A: What tax return is required while the organization's exemption application is pending?
An organization wanting exempt status should file Form 990 by the normal due date even if the application for exempt-status recognition is still pending with the IRS. The organization must file any returns that come due while its application is pending, even if the organization is appealing a proposed an IRS adverse ruling. Check the application pending box in the heading of the return and complete the return. To apply for exempt status, an organization must be a corporation (including an LLC), an association (taxable as a corporation), or a trust.
NOTE: If the application for exempt status recognition is ultimately denied by the IRS, the taxpayer must file the appropriate returns for all open years, even those for which it filed Form 990. For example, if the organization is a corporation or association, it must file Form 1120 for all open years after the final appeal is denied.
A: Is debt cancellation taxable?
If a debt is canceled or forgiven, other than as a gift or bequest, it must be included in income for the taxpayer unless the taxpayer meets one of the following exclusions:
- Canceled in a title 11 bankruptcy proceeding.
- Canceled when the taxpayer is insolvent immediately before the discharge. This exclusion is limited to the amount by which the taxpayer is insolvent.
- The debt discharged is qualified farm indebtedness.
- In the case of taxpayers other than C corporations, the debt discharged is qualified real property business debt.
- The debt discharged is qualified principal residence indebtedness discharged before January 1, 2013.
- Certain indebtedness of a qualified individual because of Midwestern disasters.
A debt includes any indebtedness for which a taxpayer is liable or which is attached to a property held (i.e. interest, taxes, penalties and attorney fees). If the canceled debt is a nonbusiness debt, report the taxable portion on Line 21 of Form 1040. If it is a business debt, report the amount on Schedule C of Form 1040. If it is a debt for the taxpayer's rental activity, report the amount on Schedule E of Form 1040. If it is a debt for the taxpayer's farming activity, then report the amount on Schedule F of Form 1040.
Generally, a taxpayer does not include in income any canceled debt if such debt is nonrecourse debt. However, the amount of nonrecourse debt that is satisfied from a foreclosure on the property is generally treated as proceeds from the sale of the property. This treatment can result in taxable gain to the taxpayer.
A: How is a tax home determined?
Generally, the tax home is the regular place of business or post of duty, regardless of where the taxpayer lives. It includes the entire city or general area in which the business or work is located.
Main Place Of Business Or Work
If a taxpayer has more than one place of work, the tax home is the main place of business. Consider the following when determining which one is the main place of business or work.
- The total time ordinarily spent in each place.
- The level of business activity in each place.
- Whether the income from each place is significant or insignificant.
No Main Place Of Business Or Work
A taxpayer may have a tax home even if he or she did not have a regular or main place of work. If a taxpayer does not have a regular or a main place of business, then the tax home may be the place where the taxpayer regularly lives.
Factors Used To Determine Tax Home
Use the following three factors to determine where the tax home is located.
- The taxpayer performs part of his or her business in the area of the main home and uses that home for lodging while doing business in the area.
- The taxpayer has living expenses at the main home that are duplicated because the business requires him to be away from that home.
- The taxpayer has not abandoned the area where both his or her historical place of lodging and claimed main home are located; the taxpayer has a member or members of the family living at the main home; or the taxpayer often uses that home for lodging.
If all three factors are satisfied, the tax home is the home where the taxpayer regularly lives. If only two factors are satisfied, the taxpayer may have a tax home depending on all the facts and circumstances. If only one factor is satisfied, the taxpayer is a transient; the tax home is wherever he works and he cannot deduct travel expenses.
A: What is the use and purpose of Form 982?
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness is used to report cancelled debt that is excluded from gross income. Generally, cancelled debt is includible in gross income. However, there are certain situations in which the taxpayer may exclude cancelled debt from income. In these cases, the taxpayer may need to reduce certain tax attributes by the amount of the excluded income, which is reported on this form.
The exclusions available under §108 are listed in Part 1 of Form 982. These exclusion are available for:
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Cancellation of debt in a title 11 bankruptcy case (including chapters 7, 11 and 13);
- Cancellation of debt to the extent of the taxpayer's insolvency (not in a title 11 case);
- Cancellation of qualified farm indebtedness;
- Cancellation of qualified real property business indebtedness;
- Cancellation of qualified principal residence indebtedness.
In addition, there is an additional exclusion (f) on Form 982, "Cancellation of certain indebtedness of a qualified individual because of Midwestern disasters," which was added by the Emergency Economic Stabilization Act of 2008, but is not codified in the Internal Revenue Code.
The amount of cancelled debt excluded from gross income reduces tax attributes, the reduction of which is determined in Part 2 of Form 982. A statement identifying any property for which basis is reduced also must be attached.
Note: If the bankruptcy exclusion applies, then none of the other exclusions apply
A: How is insolvency determined?
A taxpayer is insolvent when, and to the extent, his liabilities exceed the fair market value of his assets. The taxpayer determines his liabilities and the fair market value of his assets immediately before the cancellation of debt to determine whether or not he is insolvent and the amount by which he is insolvent. The taxpayer may exclude, from gross income, debt canceled when he is insolvent, but only up to the amount by which he is insolvent.
A: How does a corporation elect S corporation status?
A small business corporation may elect to be an S corporation. A corporation elects S corporation status by filing Form 2553, Election by a Small Business Corporation. All the shareholders (who are shareholders on the day the election is made) must consent to S corporation status on Form 2553. The election must be made during the preceding tax year, or during the taxable year if made before the 15th day of the third month of the taxable year. The election to be an S corporation is effective for the taxable year and succeeding years until the election is terminated.
Note: In community property states, the shareholder's spouse must also sign Form 2553.
The form can be filed any time during a tax year prior to the year the S election is to take effect OR by the 15th day of the third month of the tax year to which the election applies.
Relief procedures are available for certain late S corporation elections if reasonable cause for the failure to file the timely election or if the failure was inadvertent, see Revenue Procedure 2003-43.
A: When is rental income considered to be unrelated business taxable income (UBTI)?
Generally, rents from real property are not treated as unrelated business taxable income (UBTI), even if the rental activity is not related to the organization's exempt function.
Example: A church rents out a basement recreation room to the public once a week.
Exceptions
Rental income is treated as UBTI if:
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The rent charged is based upon a percentage of net income of the lessee, or
- The rent charged covers services rendered by the organization, or
Example: The church from the example above provides kitchen staff and prepares and serves meals as part of the fee charged.
- The real property is debt-financed property used in an activity unrelated to the exempt purpose of the organization. See "What does debt-financed mean?" for more details on this exception.
Note: The rental exclusion does not apply to social clubs, voluntary employee benefit associations, or supplemental unemployment benefit trusts.
A: What is SSI and is it taxable?
"SSI" is Supplemental Security Income. It is a Federal income supplement program funded by general tax revenues (not Social Security taxes):
- It is designed to help aged, blind and disabled people who have very little or no income; and
- It provides cash to meet basic needs for food, clothing, and shelter.
Supplemental Security Income (SSI) payments are not taxable. No tax documents are issued for these amounts.
