FOR LIVE PROGRAM ONLY UBTI and UBIT for Exempt...

WHO TO CONTACT DURING THE LIVE PROGRAM

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IMPORTANT INFORMATION FOR THE LIVE PROGRAM

This program is approved for 2 CPE credit hours. To earn credit you must:

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• To earn full credit, you must remain connected for the entire program.

UBTI and UBIT for Exempt Organizations:

Mastering Form 990-T

THURSDAY, JUNE 27, 2019, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

Tips for Optimal Quality FOR LIVE PROGRAM ONLY

Sound Quality

When listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, please e-mail [email protected]

immediately so we can address the problem.

June 27, 2019

UBTI and UBIT for Exempt Organizations

Anne K. Gerson, Counsel

Venable, Washington, D.C.

[email protected]

David Trimner, Principal

CliftonLarsonAllen, Washington, D.C.

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

David J. Trimner, CPA, [email protected](703) 663-0825

Anne K. [email protected](202) 344-4209

6

Outline

• Overview

– Trade or Business

– Regularly Carried On

– Unrelated to Mission

• Calculations and Schedules

– Rent

– Advertising

– Contractual Services

– Deductions

– Siloing

– Transportation Fringes

• Audit Triggers

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What is UBIT?

• General Rule: An organization recognized as tax-exempt does not pay federal income tax

• Exception: A tax-exempt entity must pay federal income tax at a corporate (or trust) rate if it has unrelated business income (UBI)

• “UBIT” = Unrelated business income tax

• “UBTI” = Unrelated business taxable income

• UBIT is imposed on an organization’s UBTI (tax is imposed on income)

8

What is UBIT?

Federal

• Currently, 21% tax rate (before the Tax Cuts and Jobs Act of 2017, it was 35%)

• Form 990-T, Unrelated Business Income Tax Return, when gross receipts from an unrelated business are $1,000 or more

• Form 990-T is available for public inspection (501(c)(3) organizations only)

State

• Certain states impose a tax on UBI generated

• Additional tax filings may be required

Penalties

• Failure to file

• Failure to pay estimated tax payments

• Late payment of tax

• Interest

9

What is UBIT?

Treas. Reg. Section 1.513-1(b): “The primary objective of adoption of the unrelated business income tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt organizations upon the same tax basis as the nonexempt business endeavors with which they compete….Activities of producing or distributing goods or performing services from which a particular amount of gross income is derived do not lose identity as trade or business merely because they are carried on within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization.”

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What is UBIT?

The size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function which they purport to serve.

If activities are conducted on a larger scale than necessary to fulfill exempt purposes, income from the “excess portion” will be subject to UBIT.

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UBI Defined – IRC § 512(a)(1)

Trade orBusiness

RegularlyCarried On

Not SubstantiallyRelated to

Exempt Purpose

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•Any activity carried on for the production of income from the sale of goods or the performance of services.

• Profit Motive Test

• Unfair Competition Test

• Commercial Manner Test

• Extensive Use of Resources

TRADE OR BUSINESS Reg. §1.513-1(b)

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Profit Motive Test – Reg. 1.183-2(b)• Manner in which the activity is carried on

• Expertise of taxpayer and advisors

• Time and effort expended

• Expectation that activity assets will appreciate

• Success experienced in carrying on the activity

• History of income or loss

• Amount of profit earned

• Financial status of the taxpayer

• Elements of personal pleasure or recreation

TRADE OR BUSINESS Reg. §1.513-1(b)

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• Is the activity’s frequency, continuity and manner of conduct comparable to commercial operations of similar for-profit organizations?

• Annually?

• Quarterly?

• Intermittently?

• Sporadically?

REGULARLY CARRIED ON Reg. §1.513-1(c)

15

NOT SUBSTANTIALLY RELATED Reg. §1.513-1(d)

• What is the relationship of the activity to the accomplishment of the exempt purpose (other than the destination of income)?

• What is the size and extent of the activity in relation to the nature and extent of the exempt function that they purport to serve? Is it excessive?

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• Is there a “causal relationship” between the activity and the exempt purpose?

• Is the causal relationship “substantial?”

• Does the activity “contribute importantly” to the mission?

• Facts and Circumstances

• Nature, scope, motivation

• Source of income, not destination of income

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• Passive Income

• Note: Private foundations and certain educational institutions are subject to an excise tax on net investment income

• Royalties

• Rent

• Capital Gains

─ Note: Controlled Entity Exception & Debt-Financed Income Exception

• Research-Generated Income

• Religious Services

• Electric Company Members

Modifications

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• Volunteers

• Convenience

• Conventions, trade shows and state fairs

• Bingo

• Donated merchandise

• Mailing list rental

• Qualified sponsorships

• Low-cost items in connection with solicitation

• Hospital services

• Agricultural and entertainment fairs

• Qualified pole rentals

• Debt management services

Exclusions

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• Income from, and deductible by, a controlled sub

• Interest

• Annuities

• Royalties

• Rent

• K-1, Box 20V (Form 1065)

• K-1, all income (Form 1120-S)

• Rental income from debt-financed property

Exceptions to the Exceptions

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UBI Analysis

Always begin with…

Trade orBusiness

RegularlyCarried On

Not SubstantiallyRelated to

Exempt Purpose

21

UBI Analysis

Then look for…

• Modifications

• Exclusions

• Court cases

But be aware of…

• Exceptions to the exceptions

22

Rental Income

• An exempt organization rents out a large portion of its office building; it charges rent to tenants whose activities are unrelated the organization’s exempt purpose

• There is a mortgage on the building

• The tenant occupies the first floor of a 12-story building

• An unrelated charity is the tenant

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Rental Income – When It Is Taxable

• Property is debt financed

• Tenant is a controlled corporation

• Based on a % of the tenant’s net income

• Includes payment for services

• >50% is attributable to personal property

• Lessor is a social club, VEBA or SUBT

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Rental Income – Acquisition Indebtedness

• Acquiring the property

• Improving the property

• Incurred prior to acquisition/improvement, but would not have been incurred but for the acquisition/improvement

• Reasonably foreseeable debt

• Exception: Property is subject to mortgage, acquired by gift or bequest

• Exception: The landlord is an educational organization

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Rental Income – An Example

In 2016, the Life Forever Foundation borrowed $450,000 to purchase an office building for its administrative offices. The debt is secured by a pledge of securities from the Foundation’s investment portfolio. In 2018, the Foundation moved its administrative staff out of the building and began renting it to the general public. At that point, the outstanding indebtedness was $340,000.

• What is the Foundation’s acquisition indebtedness in 2016?

• In 2018?

26

Rental Income – an Example

In 2016, the Life Forever Foundation borrowed $450,000 to purchase an office building for its administrative offices. The debt is secured by a pledge of securities from the Foundation’s investment portfolio. In 2018, the Foundation moved its administrative staff out of the building and began renting it to the general public. At that point, the outstanding indebtedness was $340,000.

• What is the Foundation’s acquisition indebtedness in 2016?

• In 2018?

Assume Big State University, an educational organization that maintains a regular faculty and curriculum and normally has regularly enrolled students in attendance where its educational activities are regularly carried on, does the same thing.

• What is the BSU’s acquisition indebtedness in 2016?

• In 2018?

27

Rental Income – an Example

1. On September 18, the Live Forever Foundation purchases a building with $100,000 down and a $300,000 mortgage. Beginning in October, the Foundation makes monthly payments of $10,000 plus interest, paid on the 15th of the month.

• What is the average acquisition debt?

2. The Foundation is allowed to take $4,000 of depreciation during the first year.

• What is the average adjusted basis of the property?

3. The Foundation earns $10,000 of rental income during the first year.

• How much of the rental income is subject to tax?

4. The Foundation incurs $7,000 of directly related office expenses during the first year.

• How much of the expenses may be deducted?

• Are there any indirect expenses that may be deducted?

28

Rental Income – Planning Tip

• Subdivide the property into its exempt purpose portion and its rental portion

• Apply cash down payment to the rental portion

• Accelerate payments on the rental portion

• Exempt purpose portion generates no taxable income regardless of leverage

Exempt Use PortionHighly Leveraged

Rental PortionNo Mortgage

29

Rental Income – Neighborhood Land Rule

Debt financed real property may produce income without generating UBI if:

• It is contiguous with exempt purpose property

• It is a continuous intention to use the land for exempt purposes within 10 years

• Existing structures will need to be demolished

• The property is not subject to a lease for a term of more than five years

• The IRS is given sufficient notice before the end of the fifth year

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Rental Income – Neighborhood Land Rule

Save the Whales (StW), a Section 501(c)(3) organization, wants to expand within the next seven years. It purchases a parcel of land with a building on it located a block away. A jewelry store currently rents the building, with a lease that expires in four years. StW makes a cash down payment and finances the purchase with a mortgage. It will allow the jewelry store to continue renting the property until the lease expires.

•Is the rental income taxable?

•What additional reporting obligation does StW have?

31

Selling Debt-Financed Property

• Determine the highest level of acquisition debt for the previous 12 months

• Divide by the average adjusted basis

• Multiply by the gain (or loss)

• If debt is retired more than 12 months prior to sale, none of the gain (or loss) is taxable

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Advertising

34

Advertising

35

Advertising

36

Advertising

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Florida Citrus Sports Association, Inc. Form 990 fye 3/31/17

• Statement of Revenue

• $7,008,730 Media Income

• $4,401,281 Ticket Sales

• $292,538 Concessions, Novelty Items, Etc.

• $1,181,543 Contributions

• $2,730 Investment Income

• $12,886,822 Total Revenue

• $0 Federal Income Tax

Advertising

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Advertising

39

Advertising

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Advertising Defined

Any message or material which promotes or markets any trade, business, service, facility or product using:

• Qualitative or comparative language

• Price information or other indications of savings or value

• Endorsements

• Inducement to purchase, sell or use any company, service, facility or product

A single message that contains both advertising and an acknowledgment is advertising.

Advertising

41

Qualified Sponsorship Payment (QSP) Defined (IRC 513(i))

A payment made by a trade or business where there is no arrangement or expectation of any substantial return benefit other than the use or acknowledgement of the name, logo or product lines of such trade or business. A QSP does NOT include:

• Qualitative or comparative language

• Price information or other indications of savings or value

• Endorsements

• Inducement to purchase, sell or use any company, service, facility or product

Advertising

42

Permissible QSP Acknowledgment (Reg. 1.513-4(c)(2)(iv))

• Exclusive sponsor arrangement

• Name, address, phone number, website and logo

• General description of the product line (“retailer of fine bathroom fixtures”)

• Visual depictions of the products and services

• Taglines (“The Ultimate Driving Machine”)

• Display or distribution of products

Advertising

43

Impermissible QSP Acknowledgment(Reg. 1.513-4(c))

A QSP may NOT include:

• Exclusive provider arrangement

• Goods, facilities, services or privileges

• Right to use exempt organization’s logo, trademark, patent, etc.

• Payments contingent on exposure

• Periodicals and Trade Shows are not QSPs

De Minimis benefits can be disregarded.

Advertising

44

Advertising

45

Advertising

46

Advertising

47

Advertising

48

Advertising

49

AdvertisingSponsorships

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Advertising That Is Not Regularly Carried OnNAT. COLLEGIATE ATHLETIC ASSN. v. COMM., 66 AFTR 2d 90-5602

• 129 pages

• Articles on New Orleans, Patrick Ewing, Michael Jordan, prior tournaments and the four schools

• 35% ads, $56,000 of ad revenue on gross receipts of $18.7M

• Nike, McDonald’s, Coca-Cola, Miller, ESPN, Texaco and Xerox

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•NCAA: Advertising is not UBI because the tournament is not regularly carried on

•IRS: The advertising is carried on during the entire tournament, which is the only “season” that matters

•Tax Court: The advertising activity occurs all year long, including soliciting orders and preparing the publication

Advertising That is Not Regularly Carried OnNAT. COLLEGIATE ATHLETIC ASSN. v. COMM., 66 AFTR 2d 90-5602

52

U.S. Court of Appeals, Tenth Circuit

•Commercial advertising is a year-round activity

•The business activity here is not the tournament, which is exempt, but the sale of ads, which is unrelated

•Distribution of programs to spectators occurred only three weeks during the year

•NOT regularly carried on

Advertising That is Not Regularly Carried OnNAT. COLLEGIATE ATHLETIC ASSN. v. COMM., 66 AFTR 2d 90-5602

53

• The Influenza Foundation prints a monthly magazine. Sweetsie Cola, Inc. purchases space for its name and logo, and simply states “Sweetsie Cola congratulates The Influenza Foundation for the excellent work in this year’s Marathon.”

• The Influenza Foundation receives a large check from Sweetsie Cola. In return, the Foundation will name a writing competition after Sweetsie Cola, and will only sell Sweetsie Cola products on campus.

Advertising - QSP

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Advertising - Exclusive Provider Arrangements

• An arrangement limiting the sale, distribution, availability or use of competing products, services or facilities

• Such payments are not qualified sponsorship payments, and may, under some circumstances, be unrelated business income

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• The Influenza Foundation organizes a marathon, and serves refreshments donated by Sweetsie Cola. Sweetsie Cola also provides prizes with Sweetsie’s logo. The Influenza Foundation prints flyers, banners and posters for the event, prominently featuring Sweetsie’s logo. It renames the event “The Influenza Foundation/Sweetsie Cola Marathon.”

• Same as above, except Sweetsie Cola stipulates that all items are a donation only if 1,000 or more people participate in the marathon.

Advertising - QSP

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A non-commercial broadcast radio station airs a program funded by The Music Shop. Is the following message advertising:

• “This program has been brought to you by the Music Shop, located at 123 Main Street. For your music needs, give them a call today at 555-1234. This station is proud to have the Music Shop as a sponsor.”

• “This program has been brought to you by the Music Shop, featuring the finest selection of music CDs and cassette tapes. This station is proud to have the Music Shop as a sponsor.”

• “This program has been brought to you by the Music Shop, located at 123 Main Street, 555-1234, www.musicshop.com. This station is proud to have the Music Shop as a sponsor.”

Advertising - QSP

57

Live Forever Foundation, a health-based charity, educates the public about a particular medical condition. Tri-State Pharma, Inc. (TSP) manufactures a drug that is used in treating the medical condition. TSP provides funding to the Foundation to produce educational materials and to post them on the Foundation’s website. The Foundation also posts TSP’s logo and a hyperlink to TSP’s website.

On the TSP website, the statement appears, “The Live Forever Foundation endorses the use of our drug, and suggests that you ask your doctor for a prescription if you have this medical condition.” The Foundation reviewed the endorsement before it was posted on the TSP’s website and gave permission for the endorsement to appear.

Advertising vs. Sponsorship

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As part of the funding, the Foundation is required to “Like” TSP on its Facebook page.


59


Separate from the funding, the Foundation agrees to “tweet” to its followers, encouraging them to visit TSP’s website to learn more about their products and services. In return, TSP will pay the Foundation a fee for each person who follows the tweeted hyperlink.


60


In conjunction with the funding, the Foundation voluntarily takes it upon itself to “tweet” to its followers, merely providing the hyperlink to TSP’s website. The Foundation receives nothing in return beyond the funding already provided by TSP. The Foundation is not obligated to send the tweets and nothing in the tweet can be considered an endorsement.


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•Gross Advertising Income

•Less Direct and Allocable Expenses

•Less Excess Readership Costs

•Circulation Income

•Readership Costs

Advertising Income: Periodicals and Website

62

The Save the Whales Foundation (StW), a Section 501(c)(3) organization, publishes a monthly magazine that is substantially related to its exempt purpose, but no attempt is made to solicit ads that relate to the exempt purpose. The magazine is provided for free to dues-paying members.

• During the current year, StW sold $25,600 in magazine advertising. The expenses of producing the magazine were $43,400.

Advertising Income fromPeriodicals

63



• StW assigns two paid staff members to spend a portion of their time creating the magazine, including soliciting ads and otherwise dealing with the advertising. If the magazine had 100 pages for the year, and 43.5 pages were advertising, what portion of total magazine costs may StW deduct from the advertising revenue?

• Can any of the remaining magazine expenses canbe deducted?


64



• StW assigns two paid staff members to spend a portion of their time creating the magazine, including soliciting ads and otherwise dealing with the advertising. StW calculates that $18,900 of the magazine expenses are directly allocable to the advertising, and $24,500 is allocable to the editorial content (readership costs).

• StW has 800 members who pay annual dues of $50/each. StWincurred $56,600 of costs on other exempt activities.

– What is StW’s circulation income?

– What are the excess readership costs?


65

$25,600 Gross Advertising Income

($18,900) Direct and Allocable Expenses

$6,700 Advertising Gain

$17,360 Circulation Income

($24,500) Readership Costs

($7,140) Excess Readership Costs, but limited to $6,700

$0 UBTI


Magazine Revenue

Magazine Expenses

66

• Would there be a different result if the publication was online instead of in printed form?– Report on Form 990-T Schedule I instead of Schedule J

– Calculate exploited activity gross income similar to circulation income

– Calculate exploited activity exempt expenses similar to readership costs

• Could StW convert the advertising income to a tax-free royalty by outsourcing the periodical to a third party?– Determine whether they give up all editorial control. Otherwise StW has

created a agency relationship, not a royalty.

Advertising Income from Periodicals

67

Contractual Obligations

Contracts or other agreements that obligate the nonprofit to perform certain acts or services in exchange for payment.

For example, in exchange for a large donation, the nonprofit agreesto encourage its members to use the donor’s goods and services,send out letters or emails to its members, monitor and report onresults, etc.

Services provided by an exempt organization to a donor can result in a substantial return benefit to the donor without advancing the mission. The organization should make a good-faith estimate of the fair market value of the services it is providing, and consider whether that portion of the payment is exempt-function income or UBI.

68

$100,000 License Agreement

Trial Balance/Audited Financial Statements

• Contribution?

• Sponsorship?

• Royalty?


69

The Save the Whales Foundation signs an agreement with Flyover Country Airlines.

The Foundation will:

• Grant a license to use its trademarks

• Provide a quarterly membership list, including physical and email addresses

• Send an email to its members, promoting the affinity agreement with Flyover

• Insert Flyover’s promotional material in its membership renewal notices

• Put Flyover’s logo on its homepage with a hyperlink

• Identify Flyover as the “preferred” airline of the Save the Whales Foundation

• Provide educational content to be featured on Flyover’s website


70

The Save the Whales Foundation signs an agreement with Flyover Country Airlines.

The Airline will:

• Obtain written approval of all promotional material using the trademarks

• Paint the Foundation’s logo and a depiction of a humpback whale on the body of 10 planes

• Pay a sponsorship of $100,000

• Pay the Foundation 1% of all tickets purchased by individuals following the hyperlink from the Foundation’s website

• Pay the Foundation 1% of all tickets purchased by members responding to a solicitation from Flyover


71

The Kids Hockey Foundation has a mission of mentoring troubled youths and giving them the opportunity to learn challenging skills through a structured athletic program.

The Foundation holds a celebrity golf event and reception dinner.

Platinum Sponsorship Package - $25,000

• Sponsorship recognition

• Four rounds of golf with a pro hockey player

• Brunch, dinner with all attendees

• Swag


72

Thank you for your Platinum Sponsorship of our Celebrity Golf Event. Wereceived your contribution for $25,000, and we are most grateful for yoursupport! A large portion of your sponsorship is tax deductible. As part of yoursponsorship, you received goods/services associated with the event with anestimated fair market value of $144; therefore, the deductible portion is$24,856.

Your generous support of the Kids Hockey Foundation will help us continue toadvance our mission to improve the lives of disadvantaged children in theregion.

On behalf of the Foundation’s Board of Directors,thanks again for your generous support.


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• $184 Green fees per golfer

• $146 Brunch, cocktails, dinner

• $16 Photo plaque

• $59 Golf trophy

• $85 Autographed hockey jersey

• $50 Polo shirt and hat

• $15 Golf balls

• $50 Gift certificate to golf pro shop

• $300 Gift certificate for team fan gear

• $905 Total


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Thank you for your $25,000 payment for the Platinum Sponsorship of our Celebrity Golf Event. You received goods/services associated with the event with an estimated fair market value of $3,620.

Your generous support of the Kids Hockey Foundation will help us continue to advance our mission to improve the lives of disadvantaged children in the region.

On behalf of the Foundation’s Board of Directors, thanks again for your generous support.


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77

Conventions/Trade Shows

Vendors exhibit products and services and promote public interest in the industry.

Income from such activity is excluded from UBI only when the activity is carried on by a qualifying organization in conjunction with a qualified convention or trade show. The purpose of the activity should be educating members, promoting products and services of the industry or educating persons attending the show concerning new developments or products and services related to the exempt activities.

78

Conventions/Trade Shows

The Live Forever Foundation conducts a trade show. Exhibitors pay $5,000 for a booth, and attendees pay $1,000/person.

The Platinum Sponsor pays $50,000 and receives:

• Link from website

• Logo on tote bag

• Free booth at the trade show

• Six admission tickets

• Right to introduce the keynote speaker

• Two full-page ads in the monthly magazine (FMV of $4,000/each)

How should the payment be shown on Form 990?

79

The use of a valuable intangible asset, such as a logo, copyright, trademark, etc., is excluded from UBI with certain exceptions

• Produced by debt-financed property

• Received from a controlled subsidiary

• Connected to the performance of services

Elimination would raise $1,800,000,000 of UBIT (JCT estimate)

Royalty IncomeIRC Sec 512(b)(2)

80

Royalty Income

Sale of jet fuel

Cash $$$$$$$$

Royalty payment$$$$$$$

81

Royalty Income

Sale of jet fuel

Cash $$

Royalty payment $$$$$$$

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• The rental of a mailing list between two public charities is excluded from UBI

• When a nonprofit rents its mailing list to a commercial enterprise or individual, the rules applicable to affinity card income generally apply

• Activity must remain passive

• May be prudent to use a list broker

Royalty IncomeIRC Sec 513(h)(1)(B)

83

Dual-Use Activities

• The exempt purpose of Charity X is to improve the quality of life for individuals suffering from Disease X

• Charity X maintains a vaccine manufacturing facility

• Facility manufactures vaccines to treat Disease X

• Facility also manufactures vaccines to treat Disease Y


84


Exploitation of an exempt activity

• The exempt purpose of Charity X is to improve the quality of life for individuals suffering from Disease X

• Charity X maintains a vaccine manufacturing facility

• Facility manufactures vaccines to treat Disease X

• Facility also manufactures vaccines to treat Disease Y

85

• A tax-exempt organization owns a parking garage used by the general public and charges an hourly fee

• A tax-exempt hospital owns a parking garage used by employees, physicians, patients and visitors, and charges an hourly fee

• The hospital leases the parking lots during non-business hours to local businesses and charges an hourly fee

• A tax-exempt organization leases the parking garage to a third-party operator

Parking Facilities

86

Red State Zoo Gift Shop1. T-shirts with animal pictures

2. T-shirts with animal pictures and a pamphlet describing the zoo’s efforts to preserve that animal species and habitat

3. Postcards and calendars of zoo animals

4. Postcards of the Red State City skyline

5. Camera film and batteries

6. Newspapers

7. Snack bar

8. Sale of items on the website

9. Gift wrapping

10. Stuffed animals

Gift Shops

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Gift Shops

88

Gift Shops

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UBIT Deductions

Allowable Deductions

• Ordinary and necessary

• Proximate and primary relationship to the business activity

• Related party rules

• UNICAP

• Meals and entertainment

• Fines and penalties

• Excess readership costs

90

UBIT DeductionsRensselaer Polytechnic Institute v. Commissioner

The Salamander Museum, an exempt organization, uses its auditorium for 160 days a year for exhibits and seminars related to its mission. Fifty days a year, the auditorium is used for concerts, movies and other activities unrelated to its mission.

• What portion of the indirect expenses of operating the auditorium are deductible?

• 50/210?

• 50/365?

• Some other allocation entirely?

91

Unrelated Business Income

• SPECIAL RULES

• Social clubs - IRC §501(c)(7)

• Voluntary employee benefit associations - IRC §501(c)(9)

• Unemployment compensation trusts - IRC §501(c)(17)

• Group legal service organizations - IRC §501(c)(20)

92

2017 Tax Act:UBI Tax Rate

92

2017 2018

Tax Brackets

15%

25%

35%

21%

9393

Rental Income from Debt-

Financed Property(Sch E)

Website Ads(Sch I)

Periodical Advertising

(Sch J)

Net Income: $5,000

Net Income: ($1,000)

Net Loss: ($10,000)

2017 Tax Act:Net Operating Losses

What is the UBTI in 2017? In 2018?

94

• Pre-January 1, 2018 NOLs

– Applicable to any activity

– Two-year carryback and 20-year carryforward

– May reduce up to 100% of UBTI

• Post-December 31, 2017 NOLs

– Applicable only to the same activity that generated it

– No carryback, indefinite carryforward

– May reduce up to 80% of UBTI

94


95

Planning Consideration: Create a for-profit subsidiary to hold unrelated business activities

– Activity-by-activity reporting is not required on Form 1120

– Creates additional filings and organizational complexity

– May create UBI issues if the nonprofit parent receives certain income from its taxable sub

◊ Interest

◊ Annuities

◊ Royalties

◊ Rent

95


9696

2017 Tax Act:UBI on Certain Expenditures

Transportation fringes

Parking

On-premise gym

Excessive compensation

Excessive parachute payments

9797

Provisions that Affect Nonprofits:UBI on Fringe Benefits

In 2018, employer provides $5,000 of transportation fringe benefits to employees and incurs $10,000 of

expense operating an on-premise gym

For-Profit Employer

$50,000 Net Income

$15,000 Disallowed Benefits

$65,000 Taxable Income

For Nonprofit Employer

$0 Unrelated Business Income

$15,000 Disallowed Benefits

$15,000 Taxable Income

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UBI or Potential UBI as a Trigger for Audit

• The IRS has announced it is taking a data-driven approach to reviewing the Form 990 and Form 990-T

The Form 990 reports UBI but the entity does not file a Form 990-T

Significant potential UBI, such as royalty income, may cause the IRS to investigate

Substantial UBI which may raise concerns regarding excess commerciality

David J. Trimner, [email protected]

Anne K. Gerson, [email protected]

FOR LIVE PROGRAM ONLY UBTI and UBIT for Exempt...

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