse or termination of options. Mypay dfas mil login   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Mypay dfas mil login The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Mypay dfas mil login Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Mypay dfas mil login Exception. Mypay dfas mil login   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Mypay dfas mil login Gain or loss on disposition of certain brownfield property. Mypay dfas mil login   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Mypay dfas mil login See sections 512(b)(19) and 514(b)(1)(E). Mypay dfas mil login Income from services provided under federal license. Mypay dfas mil login   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Mypay dfas mil login   This exclusion applies only if the following requirements are met. Mypay dfas mil login The trade or business must have been operated by the order or by the institution before May 27, 1959. Mypay dfas mil login The trade or business must provide services under a license issued by a federal regulatory agency. Mypay dfas mil login More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Mypay dfas mil login The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Mypay dfas mil login Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Mypay dfas mil login Exception. Mypay dfas mil login    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Mypay dfas mil login Member income of mutual or cooperative electric companies. Mypay dfas mil login   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Mypay dfas mil login Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Mypay dfas mil login For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Mypay dfas mil login Exception. Mypay dfas mil login   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Mypay dfas mil login The limit on dues paid by an associate member is $148 for 2011. Mypay dfas mil login   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Mypay dfas mil login Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Mypay dfas mil login They cannot be directly connected with excluded income. Mypay dfas mil login For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Mypay dfas mil login Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Mypay dfas mil login For an exception, see Expenses attributable to exploitation of exempt activities, later. Mypay dfas mil login Expenses attributable solely to unrelated business. Mypay dfas mil login   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Mypay dfas mil login   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Mypay dfas mil login Expenses attributable to dual use of facilities or personnel. Mypay dfas mil login   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Mypay dfas mil login The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Mypay dfas mil login Example 1. Mypay dfas mil login A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Mypay dfas mil login The school provides the tennis courts, housing, and dining facilities. Mypay dfas mil login The contracted individual hires the instructors, recruits campers, and provides supervision. Mypay dfas mil login The income the school receives from this activity is from a dual use of the facilities and personnel. Mypay dfas mil login The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Mypay dfas mil login Example 2. Mypay dfas mil login An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Mypay dfas mil login The president devotes approximately 10% of his time to the unrelated business. Mypay dfas mil login To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Mypay dfas mil login Expenses attributable to exploitation of exempt activities. Mypay dfas mil login   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Mypay dfas mil login (See Exploitation of exempt functions under Not substantially related in chapter 3. Mypay dfas mil login ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Mypay dfas mil login Exception. Mypay dfas mil login   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Mypay dfas mil login The unrelated business exploits the exempt activity. Mypay dfas mil login The unrelated business is a type normally conducted for profit by taxable organizations. Mypay dfas mil login The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Mypay dfas mil login The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Mypay dfas mil login   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Mypay dfas mil login Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Mypay dfas mil login Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Mypay dfas mil login (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Mypay dfas mil login ) Figuring unrelated business taxable income (UBTI). Mypay dfas mil login   The UBTI of an advertising activity is the amount shown in the following chart. Mypay dfas mil login IF gross advertising income is . Mypay dfas mil login . Mypay dfas mil login . Mypay dfas mil login THEN UBTI is . Mypay dfas mil login . Mypay dfas mil login . Mypay dfas mil login More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Mypay dfas mil login Equal to or less than direct advertising costs Zero. Mypay dfas mil login   • Circulation income and readership costs are not taken into account. Mypay dfas mil login   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Mypay dfas mil login   The terms used in the chart are explained in the following discussions. Mypay dfas mil login Periodical Income Gross advertising income. Mypay dfas mil login   This is all the income from the unrelated advertising activities of an exempt organization periodical. Mypay dfas mil login Circulation income. Mypay dfas mil login   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Mypay dfas mil login It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Mypay dfas mil login It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Mypay dfas mil login Allocable membership receipts. Mypay dfas mil login   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Mypay dfas mil login   The amount used to allocate membership receipts is the amount shown in the following chart. Mypay dfas mil login   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Mypay dfas mil login The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Mypay dfas mil login IF . Mypay dfas mil login . Mypay dfas mil login . Mypay dfas mil login THEN the amount used to allocate membership receipts is . Mypay dfas mil login . Mypay dfas mil login . Mypay dfas mil login 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Mypay dfas mil login The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Mypay dfas mil login Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Mypay dfas mil login U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Mypay dfas mil login One of U's activities is publishing a monthly periodical distributed to all of its members. Mypay dfas mil login U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Mypay dfas mil login Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Mypay dfas mil login Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Mypay dfas mil login Example 2. Mypay dfas mil login Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Mypay dfas mil login Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Mypay dfas mil login U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Mypay dfas mil login Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Mypay dfas mil login Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Mypay dfas mil login Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Mypay dfas mil login U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Mypay dfas mil login Periodical Costs Direct advertising costs. Mypay dfas mil login   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Mypay dfas mil login   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Mypay dfas mil login Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Mypay dfas mil login   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Mypay dfas mil login For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Mypay dfas mil login Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Mypay dfas mil login   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Mypay dfas mil login Readership costs. Mypay dfas mil login   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Mypay dfas mil login Costs partly attributable to other activities. Mypay dfas mil login   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Mypay dfas mil login When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Mypay dfas mil login The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Mypay dfas mil login Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Mypay dfas mil login Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Mypay dfas mil login It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Mypay dfas mil login Consolidated treatment, once adopted, must be followed consistently and is binding. Mypay dfas mil login This treatment can be changed only with the consent of the Internal Revenue Service. Mypay dfas mil login An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Mypay dfas mil login Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Mypay dfas mil login The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Mypay dfas mil login For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Mypay dfas mil login The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Mypay dfas mil login Example. Mypay dfas mil login Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Mypay dfas mil login Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Mypay dfas mil login Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Mypay dfas mil login The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Mypay dfas mil login The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Mypay dfas mil login It is not engaged in for profit. Mypay dfas mil login Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Mypay dfas mil login It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Mypay dfas mil login Modifications Net operating loss deduction. Mypay dfas mil login   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Mypay dfas mil login However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Mypay dfas mil login For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Mypay dfas mil login   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Mypay dfas mil login This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Mypay dfas mil login Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Mypay dfas mil login   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Mypay dfas mil login   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Mypay dfas mil login   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Mypay dfas mil login For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Mypay dfas mil login   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Mypay dfas mil login Charitable contributions deduction. Mypay dfas mil login   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Mypay dfas mil login   To be deductible, the contribution must be paid to another qualified organization. Mypay dfas mil login For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Mypay dfas mil login   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Mypay dfas mil login Deduction limits. Mypay dfas mil login   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Mypay dfas mil login See the Instructions for Form 990-T for more information. Mypay dfas mil login    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Mypay dfas mil login However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Mypay dfas mil login   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Mypay dfas mil login A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Mypay dfas mil login Suspension of deduction limits for farmers and ranchers. Mypay dfas mil login   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Mypay dfas mil login See the Instructions for Form 990-T for details. Mypay dfas mil login Specific deduction. Mypay dfas mil login   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Mypay dfas mil login However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Mypay dfas mil login   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Mypay dfas mil login Exception. Mypay dfas mil login   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Mypay dfas mil login In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Mypay dfas mil login   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Mypay dfas mil login The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Mypay dfas mil login The local units cannot file separate returns. Mypay dfas mil login However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Mypay dfas mil login See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Mypay dfas mil login Example. Mypay dfas mil login X is an association of churches and is divided into local units A, B, C, and D. Mypay dfas mil login Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Mypay dfas mil login X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Mypay dfas mil login Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Mypay dfas mil login If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Mypay dfas mil login No distinction is made between limited and general partners. Mypay dfas mil login The organization is required to notify the partnership of its tax-exempt status. Mypay dfas mil login Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Mypay dfas mil login The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Mypay dfas mil login The partnership is required to provide the organization this information on Schedule K-1. Mypay dfas mil login Example. Mypay dfas mil login An exempt educational organization is a partner in a partnership that operates a factory. Mypay dfas mil login The partnership also holds stock in a corporation. Mypay dfas mil login The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Mypay dfas mil login Different tax years. Mypay dfas mil login   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Mypay dfas mil login S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Mypay dfas mil login For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Mypay dfas mil login The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Mypay dfas mil login Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Mypay dfas mil login To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Mypay dfas mil login Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Mypay dfas mil login These organizations must figure unrelated business taxable income under special rules. Mypay dfas mil login Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Mypay dfas mil login ). Mypay dfas mil login (See Exclusions under Income, earlier. Mypay dfas mil login ) Therefore, they are generally subject to unrelated business income tax on this income. Mypay dfas mil login The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Mypay dfas mil login The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Mypay dfas mil login Losses from nonexempt activities. Mypay dfas mil login   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Mypay dfas mil login Example. Mypay dfas mil login A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Mypay dfas mil login The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Mypay dfas mil login Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Mypay dfas mil login Modifications. Mypay dfas mil login   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Mypay dfas mil login Exempt function income. Mypay dfas mil login   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Mypay dfas mil login Exempt function income also includes income set aside for qualified purposes. Mypay dfas mil login Income that is set aside. Mypay dfas mil login   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Mypay dfas mil login In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Mypay dfas mil login   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Mypay dfas mil login Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Mypay dfas mil login These rules are explained in section 512(a)(3)(E)(ii). Mypay dfas mil login   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Mypay dfas mil login In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Mypay dfas mil login   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Mypay dfas mil login However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Mypay dfas mil login The income set aside must have been includible in gross income for that earlier year. Mypay dfas mil login Nonrecognition of gain. Mypay dfas mil login   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Mypay dfas mil login The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Mypay dfas mil login   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Mypay dfas mil login Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Mypay dfas mil login The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Mypay dfas mil login For details, see section 512(a)(4) and the regulations under that section. Mypay dfas mil login Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Mypay dfas mil login The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Mypay dfas mil login All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Mypay dfas mil login Excess qualifying specified payments. Mypay dfas mil login   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Mypay dfas mil login Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Mypay dfas mil login   If a controlled participant is not required to file a U. Mypay dfas mil login S. Mypay dfas mil login income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Mypay dfas mil login 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Mypay dfas mil login S. Mypay dfas mil login Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Mypay dfas mil login S. Mypay dfas mil login Corporation or a Foreign Corporation Engaged in a U. Mypay dfas mil login S. Mypay dfas mil login Trade or Business, or any Form 8865, Return of U. Mypay dfas mil login S. Mypay dfas mil login Persons With Respect to Certain Foreign Partnerships, filed for that participant. Mypay dfas mil login Addition to tax for valuation misstatements. Mypay dfas mil login   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Mypay dfas mil login See section 512(b)(13)(E)(ii) for more information. Mypay dfas mil login Net unrelated income. Mypay dfas mil login   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Mypay dfas mil login Net unrelated loss. Mypay dfas mil login   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Mypay dfas mil login Control. Mypay dfas mil login   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Mypay dfas mil login For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Mypay dfas mil login   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Mypay dfas mil login Income from property financed with qualified 501(c)(3) bonds. Mypay dfas mil login If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Mypay dfas mil login No deduction is allowed for interest on the private activity bond. Mypay dfas mil login See sections 150(b)(3) and (c) for more information. Mypay dfas mil login Disposition of property received from taxable subsidiary and used in unrelated business. Mypay dfas mil login A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Mypay dfas mil login The assets are treated as if sold at fair market value. Mypay dfas mil login Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Mypay dfas mil login S. Mypay dfas mil login and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Mypay dfas mil login A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Mypay dfas mil login However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Mypay dfas mil login In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Mypay dfas mil login A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Mypay dfas mil login This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Mypay dfas mil login In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Mypay dfas mil login If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Mypay dfas mil login If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Mypay dfas mil login Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Mypay dfas mil login Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Mypay dfas mil login Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Mypay dfas mil login The amount of income included is proportionate to the debt on the property. Mypay dfas mil login Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Mypay dfas mil login It includes rental real estate, tangible personal property, and corporate stock. Mypay dfas mil login Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Mypay dfas mil login The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Mypay dfas mil login That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Mypay dfas mil login Example 1. Mypay dfas mil login Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Mypay dfas mil login The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Mypay dfas mil login Example 2. Mypay dfas mil login X, an exempt organization, forms a partnership with A and B. Mypay dfas mil login The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Mypay dfas mil login X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Mypay dfas mil login The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Mypay dfas mil login The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Mypay dfas mil login The loan is secured by a mortgage on the entire office building. Mypay dfas mil login By agreement with Y bank, X is not personally liable for payment of the mortgage. Mypay dfas mil login X has acquisition indebtedness of $7 million. Mypay dfas mil login This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Mypay dfas mil login Example 3. Mypay dfas mil login A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Mypay dfas mil login The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Mypay dfas mil login Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Mypay dfas mil login The union has no outstanding debt on the property. Mypay dfas mil login The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Mypay dfas mil login The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Mypay dfas mil login Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Mypay dfas mil login In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Mypay dfas mil login Accordingly, the debt is not acquisition indebtedness. Mypay dfas mil login Change in use of property. Mypay dfas mil login   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Mypay dfas mil login Example. Mypay dfas mil login Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Mypay dfas mil login Last year, the university rented the apartment building to the public for nonexempt purposes. Mypay dfas mil login The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Mypay dfas mil login Continued debt. Mypay dfas mil login   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Mypay dfas mil login This is true even if the original property was not debt-financed property. Mypay dfas mil login Example. Mypay dfas mil login To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Mypay dfas mil login The office building was not debt-financed property. Mypay dfas mil login The organization later sold the building for $1 million without repaying the $400,000 loan. Mypay dfas mil login It used the sale proceeds to buy an apartment building it rents to the general public. Mypay dfas mil login The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Mypay dfas mil login Property acquired subject to mortgage or lien. Mypay dfas mil login   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Mypay dfas mil login Example. Mypay dfas mil login An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Mypay dfas mil login The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Mypay dfas mil login Liens similar to a mortgage. Mypay dfas mil login   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Mypay dfas mil login A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Mypay dfas mil login However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Mypay dfas mil login Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Mypay dfas mil login Exception for property acquired by gift, bequest, or devise. Mypay dfas mil login   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Mypay dfas mil login However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Mypay dfas mil login   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Mypay dfas mil login   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Mypay dfas mil login Modifying existing debt. Mypay dfas mil login   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Mypay dfas mil login When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Mypay dfas mil login Extension or renewal. Mypay dfas mil login   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Mypay dfas mil login   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Mypay dfas mil login Debt increase. Mypay dfas mil login   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Mypay dfas mil login Example. Mypay dfas mil login An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Mypay dfas mil login The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Mypay dfas mil login A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Mypay dfas mil login Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Mypay dfas mil login These include the following. Mypay dfas mil login Debts incurred in performing an exempt purpose. Mypay dfas mil login Annuity obligations. Mypay dfas mil login Securities loans. Mypay dfas mil login Real property debts of qualified organizations. Mypay dfas mil login Certain Federal financing. Mypay dfas mil login Debt incurred in performing exempt purpose. Mypay dfas mil login   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Mypay dfas mil login For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Mypay dfas mil login Annuity obligation. Mypay dfas mil login   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Mypay dfas mil login It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Mypay dfas mil login Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Mypay dfas mil login It must be payable over the lives of either one or two individuals living when issued. Mypay dfas mil login It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Mypay dfas mil login Example. Mypay dfas mil login X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Mypay dfas mil login In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Mypay dfas mil login The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Mypay dfas mil login The present value of this annuity is $81,156, determined from IRS valuation tables. Mypay dfas mil login Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Mypay dfas mil login Securities loans. Mypay dfas mil login   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Mypay dfas mil login This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Mypay dfas mil login   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from