24 th Annual Health Sciences Tax Conference

Transcription

1 24 th Annual Health Sciences Tax Conference Assorted tax topics things you may not want to miss December 8, 2014

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S. This presentation is 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Ben Pitchkites Ernst & Young LLP Indianapolis, IN Mike Vecchioni Ernst & Young LLP Detroit, MI Saul Tilmann Ernst & Young LLP Chicago, IL Page 3

4 Agenda Current issues for group purchasing organizations Group returns for exempt organizations FATCA Unrelated business income tax developments Advisory Committee on Tax Exempt and Government Entities (ACT) UBTI reporting Open discussion questions Page 4

5 Current issues for group purchasing organizations Page 5

6 Group purchasing organizations (GPOs) A GPO is an intermediary that negotiates contracts for medical equipment or supplies on behalf of its members. GPOs are becoming increasingly more attractive. Health providers voluntarily belong to GPOs to obtain: Better prices and services from the vendors on contract Lower expenses associated with having to negotiate and administer purchasing contracts Assistance with resolving product failures The GPO helps organizations by negotiating discounts empowered through the combined purchasing volume. Because GPO members and/or customers are most often its owner and/or partner or shareholder, their interests and incentives are aligned. Page 6

7 GPOs contracting process GPOs create portfolios of contracts with various wholesalers/distributors/vendors. Most agreements are long-term, so the amount of work saved by the hospital is substantial and helps keep costs down. These portfolios of contractual relationships are offered to hospitals and other health care providers. GPOs do not buy products and don t take title to them. The wholesaler-distributor takes title to the product and is responsible for the delivery of the product to the buyer. The hospital orders products at its convenience, subject to the terms and conditions of the contract, without having to negotiate each purchase individually. The hospital can still purchase non-gpo-contracted items. Page 7

8 GPOs administrative fees Vendors typically pay contract administrative fees to finance the GPOs operating expenses. The fee offsets the cost of GPOs for: Staff and offices Research on products Publicizing products to their members/clients Counseling members/clients on how to efficiently use the products Administrative fees are generally paid by a vendor when a GPO s member or client makes use of a GPO contract. It is paid, in part, as incentive for the closing of a specific sale between the vendor and the member or client. The fee is based upon a percentage of the purchase price that the member or client pays for the product purchased. Page 8

9 GPOs administrative fees Administrative fees motivate vendors to provide deeper discounts and encourage health care members to amass purchasing volume to get better prices. Administrative fees allow hospitals and other health care providers participating in the GPO to have more financial resources dedicated to the direct provision of their mission. GPOs are required to report all administrative fees to their clients, and the clients must report this to Medicare as part of their cost report. If the GPO has a surplus, the GPO typically returns an efficiency dividend to its member hospitals. The characterization of the income depends on the GPO s status. Page 9

10 GPOs structural considerations Tax-exempt cooperative Nonexempt Subchapter T cooperative Limited liability company (LLC) Partnership Corporation Page 10

11 GPOs as tax-exempt entities The providing of shared services, such as group purchasing, to otherwise unrelated charitable organizations is not, in and of itself, charitable but rather is an ordinary business activity (see Revenue Ruling , C.B. 127). A shared service organization does not independently qualify under Internal Revenue Code (IRC) 501(c)(3) and therefore shared services are not exempt activities in furtherance of IRC 501(c)(3) purposes. Therefore, shared service activities are not exempt activities within the meaning of IRC 501(c)(3). An organization whose primary purpose is providing shared services can be exempt only if it is organized and operated in accordance with IRC 501(e). Its shared service activity must be listed in 501(e). Page 11

12 GPOs IRC 501(e) cooperatives An IRC 501(e) entity qualifies for exemption as an organization described in IRC 501(c)(3). It is also entitled to other benefits available to IRC 501(c)(3) organizations. To receive tax-deductible contributions To use the proceeds of qualified IRC 501(c)(3) bonds To purchase IRC 403(b) tax-sheltered annuities for its employees To be treated as an IRC 501(c)(3) organization for employment tax purposes Page 12

13 GPOs IRC 501(e) cooperatives IRC 501(e) was intended to encourage cooperative activities between and among hospitals to make the health care industry more cost effective. A cooperative returns its earnings to its members or shareholders on the basis of the amount of business done by the members or shareholders during the year, rather than on the basis of invested capital. The IRC 501(e) entity must allocate or pay all of its net earnings within 8-1/2 months after the close of its taxable year to its patron hospitals on the basis of the percentage of its services performed for each one. The percentage of services may be determined on either the value or the quantity of services, whichever basis is realistic. Page 13

14 GPOs Subchapter T cooperatives IRC Subchapter T cooperatives are business organizations formed by persons joining together for joint purchasing, marketing, selling of supplies, etc. for the benefit of the members. What is fundamental to operating on a cooperative basis is a mutual joinder of interests in the risks and benefits of the organization. In general, a Subchapter T cooperative is an organization that does not operate for profit, but instead returns net earnings to its patrons. A Subchapter T cooperative can deal with persons who aren t members, and members and nonmembers don t have to be treated equally. It may elect to return net earnings only to those parties who are members. Page 14

15 GPOs LLCs and partnerships A partnership or an LLC can house a GPO. It is necessary to look through the partnership to determine whether the partnership s activities are substantially related to the partner s exempt purposes. An LLC defaults to treatment as a partnership for tax purposes. If an exempt partner s share of administrative fees in its distributable partnership income is no greater than what it would have received based on its actual purchases, then its share of partnership income is not unrelated business income (UBI). If the administrative fees allocated to the exempt partner are greater than the fees it would have received based on its actual purchases, then the excess fees would be UBI. Page 15

16 GPOs as taxable corporations If a GPO is structured as a regular C corporation, then the GPO is subject to income tax on its taxable income. A tax-exempt shareholder s dividend income from a C corporation GPO will not be taxable UBI, unless the shareholder incurred acquisition indebtedness to acquire stock in the GPO, causing its stock investment to be treated as debt-financed property. If the GPO is structured as an S corporation, the taxexempt shareholder s distributable share of flow-through S corporation income is automatically treated as UBI by reason of IRC 512(e). Page 16

17 Group returns for exempt organizations Page 17

18 Advantages of group exemptions Administrative convenience Ability to file a group return for all subsidiaries Flexibility to opt-in or opt-out of group return on an annual basis Potential ability to reduce disclosure of highest-paid employees (not officers, directors, key employees) as well as highest-paid independent contractors Opportunity to present a combined reporting of charity care and other community benefit activity (Schedule H) Parent (i.e., central organization) can elect to disclose compensation of its officers, directors, key employees on the group return rather than on its own return Ability of competitors or others (e.g., unions) to obtain financial information about individual entities is limited since all electing subsidiaries will be in the group return Page 18

19 Basics of group returns Central organization can file a group return for two or more subordinate organizations that are: Affiliated with the central organization at the time its annual accounting period ends Subject to the central organization s general supervision or control Exempt from tax under a group exemption letter Using the same accounting period as the central organization Subordinate may elect to file a separate return. Every year, each subordinate organization must authorize the central organization in writing to include it in the group return. All subordinates must file Form 990-T and state returns on a separate entity basis as required. Page 19

20 2013 Form 990 instructions on group returns General instructions provide: Central organization must aggregate the data from all the subordinates included in the group return and report the aggregate number. If line item requires a yes/no answer and the answer is not the same for all subordinates, then state yes and explain the answer in the Schedule s supplemental information section or in Schedule O. Exceptions for certain lines, state no if the answer is no for any of the subordinates and explain in Schedule O. Page 20

21 2013 Form 990 instructions on group returns Part V, lines 1c, 2b, 3b, 5c, 6b, 7b, 7g, 7h Part VI, lines 8a, 8b, 10b, 12b, 12c Schedule C (political campaign and lobbying), Part I-B, lines 3 and 4a Schedule C, Part I-C, line 4 Schedule C, Part II-A, line 1j Schedule C, Part II-B, line 2d Schedule C, Part III-A, lines 1-3 Schedule D (supplemental financial information), Part I, lines 5 and 6 Schedule D, Part II, lines 5 and 8 Schedule E (schools), lines 1-4d and 7 Schedule F (activities outside US), Part I, line 1 Schedule G (fundraising and gaming activities), Part III, line 9a Schedule I (grants), Part I, line 1 Schedule J (comp information), Part I, lines 1b and 2 Schedule M (noncash contributions), Part I, line 31 Schedule N (liquidity, termination, dissolution), Part I, lines 3, 5b, 6, 7b Page 21

22 Specific instructions for group returns Part VII of Form 990 compensation of officers, etc. File a single consolidated Part VII showing the officers, directors, trustees and key employees of each subordinate included in the group return, and a single consolidated Schedule J, Part II for all such officers, directors, trustees and key employees above the compensation thresholds. Report five highest compensated employees and independent contractors above $100,000 for the whole group of subordinates (not for each subordinate). Report compensation from an organization that is not among the subordinates included in the group return as compensation from a related organization in column (E), even if the related organization is not required to be reported on Schedule R (Form 990), Related Organizations and Unrelated Partnerships. Page 22

23 Group returns Schedule A Schedule A, Part I reason for public charity status If subordinates do not all have the same public charity status, then check the public charity status box for the largest number of subordinates in the group and explain in Part IV. Schedule A, Part I reason for public charity status If any IRC 509(a)(3) organizations are among the subordinates in the group return, also answer lines 11e through 11h. Schedule A (Form 990 or 990-EZ). Parts II and III support schedules. Report aggregate data for all subordinates with the public charity status corresponding to Parts II or III. Page 23

24 Group returns Schedules B, C and D Schedule B: Contributors Report a consolidated Schedule B for all subordinates included in the group return. Apply the dollar and percentage thresholds subordinate by subordinate, not on a group basis. Schedule C Part II-A: Lobbying expenditures Complete column (b) for the group as a whole. If the group return includes organizations that belong to more than one affiliated group, enter in column (b) the totals for all the groups. In column (a), except on lines 1g and 1h, include the amounts that apply to all electing members of the group if they are included in the return. Schedule D Part X: Other liabilities Summarize that portion of the FIN 48 (ASC 740) footnote that applies to the liability of multiple organizations including the organization (e.g., as a member of a group with consolidated financial statements), to describe the filing organization s share of the liability. Page 24

25 Group returns Schedules L and N Schedule L: Transactions with interested persons In Part IV, report only transactions between a subordinate organization and its interested persons not transactions between a subordinate organization and the interested persons of other subordinates. In determining whether a transaction meets the financial reporting thresholds of Schedule L, Part IV, consider only the payments between the subordinate and its interested persons, not payments between interested persons and the parent or other subordinates. Schedule N: Liquidation or significant disposition of assets. Explain in Part III which of the subordinates have undergone a liquidation, termination, dissolution or significant disposition of assets during the tax year. Page 25

26 Group returns Schedule R Schedule R: related organizations Central organizations and subordinate organizations of a group exemption are not required to be listed as related organizations in Schedule R, Part II. Related organizations that the central organization knows to be included in another group exemption are not required to be listed in Schedule R, Part II. All other related organizations of the central organization or of a subordinate are required to be listed in Schedule R. Even if a related organization is not required to be listed in Part II of Schedule R, the organization must report its transactions with the related organization in Part V. Page 26

27 Group returns Schedule H advantages A health system can file a combined Schedule H to report community benefit and charity care. Ability to include information from nonhospital subordinates Instructions provide, in part, to include information: In the case of a group return filed by the organization, hospitals operated directly by members of the group exemption included in the group return and other facilities or programs of a member included in the group return even if such facilities are not hospitals or if such programs are provided separately from the hospital s license Page 27

28 Foreign Account Tax Compliance Act (FATCA) Page 28

29 What is FATCA? FATCA overview The Foreign Account Tax Compliance Act (FATCA) is a 2010 US tax law designed to identify US taxpayers who may be avoiding US taxation through investing in offshore investment vehicles. FATCA introduces new documentation standards, information reporting requirements and compliance requirements for all entities as payors. FATCA is effective on July 1, 2014, for US withholding agents and for foreign (non- US) financial institutions (FFIs). As payee and payor, FFIs will be required to enter into agreements with the Internal Revenue Service (IRS) to become participating FFIs or they may be subject to new withholding requirements. FATCA imposes a 30% withholding tax on certain US-source payments made to entities that choose not to participate in FATCA and payees that refuse to be documented. The IRS recently released Chapters 3, 4 and 61 Conformity Regulations and updated the FATCA regulations released last year. The conformity regulations make major changes to all US payors rules and responsibilities. FATCA s impact on multinational companies FATCA applies to all entities, but the impact on each entity will vary based on footprint and business lines. FATCA presents financial risks and operational challenges for most companies. FATCA will impact US entities as payors and multinational entities as both payors and payees. Why is FATCA important? 30% withholding tax applies to noncompliant organizations. Failure to comply with FATCA will make it difficult to do business with other compliant institutions. FATCA will impact business operating models from vendor onboarding to operations and compliance. The identification of affected payors and payees needs to be accomplished quickly to enable an effective communication strategy and action plan. Page 29 29

30 FATCA vs other US tax information reporting regimes: Chapters 3, 4 and 61 Chapter 61 (Form 1099) Reporting on US and foreign source income paid to US persons (i.e., Form 1099 reporting); backup withholding applicable only where Taxpayer Identification Number (TIN)/documentation requirements not met Purpose: enables IRS to match income paid with tax filings of US recipients Chapter 3 (Section 1441) Withholding (generally at 30%) and reporting on certain US source income paid to foreign persons (i.e., 1441); also addresses effectively connected income of foreign partners and gains from real property Collect tax on US source income of foreign persons Chapter 4 (FATCA) FATCA (effective July 1, 2014): collection, validation and reporting of certain information and documentation to identify offshore investments of US persons Ensure US persons pay tax on income received through offshore investment Page 30

31 FATCA withholdable payments and exclusions Following are FDAP types included or excluded from FATCA (Chapter 4). Note: FDAP is fixed, determinable, annual or periodical income. All FDAP is subject to Chapters 3 and 61 unless specifically excluded by related guidance. Included Excluded Bank and brokerage fees Investment advisory fees Custodial fees (e.g., fund manager fees) Payments in connection with lending transactions Forward, futures, option or notional principal contracts Insurance premiums and annuities Dividends on US securities Interest (with certain exceptions) Original issue discount (OID) (excluding short term) Certain dividend equivalent payments Financing leases Payments for tangible goods Fees paid for nonfinancial services (e.g., fees paid to an engineering consultant) Software licenses Rent for office space Use of other property (e.g., royalty or intellectual property) Freight/transportation expenses Interest on outstanding bills arising from services Interest on deferred purchases (e.g., goods purchased on credit) Lease payments on equipment Page 31

32 FATCA global legal entity classification A multinational organization must classify its entities into three general categories, as follows: US entities/us withholding agents Foreign financial institutions (FFIs) Nonfinancial foreign entities (NFFEs) A US entity must generally provide a Form W-9 to payors to document itself as a US person. In the absence of a Form W-9, complex presumption rules must be applied to determine US vs non-us status. In general, presumption rules cannot reduce withholding. An FFI must generally provide a Form W-8BEN-E with a US Global Intermediary Identification Number (GIIN). An NFFE must generally provide a Form W-8BEN-E and a certification with respect to substantial US owners. Page 32

33 FATCA captive insurance companies A captive insurance company can be considered (a) a US person, (b) an NFFE or (c) an FFI depending on the facts and circumstances. See Treas. Regs (e)(1)(iv). Basically, under the Treas. Regs., a specified insurance company is an insurance company that issues either cash value insurance contracts or annuity contracts. If an insurance company is a specified insurance company, the entity is a US person if a 953(d) election was made and the entity is registered to do business in a US state. Otherwise, the entity is an FFI. If an insurance company is not a specified insurance company, then it is a US person if it made a 953(d) election. Otherwise, it is an NFFE. Also, the Cayman Islands and Bermuda have intergovernmental agreements (IGAs) in place and make reference to specified insurance companies being FFIs. Page 33

34 FATCA conformity regulations highlights US TIN requirement: a change to the general requirement that a nonresident alien furnish a US TIN to claim a reduced rate of withholding under a US treaty on income other than payments with respect to publicly traded securities after June 30, 2014, either a US TIN or a foreign TIN is expected to be acceptable. Electronic forms: faxed or ed Series Form W-8 should be acceptable for Chapter 3 purposes and, hopefully, FATCA. Substitute forms: substitute forms have good support in the new regulations and should be discussed with accounts payable since the majority of their payments may not need FATCA classifications. Page 34

35 FATCA Notice transition period for FATCA enforcement Notice provides for a transition period for enforcement and administration of FATCA. Specifically, calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration of the due diligence, reporting and withholding provisions under Chapter 4. With respect to this transition period, the IRS will take into account the extent to which an organization has made good faith efforts to comply. An organization that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period. Further, the IRS will not regard calendar years 2014 and 2015 as a transition period with respect to the requirements of current Chapters 3 and 61 rules and regulations. Because no relief is to be granted without a good faith effort, it is absolutely critical that all organizations make and document good faith efforts in order to avail themselves of relief from IRS enforcement and administration. Failure to do so could lead to significant interest and penalties. Page 35

36 FATCA what multinational organizations should focus on now Corporate footprint Define and review organizational footprint Review entities within the corporate footprint and identify each legal entity s FATCA classification (U.S. withholding agent (USWA), FFI, NFFE) Identify documentation to be provided to a payor for each entity Payment streams Identify business units making and processing payments, and review FATCA implications Accounts payable, treasury, shareholder relations and any other function involved in payment processing and determination of income (e.g., procurement, legal and business units) Review impact on intercompany transactions, as well as third-party payments Information reporting and withholding compliance capabilities Review current information reporting and withholding compliance Identify process and procedure gaps that may delay or derail FATCA compliance efforts Page 36

37 Unrelated business income tax developments Page 37

38 Representative Camp s tax reform proposals On February 26, 2014, Rep. David Camp, Chairman of the House Committee on Ways and Means, released tax reform proposals. Some proposals affect tax-exempt organizations. Other proposals affect donors to tax-exempt organizations. Included in the proposed tax reform are proposals that would make significant changes to the taxation of unrelated business activities. Page 38

39 Rep. Camp s proposed changes to unrelated business taxable income (UBTI) Dual exemption entities Royalties from licensing names or logos Losses from separate businesses Research income Contribution limit for tax-exempt trusts Specific deduction Gain or loss from certain real property Qualified sponsorship payments Page 39

40 Rep. Camp s proposed changes to UBTI Dual exemption entities Currently: Some organizations that are tax exempt under IRC 501(a) are also exempt from federal income tax or exclude their income from tax under IRC 115. For example, some entities sponsored by state and local governments exclude their income from tax under IRC 115. Under current law, it is unclear whether these dual exemption entities are subject to the UBTI rules. Proposal: It clarifies that these dual exemption entities are subject to UBTI. Implications: Income earned by public pension plans from alternative investments is taxable as UBTI. Page 40

41 Rep. Camp s proposed changes to UBTI Royalties from licensing names or logos Currently: Royalties earned by an exempt organization (EO) from licensing its name or logo are not subject to UBTI. Proposal: Royalties and income earned by an EO from sale or licensing of its name or logo (including any related trademark or copyright) would be subject to UBTI. Implications: Some EOs derive substantial royalty income from licensing their name or logo. This proposal would cause this income to be subject to federal income tax. For those states that follow federal income tax law, this income would also be subject to state income tax. Page 41

42 Rep. Camp s proposed changes to UBTI Losses from separate businesses Currently: UBTI is determined on a combined basis for all unrelated businesses carried on by an EO. Losses incurred by an EO s unrelated businesses may offset the taxable income of the EO s other unrelated businesses. Proposal: UBTI would be calculated separately for each unrelated business carried on by an EO. UBTI from each separate unrelated business could not be less than zero. The EO s net UBTI would be the combination of all these separately calculated amounts. Page 42

43 Rep. Camp s proposed changes to UBTI Losses from separate businesses Currently: An EO may carry back or carry forward its net operating losses (NOLs) from unrelated businesses to offset the EO s combined net UBTI. Proposal: An EO s NOLs from each unrelated business could offset the taxable income of only the same unrelated business. NOL carryforwards from tax years before the effective date of the new law would not be subject to this segregation rule. However, NOLs in tax years beginning on or after the effective date of the new law that are carried back to an earlier tax year would be subject to this segregation rule. Page 43

44 Rep. Camp s proposed changes to UBTI Losses from separate businesses Implications: Losses incurred by an EO s unrelated business could not offset the taxable income of the EO s different unrelated business. Combined UBTI from each unrelated business could not be less than zero. Accurate expense allocations and meticulous recordkeeping of each unrelated business would be necessary to account for utilization of NOLs from each unrelated business. The IRS may revise Form 990-T to require detailed information for each unrelated business of an EO. NOLs from each unrelated business would have to be identified as originating in pre- or post-enactment NOLs. NOL carrybacks from each unrelated business originating in postenactment years could only be carried back to the pre-enactment taxable income of the same unrelated business. Page 44

45 Rep. Camp s proposed changes to UBTI Research income Currently: Certain types of income from research conducted by an EO is tax-exempt: Research performed for the US (including agencies and instrumentalities) or any state (or political subdivision) Research performed by a college, university or hospital Any research performed by an organization operated primarily for the purposes of carrying on fundamental research, the results of which are freely available to the general public Proposal: For organizations in the third category, only income from such research that is made freely available to the general public would be tax-exempt. Implications: An EO whose primary exempt purpose is performing fundamental research would be taxed on income from any such research that is not made freely available to the general public. Page 45

46 Rep. Camp s proposed changes to UBTI Contribution limit for tax-exempt trusts Currently: A tax-exempt trust may deduct charitable contributions up to 50% of its UBTI. A tax-exempt corporation reporting UBTI may deduct charitable contributions up to 10% of its UBTI. Proposal: A tax-exempt trust would be able to deduct charitable contributions only up to 10% of its UBTI. Implications: This places tax-exempt trusts and taxexempt corporations on a parity for purposes of the limitations on the deduction of charitable contributions. Page 46

47 Rep. Camp s proposed changes to UBTI Specific deduction Currently: An EO may deduct $1,000 against its UBTI. Proposal: An EO would be able to deduct $10,000 against its UBTI. Implications: EOs that carry on one or more unrelated businesses with aggregate revenue of up to $10,000 may not have to file a Form 990-T for that UBTI. Page 47

48 Rep. Camp s proposed changes to UBTI Gain or loss from certain real property Currently: An EO s gains or losses from the sale of real property is included in UBTI. An exception applies to certain real property acquired by an EO from a bank or savings and loan association that held the property in receivership or conservatorship, or as a result of a foreclosure. Proposal: This exception would be repealed. Page 48

49 Rep. Camp s proposed changes to UBTI Qualified sponsorship payments Currently: Qualified sponsorship payments received by an EO are not included in UBTI. A qualified sponsorship payment is any payment made by a business sponsor to an EO for which the business does not receive a substantial return benefit (SRB) from the EO. A SRB does not include either: The use or acknowledgment of the business s name or logo (or product lines) Or Advertising of such sponsor s products or services Proposal: Any use or acknowledgment that refers to any of the sponsor s product lines would be a SRB. Thus, the sponsorship payment the EO receives would be advertising income, a per se unrelated business. Page 49

50 Rep. Camp s proposed changes to UBTI Qualified sponsorship payments Proposal: For an EO that receives more than $25,000 of qualified sponsorship payments for an event, a sponsor s payments would not be exempt qualified sponsorship payments unless any use or acknowledgment of a sponsor s name or logo only appears with, and, in substantially the same manner as, the names of at least two donors to the event. Thus, a single business could not be listed as an exclusive sponsor of an event that generates more than $25,000 in qualified sponsorship payments. Such sponsorship payments would be advertising income taxable as UBTI. Implications: EOs would need to review and perhaps modify their agreements with sponsors to ensure that payments would qualify as exempt. Page 50

51 Advisory Committee on Tax Exempt and Government Entities (ACT) UBTI reporting Page 51

52 ACT report recommendations On June 11, 2014, the Advisory Committee on Tax Exempt and Government Entities (ACT) made the following recommendations focusing on UBTI in its 2014 annual report to the IRS: 1. Commerciality test A regulation project should be undertaken to clarify that profits from substantial commercial activity will not disqualify an organization from exemption under IRC 501(c)(3), so long as the charitable activity is commensurate in scope with the organization s financial resources, as set forth in Revenue Ruling The regulation should reject application of the commerciality test to determine whether business activity precludes exemption under IRC 501(c)(3) and what constitutes UBTI. Page 52

53 ACT report recommendations 2. Allocating indirect costs The IRS should issue formal guidance relating to proper methods for allocating indirect costs to exempt activities and unrelated trade or business for dual-use facilities and personnel. IRS guidance should contain several elements: Methods to be given safe harbor treatment should be identified. Allocation methods that are per se unreasonable should be identified. Exempt organizations that apply such methods consistently and with appropriate documentation will not likely be subject to further scrutiny, including an audit, whereas methods not designated safe harbor or per se unreasonable may come under increased scrutiny and be rejected as unreasonable subject to facts and circumstances. Page 53

54 ACT report recommendations (cont.) 3. Development of comprehensive revenue ruling A comprehensive revenue ruling should be published on a range of UBI issues. The ruling should provide categories of activities that are considered related and unrelated, guidance on preparatory time spent on activities, and scenarios of situations involving activities frequently reported on Form 990-T, including facility rentals and dual-use properties. Page 54

55 ACT report recommendations 4. New Form 990-T The IRS should adopt a new Form 990-T based on Affordable Care Act (ACA) format. The 990-T should be web-based. The centerpiece is reporting of activity-by-activity on Checklist A. Checklist (not open to public disclosure) includes links to education and outreach materials and activity-specific worksheets providing stepby-step processes for calculating revenues and expenses. 5. Electronic database and web resources improvements Continued improvement is needed for both the public s and tax professionals access to IRS materials. Web resources should be enhanced and improved to facilitate communication, education and training. Page 55

56 ACT suggested Form 990-T snapshot Page 56

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60 Questions? Page 60

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