Unrelated Business Income Tax and Private Business Use Discussion

Transcription

1 Unrelated Business Income Tax and Private Business Use Discussion Chrissy Moffatt, Director, Taxation and Accounts Payable Ashley Raimondo, Tax Analyst August 1,

2 Agenda Introductions Learning Objectives Unrelated Business Income Tax Private Business Use Annual Survey Q&A 2

3 Learning Objectives To gain a general understanding of Unrelated Business Income and Private Business Use To be able to identify potential activities that could generate Unrelated Business Taxable Income, and/or be considered Private Business Use To understand the effects of Tax Reform on Unrelated Business Income To understand and be able to accurately complete the annual survey To know what actions to take when potential activities are identified 3

4 CMU s Vision and Mission Statement Vision Carnegie Mellon University will have a transformative impact on society through continual innovation in education, research, creativity, and entrepreneurship. Mission To create a transformative educational experience for students focused on deep disciplinary knowledge; problem solving; leadership, communication, and interpersonal skills; and personal health and well-being. To cultivate a transformative university community committed to (a) attracting and retaining diverse, world-class talent; (b) creating a collaborative environment open to the free exchange of ideas, where research, creativity, innovation, and entrepreneurship can flourish; and (c) ensuring individuals can achieve their full potential. To impact society in a transformative way regionally, nationally, and globally by engaging with partners outside the traditional borders of the university campus. 4

5 Unrelated Business Income Tax Ashley Raimondo Tax Analyst 5

6 Unrelated Business Income Tax Agenda What is Unrelated Business Income? Exclusions from UBI Deductions 2017 Tax Reform UBI Examples 6

7 Unrelated Business Income Tax What is Unrelated Business Income? Income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function. Trade or Business Regularly Conducted Not Substantially Related 7

8 Unrelated Business Income Tax What is Unrelated Business Income? Trade or Business Any activity conducted for the production of income from selling goods or performing services. Must exhibit intent to profit from the activity. If fees charged are substantially below the cost of its goods or services, the activity is not a trade or business. If the business is conducted in a competitive manner, then this demonstrates a profit motive. Regularly Conducted Must show a frequency and continuity, and is pursued in a manner similar to comparable commercial activities of nonexempt organizations. Activity should not be considered regularly conducted if it is on a very infrequent basis, or for a short period of time. Not Substantially Related Activity must contribute importantly to accomplish the university s exempt purpose. Whether an activity contributes importantly depends in each case on the facts involved. In determining whether activities contribute importantly, consider the size and extent of the activity. To the extent an activity is conducted on a scale larger than is necessary to perform an exempt purpose, then that activity does not contribute importantly to the accomplishment of the exempt purpose. 8

9 Unrelated Business Income Tax Exclusions from Unrelated Business Activities Volunteer Workforce Convenience of Members Selling Donated Merchandise Qualified Sponsorship 9

10 Unrelated Business Income Tax Exclusions: Qualified Sponsorship No substantial benefit received through sponsorship Use or acknowledgment of the business name Use of logo Cannot provide advertising 10

11 Unrelated Business Income Tax Deductions To qualify as allowable deductions in computing UBTI, the expenses, depreciation, and similar items must be allowable income tax deductions. 11

12 Unrelated Business Income Tax 2017 Tax Reform Tax Cuts and Jobs Act of 2017 Qualified Transportation Benefits are now considered UBI if offered to employees on a tax-free basis (i.e., PAT bus passes and pre-tax parking). UBI Income can be offset only with expenses that are directly connected to that specific activity (siloing). Previously expenses from all sources of UBI could be net against income from all UBI sources. Profitable UBI activities will generate a tax liability. Corporate Tax rate reduced to a flat 21% rate. Net Operating Loss (NOL) can be used to offset net income up to 80%. 12

13 Unrelated Business Income Tax UBI Examples Investment Income from Alternative Investments Catering Activities Parking Transportation Benefits Entertainment Events Corporate Sponsorship 13

14 Private Business Use Chrissy Moffatt Director, Taxation & Accounts Payable 14

15 Private Business Use Agenda Tax Exempt Bonds What is Private Business Use? UBI and PBU Relationship Required Actions Summary 15

16 Private Business Use Tax-Exempt Bonds As a 501(c)3 organization, CMU is eligible to issue bonds at taxexempt interest rates. These rates are lower than taxable rates and allow the investors to earn interest on which they do not have to pay income tax. As rates are not income-tax eligible, the IRS mandates certain rules related to how we spend the money, and subsequently how we use and manage the facilities or projects financed by the bonds. These rules apply to the bonds for as long as they are outstanding, including any refinancings. The rule is for the life of the bonds (including any refundings) plus three years. Our average debt issuances have about a 30-year life. 16

17 Private Business Use Tax-Exempt Bonds: Bond Issuance History 2012 Bonds $82.8M Outstanding 2009 Bonds $120M Outstanding 2008 Bonds $120.82M Outstanding 2017 Bonds $62.17M Outstanding 2013 Bonds $52.25M Outstanding 1998 bonds 2002 Bonds New Money 1995 Bonds 1988 Bonds 1985 Bonds 1984 Bonds 1983 Bonds 1982 Bonds 2006 Bonds 2007 Bonds 17

18 Private Business Use Facilities Funded with Tax-Exempt Bond Proceeds Building Name Tax-Exempt Bond Issue Building Name Tax-Exempt Bond Issue 4616 Henry Street 2008 ($120.82M) Skibo Gymnasium 2008 ($120.82M) Baker - Porter Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) The Gates and Hillman Centers 2008 ($120.82M), 2009 ($120M) College of Fine Arts 2012A ($32.805M), 2012B ($50M) Wean Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Doherty Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) 300 South Craig St ($120.82M) GSIA 2009 ($120M), 2012A ($32.805M), 2012B ($50M) 4516 Henry Street (UTDC) 2012A ($32.805M), 2012B ($50M) Hamburg Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) 6555 Penn Avenue 2008 ($120.82M) Hamerschlag Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) East Campus Garage 2008 ($120.82M), 2009 ($120M) Hunt Library 2012A ($32.805M), 2012B ($50M) Facilities Management Services Bldg 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Jared L. Cohon University Center 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Gesling Field 2012A ($32.805M), 2012B ($50M) Margaret Morrison Carnegie Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Richard M. Cyert Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Mellon Institute 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Warner Hall 2012A ($32.805M), 2012B ($50M) Newell-Simon Hall 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Whitfield Hall 2012A ($32.805M), 2012B ($50M) Purnell Center for the Arts 2012A ($32.805M), 2012B ($50M) Pittsburgh Technology Center 2012A ($32.805M), 2012B ($50M) Roberts Engineering Hall 2008 ($120.82M), 2012A ($32.805M), 2012B ($50M) Software Engineering Institute 2009 ($120M) 18 Scott Hall 2013 ($52.25M)

19 Private Business Use Facilities with Indirect Impact Only Building Name Indirect Use Elliott Dunlap Smith Hall Chilled water from FMS Campus Plant Gates Garage Chilled water from FMS Campus Plant Scaife Hall Chilled water from FMS Campus Plant Posner Center Chilled water from FMS Campus Plant Collaborative Innovation Center Chilled water from FMS Campus Plant 19

20 Private Business Use Why is This Important? Because the university issues tax-exempt bonds, certain rules apply to how we spend that money, and what we do in the space funded by that money. Failure to follow the rules jeopardizes the tax exempt status of the bonds: Immediate payoff of the bonds Event of default under all the university s debt Retroactive declaration by the IRS that the bond interest is taxable to the buyers University liable for associated tax and penalties Public disclosures, causing reputational issues Rating agencies could reduce the university s debt ratings Educating campus community helps to protect the bonds status and university assets. 20

21 Private Business Use What is Private Business Use? Relates to activities that occur in bondfinanced space Requirements Common Areas PBU and UBI Unrelated activity Special legal entitlement* to a third-party Result of a noncompliant research agreement or service/management contract Cannot exceed 3% over the life of the bonds Must be reported annually on the university s Form 990 Schedule K Research Contracts Management Contracts Leases Correlates closely to Unrelated Business Income If you have UBI, you have PBU *Special legal entitlement could be a share of profits (economic benefit) or related to the use of the bond-financed facility. 21

22 Private Business Use PBU and Research Contracts Permitted Research Basic research Any original investigation for the advancement of scientific knowledge not having a specific commercial objective Private Use Research Research that generates UBI Research that provides specific benefits to a sponsor Exclusive Paid License Nonexclusive Royalty Consortia 22

23 Private Business Use UBI and PBU Relationship Unrelated Business is PBU and the focus is on the activity: Where is this activity occurring? PBU can only happen in bondfinanced space What is happening in the space? If a CMU group is engaging in an unrelated business activity in this bond financed space- this is PBU PBU measurement calculated on a bond by bond-issuance basis by: Length of time using the space Amount of space used Revenue generated off of the space A combination thereof Who else is using the space/performing the activity? 23

24 Private Business Use Required Actions Complete the annual questionnaire. Consider new activities and whether they are in-line with our mission or give an unrelated third party special legal entitlement to profits or use of our facilities. ACTIVITY Research EXAMPLE Federal or corporate sponsor APPROPRIATE DEPARTMENT Office of Sponsored Programs Bring the appropriate team in early to the conversation to: Analyze the impact of the activity on the PBU calculations to see if allowable. Assist with negotiating the terms to avoid PBU issues. Management Contract or Lease Unrelated Business Activities New dining vendor, Leasing space to outside parties Conferences, camps Office of General Counsel Office of General Counsel 24

25 Private Business Use Summary PBU relates to activities that occur in bond-financed space and are: an unrelated activity and/or give special legal entitlement to a third-party and/or the result of a non-compliant research agreement or service/management contract Completion of the annual questionnaire helps in identifying PBU so it can be monitored and measured appropriately. Being able to identify new activities that could potentially be UBI or PBU will allow you to bring in the appropriate teams early enough on to: Analyze the impact of the activity on the PBU calculations to see if allowable If appropriate, assist with negotiating the terms to avoid PBU issues And, include any potential UBI tax implications into the budget 25

26 26 Annual Survey Q&A