Chapter 22. Exempt Entities. Eugene Willis, William H. Hoffman, Jr., David M. Maloney and William A. Raabe

Transcription

1 Chapter 22 Exempt Entities Eugene Willis, William H. Hoffman, Jr., David M. Maloney and William A. Raabe Copyright 2004 South-Western/Thomson Learning

2 Requirements For Exempt Status (slide 1 of 3) Serve the common good Group served may be broadly defined (general public) or or narrowly defined (credit union members) Not a for-profit entity C22-2

3 Requirements For Exempt Status (slide 2 of 3) Net earnings of the entity do not benefit members of the organization Prohibitions differ for various types of of exempt entities Code may preclude benefit of of any private shareholder or or individual, for for example, or or May say earnings must be be devoted to to specific cause (e.g., religious, charitable, etc.) C22-3

4 Requirements For Exempt Status (slide 3 of 3) The entity is is generally prohibited from attempting to influence legislation or participating in political campaigns This applies both to to positive (for a candidate) and negative (against a candidate) influence C22-4

5 Examples Of Exempt Organizations(slide 1 of 4) Federal and related agencies Religious, charitable, educational, scientific, literary, etc. organizations Civic leagues and employee unions Labor, agricultural, and horticultural organizations C22-5

6 Examples Of Exempt Organizations(slide 2 of 4) Business leagues, chambers of commerce, real estate boards, etc... Social and fraternal clubs and societies Local teachers retirement fund associations Cemetery companies C22-6

7 Examples Of Exempt Organizations(slide 3 of 4) Credit unions Mutual insurance companies Corporations organized by farmers cooperatives for financing crop operations Armed forces members posts or organizations Group legal service plans C22-7

8 Examples Of Exempt Organizations(slide 4 of 4) Religious and apostolic organizations Cooperative hospital service organizations Cooperative service organizations of educational institutions Qualified state tuition programs C22-8

9 Consequences Of Exempt Status General (slide 1 of 2) Exempt from Federal income tax Exempt from most state and local income, franchise, sales, and property taxes Qualify for reductions in in postage rates Gifts to to the organization often can be deducted by donor C22-9

10 Consequences Of Exempt Status Exceptions (slide 2 of 2) May be subject to to Federal income tax associated with the following: Engaging in in a prohibited transaction Being a feeder organization Being a private foundation Generating unrelated business taxable income C22-10

11 Engaging In Prohibited Transactions May result in: Part or or all of of organization s income being subject to to federal income tax Forfeiture of of exempt status Imposition of of intermediate sanctions on certain insiders C22-11

12 Allowable Lobbying Costs (slide 1 of 6) Generally, organizations will lose their exempt status if if they attempt to to influence legislation or or participate in in political campaigns Limited lobbying can be conducted by many of of these 501(c)(3) organizations, if if so so elected Churches and and private foundations cannot conduct lobbying activities under this this rule rule C22-12

13 Allowable Lobbying Costs (slide 2 of 6) A ceiling applies to the amount of allowable lobbying expenditures under the election Exceeding the ceiling can result in in loss of of exempt status Also, a tax may be imposed on a portion of of lobbying expenditures C22-13

14 Allowable Lobbying Costs (slide 3 of 6) Lobbying expenditures defined Attempting to to affect opinions of of the general public or or any segment thereof Communicating with any legislator or or staff member or or with any government official or or staff member who may participate in in the formulation of of legislation C22-14

15 Allowable Lobbying Costs (slide 4 of 6) The statutory ceiling on lobbying expenditures is is computed as follows: 150% X Lobbying Nontaxable Amount Tax: 25% X excess expenditures over Lobbying Nontaxable Amount C22-15

16 Allowable Lobbying Costs (slide 5 of 6) Grass Roots Expenditure Expenditures to to influence legislation through attempting to to affect the opinions of of the general public or or any segment thereof C22-16

17 Allowable Lobbying Costs (slide 6 of 6) Ceiling: 150% X Grass Roots Nontaxable Amount Grass Roots Nontaxable Amount is is 25% of of Lobbying Nontaxable Amount Tax: 25% X excess expenditures over Grass Roots Nontaxable Amount C22-17

18 Calculation Of Lobbying Nontaxable Amount (slide 1 of 2) Exempt Purpose Expenditures Not Not over over $500,000 Lobbying Nontaxable Amount Is Is 20% 20% of of exempt purpose expenditures* Over Over $500,000 but but $100, % 15% of of the the excess of of exempt not not over over $1 $1 million purpose expenditures over over $ 500,000 Over Over $1 $1 million but but not not over over $1.5 $1.5 million Over Over $1.5 $1.5 million $175, % 10% of of the the excess of of exempt purpose expenditures over over $1 $1 million $225, % 5% of of the the excess of of exempt purpose expenditures over over $1.5 $1.5 million C22-18

19 Calculation Of Lobbying Nontaxable Amount (slide 2 of 2) *Exempt purpose expenditures generally are the amounts paid or or incurred for the taxable year to to accomplish the following purposes: religious, charitable, scientific, literary, educational, fostering national or or international amateur sports competition, or or the prevention of of cruelty to to children or or animals. C22-19

20 Exempt Organizations And Influencing Legislation Factor Tax Result Entity subject to to rule 501(c)(3) organization Effect of of influencing Subject to to tax tax on on lobbying legislation expenditures under 4912 OR may forfeit exempt status OR not eligible for for exempt status ( 501(c)(4) Effect of of electing to to Subject to to tax tax under make ltd. lobbying exp C22-20

21 Feeder Organizations (slide 1 of 2) Carries on a trade or business for the benefit of an exempt organization and remits its profits to the exempt organization Not exempt from federal tax Prevents exemption from tax simply because all profits are payable to to an exempt organization C22-21

22 Feeder Organizations (slide 2 of 2) Some income and activities not subject to the feeder organization rules include: Rent income if if excluded for purposes of of unrelated business income tax Trade or or business where substantially all work is is performed by volunteers Trade or or business of of selling goods where substantially all the goods were received as as contributions or or gifts C22-22

23 Consequences Of Private Foundation Status (slide 1 of 3) In general, a private foundation is is classed as such because it it serves a more narrowly defined common good It It lacks an approved exempt purpose, or or Does not receive broad public financial support C22-23

24 Consequences Of Private Foundation Status (slide 2 of 3) Private foundations compared to to other exempt entities: Private Not a Private Foundation Foundation Eligible for for exempt status? Yes Yes Most beneficial Depends. No, if if the the Yes charitable contribution private foundation deduction treatment is is classified as as a available to to donors? private nonoperating foundation. C22-24

25 Consequences Of Private Foundation Status (slide 3 of 3) Private foundations compared to to other exempt entities: Private Not a Private Foundation Foundation Subject to to excise taxes levied on on prohibited transactions? Yes No No Subject to to tax tax on on unrelated business income? Yes Yes C22-25

26 Taxes Imposed On Private Foundations (slide 1 of 2) Initial Additional Type Type of of Tax Tax Section Purpose Tax Tax Tax Tax On On investment Audit fee fee to to defray IRS IRS 2%* 2%* income expenses. On On self-dealing Engaging in in transactions 5%** 200%** with with disqualified persons. On On failure to to Failing to to distribute 15% 15% 100% distribute adequate amount of of income income for for exempt purposes. *May be be possible to to reduce the the tax tax rate rate to to 1%. 1%. Also, an an exempt operating foundation is is not not subject to to the the tax. tax. **Imposed on on the the disqualified person, not not the the foundation. C22-26

27 Taxes Imposed On Private Foundations (slide 2 of 2) Initial Initial Additional Type Type of of Tax Tax Section Section Purpose Purpose Tax Tax Tax Tax On On excess excess Investments that that enable enable the the 5% 5% 200% 200% business holdings private private foundation to to control control unrelated businesses On On jeopardizing Speculative investments 5% 5% 25% 25% investments that that put put the the private private foundation's assets assets at at risk risk On On taxable taxable Expenditures that that should should 10% 10% 100% 100% expenditures not not be be made made by by private private foundations C22-27

28 Taxes On Foundation Managers Initial Initial Additional Type Type of of Tax Tax Section Section Purpose Purpose Tax Tax Tax Tax On On self-dealing Engaging in in transactions 2.5%* 2.5%* 50%* 50%* with with disqualified persons persons On On jeopardizing Speculative investments 5%** 5%** 5%* 5%* investments that that put put the the private private foundation's assets assets at at risk risk On On taxable taxable Expenditures that that should should 2.5%** 2.5%** 50%* 50%* expenditures not not be be made made by by private private foundations *Subject to to a a statutory ceiling ceiling of of $10,000 $10,000 **Subject to to a a statutory ceiling ceiling of of $5,000 $5,000 C22-28

29 Unrelated Business Income Tax Purpose (slide 1 of 6) To To tax tax the the entity on on unrelated business income as as if if it it were subject to to the the corporate income tax tax Applicable tax rates Corporate tax tax rates Exempt organizations to to which applicable All organizations exempt under 501(c) except Federal agencies C22-29

30 Unrelated Business Income Tax (slide 2 of 6) Entities subject to the tax The organization conducts a trade or or business The trade or or business is is not substantially related to to the exempt purpose of of the organization, and The trade or or business is is regularly carried on by the organization C22-30

31 Unrelated Business Income Tax (slide 3 of 6) Trade or business is is broadly defined Includes any activity for the production of of income through the sale of of merchandise or or the performance of of services To be related to the exempt purpose, the activity must be causally related and contribute importantly to the exempt purpose C22-31

32 Unrelated Business Income Tax (slide 4 of 6) Exceptions to the tax All work is is performed by volunteers Substantially all merchandise being sold was received as as gifts C22-32

33 Unrelated Business Income Tax (slide 5 of 6) Exceptions to to the tax (cont d) For 501(c)(3) organizations, the the business is is conducted primarily for for the the benefit of of the the organization s members, students, patients, officers, or or employees For most employee unions, the the trade or or business consists of of selling to to members work-related clothing and equipment and items normally sold through vending machines, snack bars, or or food dispensing facilities C22-33

34 Unrelated Business Income Tax $1,000 provision (slide 6 of 6) If If the gross income from an unrelated trade or or business is is less than $1,000, it it is is not necessary to to file a return associated with the unrelated business income tax C22-34

35 Corporate Sponsorship Payments Not treated as unrelated trade or business if: There is is no arrangement or or expectation of of substantial benefits for the payment other than use of of its name, logo or or product lines in in connection with the activities of of the exempt organization (not advertising the payor s products or or services) Payment is is not contingent on attendance, ratings, etc C22-35

36 Bingo Games A qualified bingo game is is not an unrelated trade or business if: Game is is legal under state and local law Commercial bingo games are not allowed in in the jurisdiction C22-36

37 Distribution Of Low-Cost Articles If If organization distributes low-cost items as part of its solicitation for charitable contributions, not treated as unrelated business Low-cost articles cost $8.00 or less (indexed annually) e.g., Pens, stamps, stickers, address labels C22-37

38 Unrelated Business Income Tax is is only assessed if: Exempt organization regularly conducts the activity Considers frequency, continuity, and manner in in which the the activity is is pursued The activity produces unrelated business income Income from the the unrelated trade or or business reduced by by deductions directly connected to to the the activity C22-38

39 Unrelated Business Taxable Income (slide 1 of 9) Gross unrelated business income Less deductions = Net unrelated business income ± Modifications Unrelated business taxable income(ubti) C22-39

40 Unrelated Business Taxable Income (slide 2 of 9) Positive Adjustments Charitable contribution deduction in in excess of of 10 % of of UBTI Unrelated debt-financed income net of of unrelated debt-financed deductions Certain interest, annuity, royalty and rent income received from an organization it it controls (80% test) C22-40

41 Unrelated Business Taxable Income (slide 3 of 9) Negative Adjustments Income from dividends, interest, and annuities net of of directly related deductions Royalty income net of of directly related deductions C22-41

42 Unrelated Business Taxable Income (slide 4 of 9) Negative Adjustments (cont d) Rent income from real property and from certain personal property(if leased with real property) net net of of directly related deductions Personal property rent must be be incidental (10% or or less of of income under the the lease) to to be be used in in computing the the negative adjustment None of of rent income is is a negative adjustment if: if: > 50% 50% of of rent rent under under the the lease lease is is from from personal property Rent Rent income income is is calculated using using the the tenant s tenant s profits profits C22-42

43 Unrelated Business Taxable Income (slide 5 of 9) Negative Adjustments (cont d) Gains and losses from sale, exchange, or or other disposition of of property except for for inventory Certain research income net net of of directly related expenses To To the the extent that charitable contributions exceed those deducted in in calculating net net UBI, the the excess is is a negative adjustment A deduction of of $1,000 is is allowed C22-43

44 Unrelated Business Taxable Income (slide 6 of 9) Unrelated debt-financed income is is a positive adjustment Debt-financed income is is gross income from debt-financed property C22-44

45 Unrelated Business Taxable Income (slide 7 of 9) Unrelated debt-financed income is is a positive adjustment (cont d) Debt-financed property is is all all property held held to to produce income on on which there there is is acquisition indebtedness except: Property where substantially all all (at (at least least 85%) of of use use is is for for exempt purpose Property whose gross income is is from from research for for various organizations Property used used in in an an activity that that is is not not an an unrelated trade trade or or business C22-45

46 Unrelated Business Taxable Income (slide 8 of 9) Unrelated debt-financed income is is a positive adjustment (cont d) Once debt-financed income and deductions are determined, the portion constituting unrelated debt-financed income and deductions must be determined Unrelated debt-financed income increases UBTI Unrelated debt-financed deductions decrease UBTI C22-46

47 Unrelated Business Taxable Income (slide 9 of 9) Unrelated debt-financed income is is a positive adjustment (cont d) Calculation of of unrelated debt-financed income is is made for each property using the following formula: Gross income X Ave acq. indebtedness from property Ave adj. basis of of property C22-47

48 Annual Filing Requirements (slide 1 of 2) Most exempt organizations are required to to file an annual information return with the IRS Return filed Form 990 (Return of of Organization Exempt from Income Tax) Due date is is 15th day of of fifth month after year-end C22-48

49 Annual Filing Requirements Additional returns: (slide 2 of 2) Form 990-T (Exempt Organization Business Income Tax Return) if if at at least $1,000 gross income from unrelated trade or or business Form 4720 (Return of of Certain Excise Taxes on Charities and Other Persons) if if an exempt organization is is subject to to any excise taxes imposed on private foundations C22-49

50 If If you you have any any comments or or suggestions concerning this this PowerPoint Presentation for for West's Federal Taxation, please contact: Dr. Dr. Donald R. R. Trippeer, CPA Colorado State University-Pueblo C22-50