Unrelated Business Income Tax Matters

Transcription

1 Unrelated Business Income Tax Matters Eugene J. Logan, Tax Shareholder Sarah R. Piot, Tax Senior Manager (412) (412)

2 Exempt Organization Income Related Income An exempt organization is relieved of taxation to the extent it engages in activities that are substantially related to its tax exempt purposes Unrelated Income IRS 511(a)(1) imposes a tax for each taxable year on net income derived by exempt organizations from the conduct of a business that is regularly carried on and that is not substantially related to exempt purposes. 2

3 What is Unrelated Business Income (UBI)? Three elements of UBI: 1. The income is generated from a trade or business; 2. The trade or business is regularly carried on; and 3. The conduct of the trade or business is not substantially related to the organization s tax exempt purpose 3

4 1. Trade or Business An activity carried on for the production of income, sells goods or performs services Exceptionally broad definition and almost any activity carried on for the production of income qualifies Commerciality doctrine Fragmentation rule 4

5 2. Regularly Carried On Does the tax-exempt organization carry on the activity with the same frequency as a comparable commercial enterprise? Typically one-off activities, like the one time sale of old office furniture or a used maintenance vehicle will not meet the definition of regularly carried on An activity does not need to be ongoing throughout the year 5

6 3. Substantially Related A trade or business is related to an exempt purpose where the conduct of the business activity has a casual relationship to the achievement of the exempt purpose. A causal relationship exists when the income generating activity contributes importantly to the accomplishment of the organization s exempt purpose. Mere receipt of income to further the mission of the organization is insufficient to make the income substantially related to the organization s exempt purpose. 6

7 Statutory Modifications 512(b) Excluded from UBTI: Income derived in a passive manner is generally not commercial as compared to activities requiring active participation Dividends, interest Royalties Rents from real property Rents from personal property which are incidental to a real property rental (less than 10% of rent value) Note: if more than 50% of total rent is attributable to personal property all rent is taxable 7

8 Statutory Modifications 512(b) Gains and losses on sales other than inventory are excluded from UBTI under 512(b)(5) Research activities may be excluded from UBTI Subject to specific requirements as discussed in 512(b)(7), (8) and (9) 8

9 Statutory Exceptions Volunteer Exception - 513(a)(1) Unrelated trade or business does not include a trade or business in which substantially all the work is performed without compensation Convenience Exception - 513(a)(2) Unrelated trade or business does not include a trade or business that is carried on by a 501(c)(3) or by a state college or university primarily for the convenience of its members, students, patients, officers or employees 9

10 Reporting Requirements Form 990-T, Exempt Organization Business Income Tax Return Required to be filed if gross unrelated business income is $1,000 or more Pension Protection Act requires public disclosure for 501(c)(3) organizations First introduced in 1952 Substantially similar to what we see today Not eligible for electronic filing 10

11 Common Sources of Unrelated Business Revenue Advertising vs. Qualified Sponsorship Income Alternative Investments Rental Income from Debt-Financed Real Property Parking Operation of a Cafeteria or Bookstore Catering 11

12 Advertising = UBI Any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed, and which promotes or markets any trade or business, or any service, facility or product. A single message that contains BOTH advertising and an acknowledgement is advertising. 12

13 Advertising = UBI Advertising includes messages containing: Qualitative or comparative language; Price information or other indications of savings or value; An endorsement; or An inducement to purchase, sell, or use any company, service, facility or product 13

14 Established Part of Identity? 14

15 Qualified Sponsorship Income = NOT UBI Qualified sponsorship income does not constitute unrelated business income [ 513(i)(1)] Qualified sponsorship income Any income to which there is no arrangement or expectation for receiving any substantial return benefit other than the use of acknowledgement of name or logo [ 513(i)(2)(A)] No comparative or qualitative descriptions May display product lines/service listings 15

16 Qualified Sponsorship Payments 16

17 Substantial Return Benefit Any benefit received by the sponsor other than: Use or acknowledgement; or Goods, services or other benefits of insubstantial value Aggregate fair market value of all benefits is less than 2% of the amount received 17

18 Substantial Return Benefit If a payor gets a substantial return benefit in exchange for a payment, the safe harbor of 513(i) does not apply, and the UBI analysis should be continued under 512, 513 and 514 Benefits can include: Advertising Tickets Exclusivity provider arrangements Payment for services 18

19 Income from Partnerships Income from partnerships carrying on an unrelated trade or business is taxable [ 512(c)(1)] Gross income and deductions determined same as if organization carried on activity directly If partnership activity is related to exempt purpose of organization, no UBI If the income item would not be taxable if the exempt organization received it directly, it is not considered UBI 19

20 Income from Partnerships A Schedule K-1 is issued by the partnership Identified as a tax-exempt organization Schedule K-1 footnote review 20

21 Parking Parking income received from the normal conduct of the college/university s mission (students, faculty, staff) would not be considered taxable. General Rule: Parking income generated from the general public for non-college/university events is generally considered unrelated business income Net leases to a third party operator income derived can qualify for the rental income exclusion, provided only minimal services provided 21

22 How Much is Too Much? No safe harbor test, facts and circumstances IRS and courts look to time spent not necessarily gross receipts Theoretically it could jeopardize exempt status Various structuring options available C Corporation S Corporation Limited Liability Company 22

23 IRS Focus on Higher Education IRS Tax-Exempt Colleges and Universities Compliance Project Began in 2008, Final report issued in 2013 TE/GE Key Areas of Focus for FY16 Data-driven decision-making IRS Priority Guidance Plan Guidance under IRC Section 512 regarding methods of allocating expenses to dual use facilities 23

24 Tax Reform Highlights Topic Current Tax Law White House Tax Plan GOP A Better Way Tax Plan Individual Tax Rates Currently 7 rates (10/15/25/28/33/35/39.6 %) Standard Deduction Single: $6,350 HOH: $9,350 MFJ: $12,700 Reduce to 3 rates (12/25/35%) Single: $12,000 MFJ: $24,000 Reduce to 3 rates (12/25/33%) Single $12,000 HOH: $18,000 MFJ: $24,000 Personal Exemptions $4,050 per individual Eliminated Eliminated Itemized Deductions Eliminate all except mortgage interest & charitable contributions Eliminate all except mortgage interest & charitable contributions Cap at $100,000 (Single)/$200,000(MFJ) AMT (Individual) The sum of 26% of amount less than $187,800 plus 28% of amounts in excess of $187,800 Repealed Repealed * White House Tax Plan is a combination of President s Trump s Campaign Tax Plan as well as the most recent changes as released on April 26,

25 Tax Reform Highlights Topic Current Tax Law Trump Campaign Tax Plan GOP A Better Way Tax Plan Corporate AMT 20% of income above $40,000 Repeal Repeal Business Deductions/Credits Businesses can deduct ordinary & necessary business expenses Many deductions and credits targeted to specific groups & taxpayers Eliminate most business deductions & credits except the research credit Full & immediate write-off of business investment (both tangible & intangible) Allow deduction of interest expense against interest income but no current deduction for net interest expense.. Eliminates special interest deductions (DPAD) Maintains R&D Credit Estate Tax For 2017, rate is 40% with lifetime exclusion of $5,490,000 Repeal. Capital Gain held until death and valued over $10MM subject to tax. Repeal * White House Tax Plan is a combination of President s Trump s Campaign Tax Plan as well as the most recent changes as released on April 26,

26 Tax Reform Provide incentives through tax deductions for donations to scholarship programs Effect of lower rates, reduced itemizers and elimination of estate tax on chartable gifting Simplify tax credits currently available Changes to Endowments Possible taxation of earnings Limitations on deductions for endowment donations Specific rules for spend down of endowments 26

27 Tax Reform NACUBO s recommendations for tax reform: Above the line deductions for those that engage in charitable giving Objects proposed endowment excise tax Maintain and protect tax-exempt bond financing Narrowing the Definition of Unrelated Business Income Objects the House Tax Reform Act of 2014 proposals to treat name and logo royalties as UBI; modify rules concerning qualified sponsorship payments; and compute unrelated business taxable income separately for each trade or business. 27

28 Questions Thank you Eugene J. Logan Sarah R. Piot Shareholder Senior Manager