Instructions for Form 990-T (2006)

Chapter 2

Table of Contents

Specific Instructions

Period Covered

File the 2006 return for calendar year 2006 or a fiscal year beginning in 2006 and ending 2007. For a fiscal year, fill in the tax year information at the top of the form.

The 2006 Form 990-T may also be used if:

The organization has a tax year of less than 12 months that begins and ends in 2007, and
The 2007 Form 990-T is not available at the time the organization is required to file its return. The organization must show its 2007 tax year on the 2006 Form 990-T and take into account any tax law changes that are effective for tax years beginning after December 31, 2006.

Name and Address

The name and address on Form 990-T should be the same as the name and address shown on other Forms 990. If you received a mailing label and any information is incorrect or missing, cross out any errors, print the correct information, and add any missing information.

Include the suite, room, or other unit number after the street address. If the post office does not deliver mail to the street address and the organization has a P.O. box, show the box number instead of the street address.

If the organization receives its mail in care of a third party (such as an accountant or an attorney), enter on the street address line “C/O” followed by the third party's name and street address or P.O. box.

Change of name. If the organization has changed its name, it must check the box next to “Name of organization” and also provide the following when filing this return, if it is:

A corporation or is incorporated with the state, an amendment to the articles of incorporation along with proof of filing with the state is required.
A trust, an amendment to the trust agreement is required along with the trustee(s) signature.
An association or an unincorporated association, an amendment to the articles of association, constitution, by-laws or other organizing document is required along with signatures of at least two officers/members.

Blocks A through J

Block A. If the organization has changed its address since it last filed a return, check Block A.

If a change in address occurs after the return is filed, use Form 8822, Change of Address , to notify the IRS of the new address.

Block B. Check the box under which the organization receives its tax exemption.

Qualified pension, profit-sharing, and stock bonus plans should check the 501 box and enter “a” between the first set of parentheses.

For other organizations exempt under section 501, check the box for 501 and enter the section that describes their tax exempt status, for example, 501(c)(3).

For tax exempts that do not receive their exemption under section 501, use the following guide.

If you are a	Then check this box
IRA, SEP, or SIMPLE	408(e)
Roth IRA	408A
Archer MSA	220(e)
Coverdell ESA	530(a)
Qualified State Tuition Program	529(a)

Block C. Enter the total of the end-of-year assets from the organization's books of account.

Block D. An employees' trust described in section 401(a) and exempt under section 501(a) should enter its own trust identification number in this block.

An IRA trust enters its own EIN in this block. An IRA trust never uses a social security number or the trustee's EIN.

An EIN may be applied for:

Online—Click on the Employer ID Numbers (EINs) link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
By telephone at 1-800-829-4933.
By mailing or faxing Form SS-4, Application for Employer Identification Number.

If the organization has not received its EIN by the time the return is due, write “Applied for” in the space for the EIN. For more details, see Pub. 583, Starting a Business and Keeping Records.

The online application process is not yet available for organizations with addresses in foreign countries or Puerto Rico.

Block E. Enter the applicable unrelated business activity code(s) that specifically describes the organization's unrelated business activity. If a specific activity code does not accurately describe the organization's activities, then choose a general code that best describes its activity. These codes are listed on
page 24.

Block F. If the organization is covered by a group exemption, enter the group exemption number.

Block G. Check the box that describes your organization.

“Other trust” includes IRAs, SEPs, SIMPLEs, Roth IRAs, Coverdell IRAs, and Archer MSAs.

Section 529 organizations check the 501(c) corporation or 501(c) trust box depending on whether the organization is a corporation or a trust. Also, be sure the box for 529(a) in Block B is checked.

If you check “501(c) corporation,” leave line 36 blank. If you check “501(c) trust,” “401(a) trust,” or “Other trust” leave lines 35a, b, and c blank.

Block H. Describe the primary unrelated business activity of your organization based on unrelated income. Attach a schedule if more space is needed.

Block I. Check the “Yes” box if your organization is a corporation and either 1 or 2 below applies:

The corporation is a subsidiary in an affiliated group (defined in section 1504) but is not filing a consolidated return for the tax year with that group.
The corporation is a subsidiary in a parent-subsidiary controlled group (defined in section 1563).

Excluded member. If the corporation is an “excluded member” of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for purposes of Block I.

Block J. Enter the name of the person who has the organization's books and records and the telephone number at which he or she can be reached.

Part I—Unrelated Trade or Business Income

Complete column (A), lines 1 through 13. If the amount on line 13 is $10,000 or less, you may complete only line 13 for columns (B) and (C). These filers do not have to complete Schedules A through K (however, refer to applicable schedules when completing column (A)). If the amount on line 13, column (A), is more than $10,000, complete all lines and schedules that apply.

Member income of mutual or cooperative electric companies. Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income.

Extraterritorial income. Except as otherwise provided in the Internal Revenue Code, gross income includes all income from whatever source derived. Gross income generally does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873, Extraterritorial Income Exclusion, to figure the exclusion. Include the exclusion in the total for Other deductions on line 28, Form 990-T.

Income from qualifying shipping activities. The organization's gross income does not include income from qualifying shipping activities (as defined in section 1356) if the organization makes an election under section 1354 on a timely filed return (including extensions) to be taxed on its notional shipping income (as defined in section 1353) at the highest corporate rate (35%). If the election is made, the organization generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. An organization making this election also may elect to defer gain on the disposition of a qualifying vessel under section 1359. Use Form 8902, Alternative Tax on Qualifying Shipping Activities, to figure the tax. Include the alternative tax on Form 990-T, Part IV, line 42.

Line 1a—Gross Receipts or Sales

Enter the gross income from any unrelated trade or business regularly carried on that involves the sale of goods or performance of services.

A section 501(c)(7) social club would report its restaurant and bar receipts from nonmembers on line 1, but would report its investment income on line 9 and in Schedule G.

Advance payments. In general, advanced payments are reported in the year of receipt. To report income from long-term contracts, see section 460. For special rules for reporting certain advanced payments for goods and long-term contracts, see Regulations section 1.451-5. For permissible methods for reporting advanced payments for services and certain goods by an accrual method organization, see Rev. Proc. 2004-34, 2004-22 I.R.B. 991.

Installment sales. Generally, the installment method cannot be used for dealer dispositions of property. A “dealer disposition” is (a) any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan or (b) any disposition of real property held for sale to customers in the ordinary course of the taxpayer's trade or business.

These restrictions on using the installment method do not apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots for which the organization elects to pay interest under section 453(l)(3).

For sales of timeshares and residential lots reported under the installment method, the organization's income tax is increased by the interest payable under section 453(l)(3). To report this addition to the tax, see the instructions for line 42.

Enter on line 1a (and carry to line 3), the gross profit on collections from installment sales for any of the following:

Dealer dispositions of property before March 1, 1986.
Dispositions of property used or produced in the trade or business of farming.
Certain dispositions of timeshares and residential lots reported under the installment method.

Attach a schedule showing the following information for the current and the 3 preceding years:

Gross sales,
Cost of goods sold,
Gross profits,
Percentage of gross profits to gross sales,
Amount collected, and
Gross profit on amount collected.

Nonaccrual experience method. Accrual method organizations are not required to accrue certain amounts to be received from the performance of services that, on the basis of their experience, will not be collected, if:

The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, or
The organization's average annual gross receipts for the 3 prior tax years does not exceed $5 million.

This provision does not apply to any amount if interest is required to be paid on the amount or if there is any penalty for failure to timely pay the amount. For more information, see section 448(d)(5) and Regulations section 1.488-2. Organizations that qualify to use the nonaccrual experience method should attach a schedule showing total gross receipts, amounts not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Enter the net amount on line 1a.

Certain cooperatives that have gross receipts of $10 million or more and have patronage and nonpatronage source income and deductions must complete and attach Form 8817, Allocation of Patronage and Nonpatronage Income and Deductions, to their return.

Gain or loss on disposition of certain brownfield property. Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(18)(C)), which was acquired by the organization after December 31, 2004, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. See section 512(b)(19) and 514(b)(1)(E).

Line 4a—Capital Gain Net Income

Generally, organizations required to file Form 990-T (except organizations described in sections 501(c)(7), (9), and (17)) are not taxed on the net gains from the sale, exchange, or other disposition of property. However, net capital gains on debt-financed property, capital gains on cutting timber, and ordinary gains on sections 1245, 1250, 1252, 1254, and 1255 property are taxed. See Form 4797, Sales of Business Property, and its instructions for additional information.

Also, any capital gain or loss passed through from an S corporation or any gain or loss on the disposition of S corporation stock by a qualified tax exempt (see S Corporations under the line 5 instructions) is taxed as a capital gain or loss.

Capital gains and losses should be reported by a trust on Schedule D (Form 1041), Capital Gains and Losses, and by a corporation on Schedule D (Form 1120), Capital Gains and Losses.

An organization that transfers securities it owns for the contractual obligation of the borrower to return identical securities recognizes no gain or loss. To qualify for this treatment, the organization must lend the securities under an agreement that requires:

The return of identical securities;
The payment of amounts equivalent to the interest, dividends, and other distributions that the owner of the securities would normally receive; and
The risk of loss or opportunity for gain not be lessened.

See section 512(a)(5) for details.

Debt-financed property disposition. The amount of gain or loss to be reported on the sale, exchange, or other disposition of debt-financed property is the same percentage as the highest acquisition indebtedness for the property for the 12-month period before the date of disposition is to the average adjusted basis of the property. The percentage may not be more than 100%. See the instructions for Schedule E, column 5, to determine adjusted basis and average adjusted basis.

If debt-financed property is depreciable or depletable property, the provisions of sections 1245, 1250, 1252, 1254, and 1255 must be considered first.

Example.

On January 1, 2005, an exempt educational corporation, using $288,000 of borrowed funds, purchased an office building for $608,000. The only adjustment to basis was $29,902 for depreciation (straight line method under MACRS over the 39-year recovery period for nonresidential real property). The corporation sold the building on December 31, 2006, for $640,000. At the date of sale, the adjusted basis of the building was $578,098 ($608,000 - $29,902) and the indebtedness remained at $288,000. The adjusted basis of the property on the first day of the year of disposition was $593,037. The average adjusted basis is $585,568 (($593,037 + $578,098) ÷ 2). The debt/basis percentage is 49% ($288,000 ÷ $585,568).

The taxable gain is $30,332 (49% × ($640,000 - $578,098)). This is a long-term capital gain. A corporation should enter the gain on line 6, Part II, Schedule D (Form 1120). A trust should enter the gain on Schedule D (Form 1041). Both should attach a statement to the return showing how the gain was figured.

Line 4b—Net Gain or (Loss)

Show gains and losses on other than capital assets on Form 4797. Enter on this line the net gain or (loss) from Part II, line 17, Form 4797.

An exempt organization using Form 4797 to report ordinary gain on sections 1245, 1250, 1252, 1254, and 1255 property will include only depreciation, amortization, or depletion allowed or allowable in figuring unrelated business taxable income or taxable income of the organization (or a predecessor organization) for a period when it was not exempt.

Line 4c—Capital Loss Deduction for Trusts

If a trust has a net capital loss, it is subject to the limitations of Schedule D (Form 1041). Enter on this line the loss figured on Schedule D (Form 1041).

Line 5—Income or (Loss) From Partnerships and S Corporations

Combine all partnership income or loss (determined below) with all S corporation income or loss and enter it on line 5.

However, for limitations on losses for certain activities, see Form 6198 and, for trusts, Form 8582, Passive Activity Loss Limitations, or, for corporations, Form 8810, Corporate Passive Activity Loss and Credit Limitations, and sections 465 and 469.

Partnerships

If the organization is a partner in a partnership carrying on an unrelated trade or business, enter the organization's share (whether or not distributed) of the partnership's income or loss from the unrelated trade or business.

Figure the gross income and deductions of the partnership in the same way you figure unrelated trade or business income the organization earns directly.

Attachment. Attach a statement to this return showing the organization's share of the partnership's gross income from the unrelated trade or business, and its share of the partnership deductions directly connected with the unrelated gross income. Also, see Attachments on page 7 for other information you need to include.

S Corporations

For tax years beginning after December 31, 1997, qualified tax exempts can be shareholders in an S corporation without the S corporation losing its status as an S corporation. Qualified tax exempts that hold stock in an S corporation treat their stock interest as an unrelated trade or business. All items of income, loss, or deduction are taken into account in figuring unrelated business taxable income. Report on line 4 any gain or loss on the disposition of S corporation stock.

Qualified tax exempts. A qualified tax exempt is an organization that is described in section 401(a) (qualified stock bonus, pension, and profit-sharing plans) or 501(c)(3) and exempt from tax under section 501(a).

Exception. Employer stock ownership plans (ESOPs) do not follow these S corporation rules if the S corporation stock is an employer security as defined in section 409(l).

Attachment. Attach a statement to this return showing the qualified tax exempt's share of all items of income, loss, or deduction. Show capital gains and losses separately and include them on line 4a. Combine the income, loss, and deductions (except for the capital gains and losses) on the statement. If you hold stock in more than one S corporation, total the combined amounts. Also, see Attachments on page 7 for other information you need to include.

Line 12—Other Income

Enter on line 12 any item of unrelated business income that is not reportable elsewhere on the return. Include:

Recoveries of bad debts deducted in earlier years under the specific charge-off method. Attach a separate schedule of any items of other income to your return;
The amount from Form 6478, Credit for Alcohol Used as Fuel; and
The amount from Form 8864, Biodiesel and Renewable Diesel Fuels Credit.

Organizations described in section 501(c)(19). Enter the net income from insurance business that was not properly set aside. These organizations may set aside income from payments received for life, sick, accident, or health insurance for members of the organization or their dependents:

To provide for the payment of insurance benefits;
For a purpose specified in section 170(c)(4) (religious, charitable, scientific, literary, educational, etc.); or
For administrative costs directly connected with benefits described in 1 and 2 above.

Amounts set aside and used for purposes other than those in 1, 2, or 3 above must be included in unrelated business taxable income for the tax year if they were previously excluded from taxable income.

Any amount spent for a purpose described in section 170(c)(4) is first considered paid from funds earned by the organization from insurance activities if the income is not used for the insurance activities.

Expenditures for lobbying are not considered section 170(c)(4) expenses.

Income from property financed with qualified 501(c)(3) bonds. If any part of the property is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, your section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. No deduction is allowed for interest on the private activity bond. Report the greater of the actual rent or the fair rental value on line 12. Report allowable deductions in Part II. See section 150(b)(3) for more information.

Passive foreign investment company (PFIC) shareholders. If your organization is a direct or indirect shareholder of a PFIC within the meaning of section 1296, it may have income tax consequences under section 1291 on the disposition of the PFIC stock or on receipt of an excess distribution from the PFIC, described in section 1291(a). Your organization may have current income under section 1293 if the PFIC is a qualified electing fund (QEF) with respect to the organization.

Include on line 12 the portion of an excess distribution or section 1293 inclusion that is taxable as unrelated business taxable income. See Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, for more information on reporting excess distributions and current income inclusions.

See the instructions for lines 35c and 36 in Part III for reporting the deferred tax amount that may be owed by your organization with respect to an excess distribution.

Part II—Deductions Not Taken Elsewhere

If the amount on Part I, line 13, column (A), is $10,000 or less, you do not have to complete lines 14 through 28 of Part II. However, you must complete lines 29 through 34 of Part II.

Directly connected expenses. Only expenses directly connected with unrelated trade or business income (except contributions) may be deducted on these lines (see Directly connected expenses on page 2). Contributions may be deducted, whether or not directly connected. Do not separately include in Part II any expenses that are reported in Schedules A through J, other than excess exempt expenses entered on line 26 and excess readership costs entered on line 27. For example, officers' compensation allocable to advertising income is reported on Schedule J only, and should not be included on Schedule K or line 14 of Part II.

Limitations on Deductions

The following items discuss certain areas in which the amount of the deduction may to some extent be limited.

Activities Lacking a Profit Motive

If income is attributable to an activity lacking a profit motive, a loss from the activity cannot be claimed on Form 990-T. Therefore, in Part I, column (B) and Part II, the total of deductions for expenses directly connected with income from an activity lacking a profit motive is limited to the amount of that income. Generally, an activity lacking a profit motive is one that is not conducted for the purpose of producing a profit or one that has consistently produced losses when both direct and indirect expenses are taken into account.

Deductions related to property leased to tax-exempt entities

For property leased to a governmental or other tax-exempt entity, or in the case of property acquired after March 12, 2004, that is treated as tax-exempt use property other than by reason of a lease, the organization may not claim deductions related to the property to the extent that they exceed the organization's income from the lease payments. Amounts disallowed may be carried over to the next year and treated as a deduction with respect to the property. See section 470 for more information.

Transactions Between Related Taxpayers

Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses.

Preference Items

Corporations may be required to adjust deductions for depletion of iron ore and coal, intangible drilling and exploration and development costs, and the amortizable basis of pollution control facilities. See section 291 to determine the amount of the adjustment.

Section 263A Uniform Capitalization Rules

These rules require organizations to capitalize or include as inventory cost certain costs incurred in connection with:

The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business.
Real property or personal property held in inventory (tangible and intangible) acquired for resale.
The production of real property and tangible personal property produced by the organization for use in its trade or business or in an activity engaged in for profit.

Tangible personal property produced by an organization includes a film, sound recording, videotape, book, or similar property.

Indirect expenses. Organizations subject to the section 263A uniform capitalization rules are required to capitalize direct costs and an allocable part of most indirect costs (including taxes) that benefit the assets produced or acquired for resale or are incurred by reason of the performance of production or resale activities.

For inventory, some of the indirect expenses that must be capitalized are:

Administration expenses,
Taxes,
Depreciation,
Insurance,
Compensation paid to officers attributable to services,
Rework labor, and
Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.

Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.

Interest expense. Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations section 1.263A-8 through 1.263A-15.

When are section 263A capitalized costs deductible? The costs required to be capitalized under section 263A are not deductible until the property (to which the costs relate) is sold, used, or otherwise disposed of by the organization.

Exceptions. Section 263A does not apply to:

Personal property acquired for resale if the organization's average annual gross receipts for the 3 prior tax years were $10 million or less.
Timber.
Most property produced under long-term contract.
Certain property produced in a farming business.
Research and experimental costs under section 174.
Geological and geophysical costs amortized under section 167(h).
Intangible drilling costs for oil, gas, and geothermal property.
Mining exploration and development costs.
Inventory of an organization that accounts for inventories in the same manner as materials and supplies that are not incidental. See Schedule A—Cost of Goods Sold on page 19 for details.

Additional information. For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.

Travel, Meals, and Entertainment

Subject to limitations and restrictions discussed below, an organization can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463, Travel, Entertainment, Gift, and Car Expenses, for more details.

Travel. The organization cannot deduct travel expenses of any individual accompanying an organization's officer or employee, including a spouse or dependent of the officer or employee, unless:

That individual is an employee of the organization and
His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment. Generally, the organization can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

Meals must not be lavish or extravagant;
A bona fide business discussion must occur during, immediately before, or immediately after the meal; and
An employee of the organization must be present at the meal.

Membership dues. The organization may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for members or their guests. In addition, organizations may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities. The organization cannot deduct an expense paid or incurred for use of a facility (such as a yacht or hunting lodge) for an activity usually considered entertainment, amusement, or recreation.

Amounts treated as compensation. The organization generally may be able to deduct otherwise nondeductible travel, meals, and entertainment expenses if the amounts are treated as compensation and reported on Form W-2 for an employee or Form 1099-MISC for an independent contractor.

However, if the recipient is an officer or director, the deduction for otherwise nondeductible meals, travel, and entertainment expenses is limited to the amount treated as compensation. See section 274(e)(2) and Notice 2005-45, 2005-24 I.R.B. 1228.

Certain Expenses For Which Credits Are Allowable

For each of the credits listed below, the organization may need to reduce the otherwise allowable deductions for expenses used to figure the credit by the amount of the current year credit:

The credit for increasing research activities,
The disabled access credit,
The employer credit for social security and Medicare taxes paid on certain employee tips,
The credit for employer-provided child care,
The orphan drug credit,
The credit for small employer pension plan startup,
The low sulfur diesel fuel production credit, and
Mine rescue team training credit.

If the organization has any of these credits, figure each current year credit before figuring the deduction for expenses on which the credit is based.

Business Startup Expenses

Business startup and organizational costs must be capitalized unless an election is made to amortize them. For costs paid or incurred before October 23, 2004, the organization must capitalize them unless it elects to amortize these costs over a period of 60 months or more. For costs paid or incurred after October 23, 2004, the following rules apply separately to each category of costs.

The organization can elect to deduct up to $5,000 of such costs for the year the organization begins business operations.
The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.
If the election is made, any costs that are not deducted must be amortized ratably over a 180-month period.

In all cases, the amortization period begins the month the corporation begins operations. For more details on the election for business startup and organizational costs, see Pub. 535.

For more details on the election for business startup costs, see section 195 and attach the statement required by Regulations section 1.195-1(b). For more details on the election for organizational costs, see section 248 and attach the statement required by Regulations section 1.248-1(c). Report the deductible amount of these costs and any amortization on line 28. For amortization that begins during the 2006 tax year, complete and attach Form 4562.

Line 16—Repairs and Maintenance

Enter the cost of incidental repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that do not add to the value or appreciably prolong the life of the property.

Line 17—Bad Debts

Enter the total receivables from unrelated business activities that were previously included in taxable income and that became worthless in whole or in part during the tax year.

Line 18—Interest

Attach a separate schedule listing the interest being claimed on this line.

Interest allocation. If the proceeds of a loan were used for more than one purpose (for example, to purchase a portfolio investment and to acquire an interest in a passive activity), an interest allocation must be made. See Temporary Regulations section 1.163-8T for the interest allocation rules.
Tax-exempt interest. Do not include interest on indebtedness incurred or continued to purchase or carry obligations, on which the interest income is totally exempt from income tax. For exceptions, see section 265(b).
Prepaid interest. Generally, a cash basis taxpayer cannot deduct prepaid interest allocable to years following the current tax year. For example, in 2006 a cash basis calendar year taxpayer prepaid interest on a loan. The taxpayer can deduct only that part of the prepaid interest that was for the use of the loan before January 1, 2007.
Straddle interest. Generally, the interest and carrying charges on straddles cannot be deducted and must be capitalized. See section 263(g).
Original issue discount. See section 163(e)(5) for special rules for the disqualified portion of original issue discount on a high yield discount obligation.
Related party interest. Certain interest paid or accrued by the organization (directly or indirectly) to a related person may be limited if no tax is imposed on such interest. See section 163(j) for more details.
Interest on certain underpayments of tax. Interest paid or incurred on any portion of an underpayment of tax that is attributable to an understatement arising from an undisclosed listed transaction or an undisclosed reportable avoidance transaction (other than a listed transaction) entered into in tax years beginning after October 22, 2004.
Interest allocable to the production of designated property. Do not deduct interest on debt allocable to the production of designated property. Interest that is allocable to such property produced by an organization for its own use or for sale must be capitalized. An organization must also capitalize any interest on debt allocable to an asset used to produce the above property. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15 for definitions and more information.
Interest on below-market loans. See section 7872 for special rules regarding the deductibility of foregone interest on certain below-market-rate loans.
Interest on which no tax is imposed (section 163(j)). For tax years beginning after May 16, 2006, an organization that owns an interest in a partnership, directly or indirectly, must treat its distributive share of the partnership liabilities, interest income, and interest expense as liabilities, income, and expenses of the organization for purposes of applying the earnings stripping rules. For more details, see section 163(j)(8).

Line 19—Taxes and Licenses

Enter taxes and license fees paid or accrued during the year, but do not include the following:

Federal income taxes.
Foreign or U.S. possession income taxes if a foreign tax credit is claimed.
Taxes not imposed on your organization.
Taxes, including state or local sales taxes, paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
Taxes deducted elsewhere on the return, such as those reflected in cost of good sold.

See section 164(d) for apportionment of taxes on real property between the buyer and seller.

Line 20—Charitable Contributions

Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c). Also, enter any unused contributions carried over from earlier years. The deduction for contributions will be allowed whether or not directly connected with the carrying on of a trade or business.

Corporations. The total amount claimed normally cannot be more than 10% of unrelated business taxable income figured without regard to the following.

Any deduction for contributions.
The domestic production activities deduction under section 199.
Any net operating loss (NOL) carryback to the tax year under section 172.
Any capital loss carryback to the tax year under section 1212(a)(1).

Corporations on the accrual basis can elect to deduct contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions are authorized by the board of directors during the tax year. Attach a declaration to the return stating that the resolution authorizing the contributions was adopted by the board of directors during the tax year. The declaration must also include the date the resolution was adopted. See Regulations section 1.170A-11

Suspension of 10% limitation for farmers and ranchers. For tax years beginning in 2006, an organization that is a qualified farmer or rancher (as defined in section 170(b)(1)(E) that does not have publicly traded stock, can deduct contributions of qualified conservation property without regard to the general 10% limit. The total amount of the contribution claimed for the qualified conservation property cannot exceed 100% of the excess of the organization's taxable income (as computed above substituting “100%” for “10%”) over all other allowable charitable contributions. Any excess qualified conservation contributions can be carried over to the next 15 years subject to the 100% limitation. See section 170(b)(2)(B).

For contributions made after August 17, 2006, contributed conservation property that is used in agriculture or livestock production must remain available for such production.

Carryover. Charitable contributions over the 10% limitation cannot be deducted for the tax year, but may be carried over to the next 5 tax years.

In figuring the charitable contributions deduction, if the corporation has an NOL carryover to the tax year, the 10% limit is applied using the taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified. See section 172(b). To the extent charitable contributions are used to reduce taxable income for this purpose and increase a net operating loss carryover, a contributions carryover is not allowed. See section 170(d)(2)(B).

Trusts. In general:

For contributions to organizations described in section 170(b)(1)(A), the amount claimed may not be more than 50% of the unrelated business taxable income figured without this deduction; and
For contributions to other organizations, the amount claimed may not be more than the smaller of:
1. 30% of unrelated business taxable income figured without this deduction; or
2. The amount by which 50% of the unrelated business taxable income is more than the contributions allowed in 1 above.

Contributions not allowable in whole or in part because of the limitations may not be deducted as a business expense, but may be carried over to the next 5 tax years.

Substantiation requirements. Generally, no deduction is allowed for any contribution of $250 or more, unless the organization gets a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the organization's return, or, if earlier, the date the return is filed. However, see section 170(f)(8) and the related regulations for exceptions to this rule. Do not attach the acknowledgment to the return, but keep it with the organization's records.

For contributions of cash, check, or other monetary gifts (regardless of the amount), made in tax years beginning after August 17, 2006, the organization must maintain a bank record, or a receipt, letter, or other written communication from the donee organization indicating the name of the organization, the date of the contribution, and the amount of the contribution.

Contributions of property other than cash. If an organization contributes property other than cash and claims over a $500 deduction for the property, it must attach a schedule to the return describing the kind of property contributed and the method used to determine its fair market value (FMV). All organizations generally must complete and attach Form 8283, Noncash Charitable Contributions, to their returns for contributions or property (other than money) if the total claimed deduction for all property contributed was more than $5,000. Special rules apply to the contribution of certain property. See the instructions for Form 8283.

Special rules for contributions of certain easements in registered historic districts. The following rules apply to certain contributions of real property interests located in a registered historic district.

For contributions made after July 25, 2006, a deduction is allowed for the qualified real property interest, if the exterior of the building (including the front, side, rear, and space above the building) is preserved and no portion of the exterior is changed in manner that is inconsistent with its historical character. For more details, see section 170(h)(4)(B).
For contributions made after August 17, 2006, a deduction is allowed on the building only (no deduction is allowed for a structure or land) if located in a registered historic district. However, if listed in the National Register, a deduction is also allowed for structures or land areas. For more information, see section 170(h)(4)(c)
For contributions made in tax years beginning after August 17, 2006, the organization must also include the following information with the tax return.
1. A qualified appraisal (as defined in section 170(f)(11)(E)) of the qualified property interest,
2. Photographs of the entire exterior of the building, and
3. A description of all restrictions on the development of the building. See section 170(h)(4)(B)(iii).
The organization's deduction may be reduced if rehabilitation credits were claimed on the building. See section 170(f)(14).
A $500 filing fee may apply to certain deductions over $10,000. See section 170(f)(13).

Other special rules. The organization must reduce its deduction for contributions of certain capital gain property. See sections 170(e)(1) and 170(e)(5).

A larger deduction is allowed for certain contributions of:

Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (section 170(e)(3)), including contributions of “apparently wholesome food” (section 170(e)(3)(C)) and contributions of qualified book inventory to public schools (section 170(e)(3)(D)).
Of scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (other than by personal holding companies and service organizations), see section 170(e)(4).
Computer technology and equipment for educational purposes.

For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170, the related regulations, and Pub. 526, Charitable Contributions.

Line 21—Depreciation

Besides depreciation, include on line 21 the part of the cost, under section 179, that the organization elected to expense for certain tangible property placed in service during tax year 2006 or carried over from 2005. See Form 4562, Depreciation and Amortization, and its instructions.

Line 23—Depletion

See sections 613 and 613A for percentage depletion rates for natural deposits. Attach Form T, Forest Activities Schedules, if a deduction is taken for depletion of timber.

Line 24—Contributions to Deferred Compensation Plans

Employers who maintain pension, profit-sharing, or other funded deferred compensation plans are generally required to file Form 5500. This requirement applies whether or not the plan is qualified under the Internal Revenue Code and whether or not a deduction is claimed for the current tax year. Section 6652(e) imposes a penalty for late filing of these forms. In addition, there is a penalty for overstating the pension plan deduction. See section 6662(f).

Line 25—Employee Benefit Programs

Enter the amount of contributions to employee benefit programs (such as insurance, health, and welfare programs) that are not an incidental part of a deferred compensation plan included on line 24.

Line 28—Other Deductions

Enter on this line the deduction taken for amortization (see Form 4562) as well as other authorized deductions for which no space is provided on the return. Attach a separate schedule listing the deductions claimed on this line. Deduct only items directly connected with the unrelated trade or business for which income is reported in Part I.

Domestic production activities. Complete Form 8903 and enter the deduction on this line.

Energy efficient commercial buildings. You may deduct expenses for energy efficient commercial buildings placed in service after December 31, 2005. See section 179D.

Do not deduct fines or penalties paid to a government for violating any law.

Line 31—Net Operating Loss (NOL) Deduction

The NOL deduction is the total of the net operating loss carryovers and carrybacks that can be deducted in the tax year. To be deductible, an NOL must have been incurred in an unrelated trade or business activity. See section 172(a).

If any portion of any NOL is a qualified Gulf Opportunity Zone loss that was paid or incurred after August 27, 2005, and before January 1, 2008, the amount of the NOL may be eligible for a 5-year carryback. However, an organization may elect to treat a Go Zone public utility casualty loss as a specified liability loss to which the 10-year carryback period applies. See sections 172 and 1400N(k) for more information.

Enter on line 31, the total NOL carryover from other tax years, but do not enter more than the amount shown on line 30. Attach a schedule showing the computation of the NOL deduction. The amount of an NOL carryback or carryover is determined under section 172. See Regulations section 1.512(b)-1(e). For more information about NOLs, see Pub. 536, Net Operating Losses for Individuals, Estates and Trusts..

Line 33—Specific Deduction

A specific deduction of $1,000 is allowed except for computing the net operating loss and the net operating loss deduction under section 172.

Only one specific deduction may be taken, regardless of the number of unrelated businesses conducted. However, a diocese, province of a religious order, or convention or association of churches is allowed one specific deduction for each parish, individual church, district, or other local unit that regularly conducts an unrelated trade or business. This applies only to those parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association). Each specific deduction will be the smaller of $1,000 or the gross income from any unrelated trade or business the local unit conducts. If you claim a total specific deduction larger than $1,000, attach a schedule showing how you figured the amount.

The diocese, province of a religious order, or convention or association of churches must file a return reporting the gross income and deductions of all its units that are not separate legal entities. These local units cannot file separate returns because they are not separately incorporated. Local units that are separately incorporated must file their own returns and cannot be included with any other entity except for a title holding company. See the instructions under Consolidated Returns on page 5.