Unrelated Business Income Tax Matters Eugene J. Logan, Tax - - PowerPoint PPT Presentation

Unrelated Business Income Tax Matters

Eugene J. Logan, Tax Shareholder Sarah R. Piot, Tax Senior Manager elogan@schneiderdowns.com | (412) 697-5684 spiot@schneiderdowns.com | (412) 697-5303

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 regularly carried on and that is not substantially relat not substantially related t d to e exem empt pur pt purposes.

• ses.

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

and

• 3. The conduct of the trade or business is not

substantially related to the organization’s tax exempt purpose

• 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

• 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
• f 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

• 3. Substantially Related
• A trade or business is related to an exempt purpose

where the conduct of the business activity has a casual casual relationship relationship to the achievement of the exempt purpose.

– A causal relationship exists when the income generating activity contributes importantly to the accomplishment of the

• rganization’s exempt purpose.

– Mere receipt of income to further the mission of the

• rganization is insufficient to make the income substantially

related to the organization’s exempt purpose.

6

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

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

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

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

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

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

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

Established Part of Identity?

14

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”

• ther 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

Qualified Sponsorship Payments

16

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

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

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

• rganization, no UBI

– If the income item would not be taxable if the exempt

• rganization received it directly, it is not considered UBI

19

Income from Partnerships

• A Schedule K-1 is issued by the partnership
• Identified as a tax-exempt organization
• Schedule K-1 footnote review

20

Parking

• Parking income received from the normal conduct
• f 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

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

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 2016-2017 Priority Guidance Plan

– Guidance under IRC Section 512 regarding methods of allocating expenses to dual use facilities

23

Tax Reform Highlights

24

To Topic Current Ta Tax L Law White House Ta Tax Plan Plan GOP A GOP A Be Bett tter er Way y Ta Tax P Plan

Individual Tax Rates Currently 7 rates (10/15/25/28/33/35/39.6 %) Reduce to 3 rates (12/25/35%) Reduce to 3 rates (12/25/33%) Standard Deduction Single: $6,350 HOH: $9,350 MFJ: $12,700 Single: $12,000 MFJ: $24,000 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 Cap at $100,000 (Single)/$200,000(MFJ) Eliminate all except mortgage interest & charitable contributions 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, 2017.

Tax Reform Highlights

25

To Topic Current Ta Tax L Law Trump C Campaign Ta Tax P Plan GOP A GOP A Be Bett tter er Way y Ta Tax P Plan

Corporate AMT 20% of income above $40,000 Repeal Repeal Business Deductions/Credits Businesses can deduct

• rdinary & 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, 2017.

Tax Reform

• Provide incentives through tax deductions for donations

to scholarship programs

• Effect of lower rates, reduced itemizers and elimination
• f 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

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

Questions

Thank you

Eugene J. Logan Sarah R. Piot Shareholder Senior Manager 412-697-5684 412-697-5303 elogan@schneiderdowns.com spiot@schneiderdowns.com

28