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File free state return only 5. File free state return only   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. File free state return only A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. File free state return only Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. File free state return only Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. File free state return only  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. File free state return only Tax-exempt entities. File free state return only   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). File free state return only Religious or apostolic associations or corporations described in section 501(d). File free state return only Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). File free state return only Indian tribal governments within the meaning of section 7701(a)(40). File free state return only Entity manager. File free state return only    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. File free state return only Prohibited tax shelter transaction. File free state return only   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. File free state return only A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. File free state return only 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. File free state return only 6011-4(b)(4). File free state return only See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. File free state return only Subsequently listed transaction. File free state return only   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. File free state return only Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). File free state return only The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. File free state return only The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. File free state return only To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. File free state return only For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. File free state return only Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. File free state return only The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. File free state return only To report this tax, file Form 4720. File free state return only Excess Benefit Transactions Excise tax on excess benefit transactions. File free state return only   A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. File free state return only A manager of the organization may also have to pay an excise tax under section 4958. File free state return only These taxes are reported on Form 4720. File free state return only   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange. File free state return only   There are three taxes under section 4958. File free state return only Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. File free state return only    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. File free state return only Tax on Disqualified Persons An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. File free state return only The disqualified person who benefited from the transaction is liable for the tax. File free state return only See definition of Disqualified person, later at Disqualified person. File free state return only Additional tax on the disqualified person. File free state return only   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. File free state return only   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. File free state return only If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. File free state return only   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. File free state return only The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. File free state return only Taxable period. File free state return only   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. File free state return only Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. File free state return only This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. File free state return only There is also joint and several liability for this tax. File free state return only A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. File free state return only Organization Manager. File free state return only   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. File free state return only An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. File free state return only For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. File free state return only A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. File free state return only Knowing does not mean having reason to know. File free state return only The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. File free state return only Participation by an organization manager is willful if it is voluntary, conscious, and intentional. File free state return only An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. File free state return only Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. File free state return only The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. File free state return only To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. File free state return only For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. File free state return only Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. File free state return only Donor advised fund transactions occurring after August 17, 2006. File free state return only   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. File free state return only   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. File free state return only For additional information, see the Instructions for Form 4720. File free state return only Supporting organization transactions occurring after July 25, 2006. File free state return only   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. File free state return only   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). File free state return only   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. File free state return only For additional information, see the Instructions for Form 4720. File free state return only   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. File free state return only Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. File free state return only However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. File free state return only In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. File free state return only In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. File free state return only Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. File free state return only Correcting the excess benefit. File free state return only   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. File free state return only   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. File free state return only The correction amount equals the excess benefit plus the interest on the excess benefit. File free state return only The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. File free state return only   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. File free state return only In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. File free state return only   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. File free state return only   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. File free state return only Exception. File free state return only   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. File free state return only Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. File free state return only An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. File free state return only An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. File free state return only Disqualified Person A disqualified person is: Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization, A family member of an individual described in 1, and A 35% controlled entity. File free state return only For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. File free state return only   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. File free state return only Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. File free state return only For certain supporting organization transactions occurring after July 25, 2006. File free state return only   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. File free state return only Investment advisor. File free state return only   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. File free state return only Substantial contributor. File free state return only   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. File free state return only A substantial contributor includes the grantor of a trust. File free state return only Family members. File free state return only   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). File free state return only 35% controlled entity. File free state return only   A 35% controlled entity is: A corporation in which disqualified persons own more than 35% of the total combined voting power, A partnership in which such persons own more than 35% of the profits interest, or A trust or estate in which such persons own more than 35% of the beneficial interest. File free state return only   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. File free state return only Persons having substantial influence. File free state return only   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. File free state return only Treasurers and chief financial officers. File free state return only Persons with a material financial interest in a provider-sponsored organization. File free state return only Persons not considered to have substantial influence. File free state return only   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. File free state return only Facts and circumstances. File free state return only   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. File free state return only Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. File free state return only The person founded the organization. File free state return only The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. File free state return only The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. File free state return only The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. File free state return only The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. File free state return only The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. File free state return only The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. File free state return only   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. File free state return only The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. File free state return only The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. File free state return only Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. File free state return only The direct supervisor of the person is not a disqualified person. File free state return only The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. File free state return only   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. File free state return only A person may be a disqualified person with respect to transactions with more than one organization. File free state return only Reasonable Compensation. File free state return only    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. File free state return only The section 162 standard will apply in determining the reasonableness of compensation. File free state return only The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. File free state return only   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). File free state return only Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. File free state return only    Intent to treat benefits as compensation. File free state return only An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. File free state return only   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. File free state return only Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. File free state return only Exception. File free state return only   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. File free state return only Rebuttable presumption that a transaction is not an excess benefit transaction. File free state return only   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. File free state return only The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. File free state return only Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. File free state return only (There is a special safe harbor for small organizations. File free state return only If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. File free state return only ) The authorized body adequately documents the basis for its determination concurrently with making that determination. File free state return only The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. File free state return only Disregarded benefits. File free state return only   The following economic benefits are disregarded for section 4958 purposes. File free state return only Nontaxable fringe benefits that are excluded from income under section 132. File free state return only Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. File free state return only Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. File free state return only Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. File free state return only A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. File free state return only Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. File free state return only   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. File free state return only   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). File free state return only   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. File free state return only   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. File free state return only Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. File free state return only More information. File free state return only   For more information, see the Instructions to Forms 990 and 4720. File free state return only Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. File free state return only They may be subject to an excise tax on the amount of any excess business holdings. File free state return only For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. File free state return only Donor advised fund. File free state return only   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. File free state return only Supporting organizations. File free state return only   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. File free state return only These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. File free state return only Taxes. File free state return only   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. File free state return only The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. File free state return only The excess holdings are determined on the day during the tax year when they were the largest. File free state return only   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. File free state return only   For more information on the tax on excess business holdings, see the Instructions for Form 4720. File free state return only Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. File free state return only An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. File free state return only Taxable distribution. File free state return only   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). File free state return only    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. File free state return only The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. File free state return only Sponsoring organization. File free state return only   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. File free state return only Donor advised fund. File free state return only    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. File free state return only Exception. File free state return only A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. File free state return only The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). File free state return only Disqualified supporting organization. File free state return only   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. File free state return only Tax on sponsoring organization. File free state return only   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. File free state return only Tax on fund manager. File free state return only   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. File free state return only Any fund manager who took part in the distribution and is liable for the tax must pay the tax. File free state return only The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. File free state return only If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. File free state return only   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. File free state return only Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. File free state return only   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. File free state return only The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. File free state return only Donor advisor. File free state return only   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. File free state return only Related party. File free state return only   A related party includes any family member or 35% controlled entity. File free state return only See the definition of those terms under Disqualified Person , earlier. File free state return only Tax on donor, donor advisor, or related person. File free state return only    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). File free state return only The advisor and the party who received the benefit are jointly and severally liable for the tax. File free state return only Tax on fund managers. File free state return only   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. File free state return only Any fund manager who took part in the distribution and is liable for the tax must pay the tax. File free state return only The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. File free state return only If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. File free state return only Exception. File free state return only   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. File free state return only   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. File free state return only Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. File free state return only Capital gains from appreciation are included in the tax base on private foundation net investment income. File free state return only This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. File free state return only Form 990-W is used to calculate the estimated tax. File free state return only In addition, there are several other rules that apply to excise taxes on private foundations. File free state return only These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. File free state return only Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. File free state return only For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. File free state return only Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. File free state return only If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. File free state return only Both of these excise taxes are reported on Schedule A (Form 990-BL). File free state return only See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. File free state return only Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. File free state return only These entities must meet section 501(r)(3) requirements at all times during their tax year. File free state return only Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). File free state return only See Schedule H, Hospitals (Form 990), for details. File free state return only Prev  Up  Next   Home   More Online Publications
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File free state return only 3. File free state return only   Claiming the Special Depreciation Allowance Table of Contents Introduction What Is Qualified Property?Qualified Reuse and Recycling Property Qualified Cellulosic Biofuel Plant Property Qualified Disaster Assistance Property Certain Qualified Property Acquired After December 31, 2007 Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance How Much Can You Deduct? How Can You Elect Not To Claim an Allowance? When Must You Recapture an Allowance? Introduction You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. File free state return only The allowance applies only for the first year you place the property in service. File free state return only For qualified property placed in service in 2013, you can take an additional 50% special allowance. File free state return only The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. File free state return only This chapter explains what is qualified property. File free state return only It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance. File free state return only Corporations can elect to accelerate certain minimum tax credits in lieu of claiming the special depreciation allowance for eligible qualified property. File free state return only See Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance , later. File free state return only See chapter 6 for information about getting publications and forms. File free state return only What Is Qualified Property? Your property is qualified property if it is one of the following. File free state return only Qualified reuse and recycling property. File free state return only Qualified cellulosic biofuel plant property. File free state return only Qualified disaster assistance property. File free state return only Certain qualified property acquired after December 31, 2007. File free state return only The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance. File free state return only Qualified Reuse and Recycling Property You can take a 50% special depreciation allowance for qualified reuse and recycling property. File free state return only Qualified reuse and recycling property is any machinery or equipment (not including buildings or real estate), along with any appurtenance, that is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials (as defined in section 168(m)(3)(B) of the Internal Revenue Code). File free state return only Qualified reuse and recycling property also includes software necessary to operate such equipment. File free state return only The property must meet the following requirements. File free state return only The property must be depreciated under MACRS. File free state return only The property must have a useful life of at least 5 years. File free state return only The original use of the property must begin with you after August 31, 2008. File free state return only You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) after August 31, 2008, with no binding written contract for the acquisition in effect before September 1, 2008. File free state return only The property must be placed in service for use in your trade or business after August 31, 2008. File free state return only Excepted Property Qualified reuse and recycling property does not include any of the following. File free state return only Any rolling stock or other equipment used to transport reuse or recyclable materials. File free state return only Property required to be depreciated using the Alternative Depreciation System (ADS). File free state return only For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . File free state return only Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies. File free state return only Property for which you elected not to claim any special depreciation allowance (discussed later). File free state return only Property placed in service and disposed of in the same tax year. File free state return only Property converted from business use to personal use in the same tax year acquired. File free state return only Property converted from personal use to business use in the same or later tax year may be qualified reuse and recycling property. File free state return only Qualified Cellulosic Biofuel Plant Property You can take a 50% special depreciation allowance for qualified cellulosic biofuel plant property. File free state return only Cellulosic biofuel is any liquid fuel which is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. File free state return only Examples include bagasse (from sugar cane), corn stalks, and switchgrass. File free state return only The property must meet the following requirements. File free state return only The property is used in the United States solely to produce cellulosic biofuel. File free state return only The original use of the property must begin with you after December 20, 2006. File free state return only You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) after December 20, 2006, with no binding written contract for acquisition in effect before December 21, 2006. File free state return only The property must be placed in service for use in your trade or business or for the production of income after October 3, 2008, and before January 3, 2013. File free state return only Note. File free state return only For property placed in service after January 2, 2013, and before January 1, 2014, you can take a 50% special depreciation allowance for qualified second generation biofuel plant property that is used solely in the United States to produce second generation biofuel (as defined in section 40(b)(6)(E)). File free state return only The other requirements for qualified second generation biofuel plant property to be eligible for the special depreciation allowance are identical to the requirements discussed for Qualified Cellulosic Biofuel Plant Property above. File free state return only Special Rules Sale-leaseback. File free state return only   If you sold qualified cellulosic biofuel plant property you placed in service after October 3, 2008, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. File free state return only   The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before December 21, 2006. File free state return only Syndicated leasing transactions. File free state return only   If qualified cellulosic biofuel plant property is originally placed in service by a lessor after October 3, 2008, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. File free state return only   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months. File free state return only Excepted Property Qualified cellulosic biofuel plant property does not include any of the following. File free state return only Property placed in service and disposed of in the same tax year. File free state return only Property converted from business use to personal use in the same tax year it is acquired. File free state return only Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property. File free state return only Property required to be depreciated using the Alternative Depreciation System (ADS). File free state return only For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . File free state return only Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code. File free state return only Property for which you elected not to claim any special depreciation allowance (discussed later). File free state return only Property for which a deduction was taken under section 179C for certain qualified refinery property. File free state return only Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies. File free state return only Qualified Disaster Assistance Property You can take a 50% special depreciation allowance for qualified disaster assistance property placed in service in federally declared disaster areas in which the disaster occurred in 2009. File free state return only A list of the federally declared disaster areas is available at the FEMA website at www. File free state return only fema. File free state return only gov. File free state return only Your property is qualified disaster assistance property if it meets the following requirements. File free state return only The property is nonresidential real property or residential real property placed in service before January 1, 2014, in a federally declared disaster area in which the disaster occurred in 2009. File free state return only You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) on or after the applicable disaster date, with no binding written contract for the acquisition in effect before the applicable disaster date. File free state return only The property must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the applicable federally declared disaster. File free state return only The property must be similar in nature to, and located in the same county as, the rehabilitated or replaced property. File free state return only The original use of the property within the applicable disaster area must have begun with you on or after the applicable disaster date. File free state return only The property is placed in service by you on or before the date which is the last day of the fourth calendar year. File free state return only Substantially all (80% or more) of the use of the property must be in the active conduct of your trade or business in a federally declared disaster area, occurring in 2009. File free state return only It is not excepted property (explained later in Excepted Property ). File free state return only Special Rules Sale-leaseback. File free state return only   If you sold qualified disaster assistance property you placed in service after the applicable disaster date and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. File free state return only   The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before the applicable disaster date. File free state return only Syndicated leasing transactions. File free state return only   If qualified disaster assistance property is originally placed in service by a lessor after the applicable disaster date, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. File free state return only   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months. File free state return only Excepted Property Qualified disaster assistance property does not include any of the following. File free state return only Property required to be depreciated using the Alternative Depreciation System (ADS). File free state return only For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . File free state return only Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code. File free state return only Any qualified revitalization building (defined later) placed in service before January 1, 2010, for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures. File free state return only Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises. File free state return only Any property for which the special allowance under section 168(k) or section 1400N(d) of the Internal Revenue Code applies. File free state return only Property for which you elected not to claim any special depreciation allowance (discussed later). File free state return only Property placed in service and disposed of in the same tax year. File free state return only Property converted from business use to personal use in the same tax year acquired. File free state return only Property converted from personal use to business use in the same or later tax year may be qualified disaster assistance property. File free state return only Any gambling or animal racing property (defined later). File free state return only Qualified revitalization building. File free state return only   This is a commercial building and its structural components that you placed in service in a renewal community before January 1, 2010. File free state return only If the building is new, the original use of the building must begin with you. File free state return only If the building is not new, you must substantially rehabilitate the building and then place it in service. File free state return only For more information, including definitions of substantially rehabilitated building and qualified revitalization expenditure, see section 1400I(b) of the Internal Revenue Code. File free state return only Gambling or animal racing property. File free state return only   Gambling or animal racing property includes the following personal and real property. File free state return only Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing. File free state return only Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing. File free state return only Certain Qualified Property Acquired After December 31, 2007 You can take a 50% special depreciation deduction allowance for certain qualified property acquired after December 31, 2007. File free state return only Your property is qualified property if it meets the following requirements. File free state return only It is one of the following types of property. File free state return only Tangible property depreciated under MACRS with a recovery period of 20 years or less. File free state return only Water utility property. File free state return only Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. File free state return only (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. File free state return only ) Qualified leasehold improvement property (defined under Qualified leasehold improvement property later). File free state return only You must have acquired the property after December 31, 2007, with no binding written contract for the acquisition in effect before January 1, 2008. File free state return only The property must be placed in service for use in your trade or business or for the production of income before January 1, 2014 (before January 1, 2015, for certain property with a long production period and certain aircraft (defined next)). File free state return only The original use of the property must begin with you after December 31, 2007. File free state return only It is not excepted property (explained later in Excepted property). File free state return only Qualified leasehold improvement property. File free state return only    Generally, this is any improvement to an interior part of a building that is nonresidential real property, if all the following requirements are met. File free state return only The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building. File free state return only That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. File free state return only The improvement is placed in service more than 3 years after the date the building was first placed in service by any person. File free state return only The improvement is section 1250 property. File free state return only See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property. File free state return only   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. File free state return only The enlargement of the building. File free state return only Any elevator or escalator. File free state return only Any structural component benefiting a common area. File free state return only The internal structural framework of the building. File free state return only   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. File free state return only However, a lease between related persons is not treated as a lease. File free state return only Related persons. File free state return only   For this purpose, the following are related persons. File free state return only Members of an affiliated group. File free state return only An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. File free state return only A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation. File free state return only Two corporations that are members of the same controlled group. File free state return only A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. File free state return only The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. File free state return only The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. File free state return only A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. File free state return only Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation. File free state return only A corporation and a partnership if the same persons own both of the following. File free state return only 80% or more of the value of the outstanding stock of the corporation. File free state return only 80% or more of the capital or profits interest in the partnership. File free state return only The executor and beneficiary of any estate. File free state return only Long Production Period Property To be qualified property, long production period property must meet the following requirements. File free state return only It must meet the requirements in (2)-(5), above. File free state return only The property has a recovery period of at least 10 years or is transportation property. File free state return only Transportation property is tangible personal property used in the trade or business of transporting persons or property. File free state return only The property is subject to section 263A of the Internal Revenue Code. File free state return only The property has an estimated production period exceeding 1 year and an estimated production cost exceeding $1,000,000. File free state return only Noncommercial Aircraft To be qualified property, noncommercial aircraft must meet the following requirements. File free state return only It must meet the requirements in (2)-(5), above. File free state return only The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for agricultural or firefighting purposes). File free state return only The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2 ) by a purchaser who at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000. File free state return only The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000. File free state return only Special Rules Sale-leaseback. File free state return only   If you sold qualified property you placed in service after December 31, 2007, and leased it back within 3 months after you originally placed in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. File free state return only   The property will not qualify for the special depreciation allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before January 1, 2008. File free state return only Syndicated leasing transactions. File free state return only   If qualified property is originally placed in service by a lessor after December 31, 2007, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. File free state return only   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of the last sale if the property is sold within 3 months after the final unit is placed in service and the period between the time the first and last units are placed in service does not exceed 12 months. File free state return only Excepted Property Qualified property does not include any of the following. File free state return only Property placed in service and disposed of in the same tax year. File free state return only Property converted from business use to personal use in the same tax year acquired. File free state return only Property converted from personal use to business use in the same or later tax year may be qualified property. File free state return only Property required to be depreciated under the Alternative Depreciation System (ADS). File free state return only This includes listed property used 50% or less in a qualified business use. File free state return only For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . File free state return only Qualified restaurant property (as defined in section 168(e)(7) of the Internal Revenue Code). File free state return only Qualified retail improvement property (as defined in section 168(e)(8) of the Internal Revenue Code). File free state return only Property for which you elected not to claim any special depreciation allowance (discussed later). File free state return only Property for which you elected to accelerate certain credits in lieu of the special depreciation allowance (discussed next). File free state return only Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 2 extension property (as defined in section 168(k)(4)(I)(iv)), unless the corporation made an election not to apply the section 168(k)(4) election to round 2 extension property for its first tax year ending after December 31, 2010. File free state return only For 2013, round 2 extension property generally is long production period and noncommercial aircraft if acquired after March 31, 2008, and placed in service after December 31, 2012, but before January 1, 2014. File free state return only An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 3 extension property (as defined in section 168(k)(4)(J)(iv)), unless the corporation makes an election not to apply the section 168(k)(4) election to round 3 extension property. File free state return only If a corporation did not make a section 168(k)(4) election for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, the corporation may elect for its first tax year ending after December 31, 2012, to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for only round 3 extension property. File free state return only If you make an election to accelerate these credits in lieu of claiming the special depreciation allowance for eligible property, you must not take the 50% special depreciation allowance for the property and must depreciate the basis in the property under MACRS using the straight line method. File free state return only See Which Depreciation Method Applies in chapter 4 . File free state return only Once made, the election cannot be revoked without IRS consent. File free state return only Additional guidance. File free state return only   For additional guidance on the election to accelerate the research or minimum tax credit in lieu of claiming the special depreciation allowance, see Rev. File free state return only Proc. File free state return only 2008-65 on page 1082 of Internal Revenue Bulletin 2008-44, available at www. File free state return only irs. File free state return only gov/pub/irs-irbs/irb08-44. File free state return only pdf, Rev. File free state return only Proc. File free state return only 2009-16 on page 449 of Internal Revenue Bulletin 2009-06, available at www. File free state return only irs. File free state return only gov/pub/irs-irbs/irb09-06. File free state return only pdf, and Rev. File free state return only Proc. File free state return only 2009-33 on page 150 of Internal Revenue Bulletin 2009-29, available at www. File free state return only irs. File free state return only gov/pub/irs-irbs/irb09-29. File free state return only pdf. File free state return only Also, see Form 3800, General Business Credit; Form 8827, Credit for Prior Year Minimum Tax — Corporations; and related instructions. File free state return only   Additional guidance regarding the election to accelerate the minimum tax credit in lieu of claiming the special depreciation allowance for round 2 extension property and round 3 extension property may also be available in later Internal Revenue Bulletins available at www. File free state return only irs. File free state return only gov/irb. File free state return only How Much Can You Deduct? Figure the special depreciation allowance by multiplying the depreciable basis of qualified reuse and recycling property, qualified cellulosic biofuel plant property, qualified disaster assistance property, and certain qualified property acquired after December 31, 2007, by 50%. File free state return only For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. File free state return only For qualified property that is listed property, enter the special allowance on line 25 in Part V of Form 4562. File free state return only If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance. File free state return only Depreciable basis. File free state return only   This is the property's cost or other basis multiplied by the percentage of business/investment use, reduced by the total amount of any credits and deductions allocable to the property. File free state return only   The following are examples of some credits and deductions that reduce depreciable basis. File free state return only Any section 179 deduction. File free state return only Any deduction for removal of barriers to the disabled and the elderly. File free state return only Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. File free state return only Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code. File free state return only   For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. File free state return only   For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . File free state return only For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . File free state return only Depreciating the remaining cost. File free state return only   After you figure your special depreciation allowance for your qualified property, you can use the remaining cost to figure your regular MACRS depreciation deduction (discussed in chapter 4 . File free state return only Therefore, you must reduce the depreciable basis of the property by the special depreciation allowance before figuring your regular MACRS depreciation deduction. File free state return only Example. File free state return only On November 1, 2013, Tom Brown bought and placed in service in his business qualified property that cost $450,000. File free state return only He did not elect to claim a section 179 deduction. File free state return only He deducts 50% of the cost ($225,000) as a special depreciation allowance for 2013. File free state return only He uses the remaining $225,000 of cost to figure his regular MACRS depreciation deduction for 2013 and later years. File free state return only Like-kind exchanges and involuntary conversions. File free state return only   If you acquire qualified property in a like-kind exchange or involuntary conversion, the carryover basis of the acquired property is eligible for a special depreciation allowance. File free state return only After you figure your special allowance, you can use the remaining carryover basis to figure your regular MACRS depreciation deduction. File free state return only In the year you claim the allowance (the year you place in service the property received in the exchange or dispose of involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your regular MACRS depreciation deduction. File free state return only See Figuring the Deduction for Property Acquired in a Nontaxable Exchange , in chapter 4 under How Is the Depreciation Deduction Figured . File free state return only The excess basis (the part of the acquired property's basis that exceeds its carryover basis) is also eligible for a special depreciation allowance. File free state return only How Can You Elect Not To Claim an Allowance? You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service during the tax year. File free state return only To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election. File free state return only When to make election. File free state return only   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. File free state return only   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). File free state return only Attach the election statement to the amended return. File free state return only On the amended return, write “Filed pursuant to section 301. File free state return only 9100-2. File free state return only ” Revoking an election. File free state return only   Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. File free state return only A request to revoke the election is a request for a letter ruling. File free state return only If you elect not to have any special allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. File free state return only When Must You Recapture an Allowance? When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. File free state return only See When Do You Recapture MACRS Depreciation in chapter 4 or more information. File free state return only Recapture of allowance deducted for qualified GO Zone property. File free state return only   If, in any year after the year you claim the special depreciation allowance for qualified GO Zone property (including specified GO Zone extension property), the property ceases to be used in the GO Zone, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. File free state return only For additional guidance, see Notice 2008-25 on page 484 of Internal Revenue Bulletin 2008-9. File free state return only Qualified cellulosic biomass ethanol plant property and qualified cellulosic biofuel plant property. File free state return only   If, in any year after the year you claim the special depreciation allowance for any qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, the property ceases to be qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. File free state return only Recapture of allowance for qualified Recovery Assistance property. File free state return only   If, in any year after the year you claim the special depreciation allowance for qualified Recovery Assistance property, the property ceases to be used in the Kansas disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. File free state return only For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32. File free state return only Recapture of allowance for qualified disaster assistance property. File free state return only   If, in any year after the year you claim the special depreciation allowance for qualified disaster assistance property, the property ceases to be used in the applicable disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. File free state return only   For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32. File free state return only Prev  Up  Next   Home   More Online Publications