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Its UBI! Now What Do I Do?presented byJoseph Irvine, CPA, JDThe Ohio State UniversityDeborah G. Kosnett, CPATate & Tryon, ...
Speaker BiographyJoseph R. Irvine is Development and Tax Counsel and a faculty member of the FisherCollege of Business at ...
Speaker BiographyDeborah G. Kosnett, CPA, is a Tax Principal with Tate &Tryon, CPAs and Consultants, in Washington, DC, a ...
“I’ve Just Found UBI!”                    Is It As Bad As You            Think?American Institute of CPAs
Unrelated Business Income Trade or Business Regularly Carried On Not Substantially Related  American Institute of CPAs
Modifications in IRC Section 512(b) Investment income (interest, dividends, annuities) Royalties Real property rents Capit...
Exceptions in IRC Section 513 Substantially all work by volunteers (85%?) Convenience ((c)(3)s and colleges and universiti...
Additional Exceptions in IRC Section 513 Bingo games Low cost articles Hospital services Pole rentals Fair entertainment T...
Fragmentation: IRC IRC Section 513(c)… an activity does not lose identity as a trade or business merely because it is carr...
Fragmentation: IRC IRC Section 513(c) PLR 200148057: sales of golf equipment and food and drink at snack bar related, but ...
Fragmentation: IRC IRC Section 513(c) Rev. Rul. 78-98: Fees for ski facility from general public use were unrelated. Use b...
Pass Through EntitiesAll income of S corporation, including gainon sale, is treated as unrelated businessincome.Income fro...
The Attack on Loss ActivitiesWhere an activity carried on for profit constitutes anunrelated trade or business, no part of...
The Attack on Loss ActivitiesForm 5701 issued by the IRS: the facts clearlyshow no desire on X’s part to operate its cater...
History of LossesWeller, TC Memo 2011-224:      4 consecutive yrs.Dennis, TC Memo 2010-216:      5 consecutive yrsLamb, TC...
The Attack on Loss Activities Have a business plan Document purpose of the activity Document changes to that plan in the e...
“What Expenses May I         Use?”               The G/L and BeyondAmerican Institute of CPAs
Expense Allocation: Directly Connected 512(a)(1) and 1.512(a)-1(a) Depreciation, and similar items attributable solely to ...
Reasonable Allocation MethodsNACUBO draft revenue procedure from 1997Proposes use of OMB Circular A-21 methodologyRegulati...
Reasonable Allocation MethodsGross receiptsActual use or time spentMust be able to substantiate expense as well asallocati...
Reasonable Allocation Methods Regulation example: exhibit catalog advertising Ad income                      $100,000 Dire...
Rensselaer Polytechnic InstituteAllocation based on actual use or availableuse?Variable expenses were allocated based onac...
Rensselaer Polytechnic InstituteExample: • 150 days of related use • 100 days of unrelated use • $300,000 of fixed expense...
Exploitation of Exempt Activities1.512(a)-1(d)Unrelated activity is kind carried on for profit bytaxable organizationsExem...
Exploitation ExampleAd income                      $100,000Direct expense                   (25,000)   75,000Program inc  ...
“Where Does It All Go?”              Form 990-TAmerican Institute of CPAs
The Unrelated Business Income Tax Imposed by the Revenue Act of 1950 Tax originally levied on “supplement U net income” In...
1971 – Not Too Different!  American Institute of CPAs
The 1971 990-T Introduced . . . Schedule H – Exploited Exempt Activity Income (other than advertising income) Schedule I –...
Form 990-T Has Changed Little . . .… but unrelated activities (especially advertising)have changed a lot!   1971 . . .    ...
Who Has To File a 990-T? Organizations exempt under §501(a) with gross income >= $1,000 from a UTB Organizations liable fo...
When to File the 990-T Surprise! There’s more than one due date Most entities must file by the 15th day of the 5th month a...
What To Report, and Where                        Activity                           Where it goes on the 990-TRent from pe...
What Is A Periodical? Regularly scheduled and printed material . . . … not associated with a specific event Periodical rul...
Non-Periodical – Ad vs. Acknowledgement   American Institute of CPAs
A Word About Circulation Income … Circulation income = a portion of member dues PLUS actual sales To allocate dues, use on...
Consolidated Periodical Election For organizations publishing 2 or more periodicals Treats ALL periodicals as if they were...
Consolidated Periodicals - ExampleNo excess readership costs on a consolidated basis     American Institute of CPAs
Do NOT Do This!! You MUST include all items of income and expense in a consolidated                             calculatio...
Exploited Exempt Activity - Example• Remember that especially on the Web, an “ad” may  actually be a non-taxable “acknowle...
“Everything                        Else” - IncomeLine 1 – sales of goods and services (also §  501(c)(7), (9), (17) items)...
“Everything Else” – Other DeductionsFew of these lines will be used if UBI is reported in the separate schedules.        A...
Can You File a Consolidated 990-T? Organizations with §501(c)(2) title holding companies may consolidate their 990-T’s A F...
“What ‘Regular’ Tax   Rules Apply?”         Book-Tax Differences     and MoreAmerican Institute of CPAs
Net Operating Loss Deduction Deductible only if incurred in a UBI activity Allowable only in a year where UBI occurs Losse...
Differing Tax Rates• Controlled group bracket apportionment rules also apply   • Parent/subsidiary   • Brother-sister   • ...
Book-Tax Differences: Not Just For 1120s Book vs. tax depreciation Special depreciation rules Passive activity loss limita...
Tax Credits Also May Apply General business credit Credit for prior year minimum tax Foreign tax credit Credit for certain...
Potential Form AttachmentsOpen to Public Inspection (501(c)(3)         NOT Open to Public InspectionForm 4626 (alternative...
Questions?          Don’t forget to fill out your online evaluations!  http://data.express-evaluations.com/eval/aicpa/web/...
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Unrelated Business Income Tax (UBIT)

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Presentation on the impact of UBIT (unrelated business income tax) issues to nonprofit organizations and what they can do to handle these issues as they arise.

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Transcript of "Unrelated Business Income Tax (UBIT)"

  1. 1. Its UBI! Now What Do I Do?presented byJoseph Irvine, CPA, JDThe Ohio State UniversityDeborah G. Kosnett, CPATate & Tryon, CPAs, Washington, DC
  2. 2. Speaker BiographyJoseph R. Irvine is Development and Tax Counsel and a faculty member of the FisherCollege of Business at The Ohio State University, Columbus, Ohio. His practice includestax planning and compliance as well as resolving conflicts with the IRS and state and localtax agencies. He handles charitable gift planning, donor tax issues as well as issuesregarding UBIT, compensation and benefit matters, and state and local tax matters. Hewas an attorney with a multistate law firm prior to joining the University. He also hasexperience with one of the Big Four accounting firms. He is past Chair of the Tax Councilof the National Association of College and University Business Officers and the past co-chair of the Taxation Section of the National Association of College and UniversityAttorneys. He is also a member of the Ohio State Bar Association and the Tax Lead ofthe Steering Committee for the AICPA Not-For-Profit Industry Conference. He is arecipient of the NACUBO Tax Award. His article, “Does Exclusivity Create Liability forUBIT?,” appeared in the July/August 2002 edition of Taxation of Exempts and “ProposedFICA Regulations Go Far Beyond A Response To Mayo,” appeared in theSeptember/October 2004 edition of the same publication. Mr. Irvine is a graduate of KentState University (BBA, summa cum laude), the University of Cincinnati (MS, taxation) andDuke University Law School (JD, high honors). He is admitted to practice in Ohio and theFederal Court for the Southern District of Ohio. He is also a certified public accountantand a frequent speaker on tax issues. American Institute of CPAs
  3. 3. Speaker BiographyDeborah G. Kosnett, CPA, is a Tax Principal with Tate &Tryon, CPAs and Consultants, in Washington, DC, a firmspecializing solely in not-for-profit organizations. She has 25years experience as a tax advisor to not-for-profitorganizations throughout the country. Prior to joining Tate &Tryon in 1999, Ms. Kosnett was a senior tax manager withboth KPMG and Ernst & Young in Washington, DC, whereshe worked with numerous exempt organizations, as well aswith not-for-profit hospitals and multi-entity health systems.Ms. Kosnett is a frequent contributor to American Society of Association Executives(ASAE) publications, including “2011 Form 990: Reporting Requirements forAMCs,” and “Need-to-Knows in the New 990.” She is also a regular presenter atconferences held by AICPA, ASAE, the Greater Washington Society of CPAs, andthe Finance and Administration Roundtable, and is a co-author of ASAEs "Guide tothe Newest Form 990.” Ms. Kosnett currently serves on the AICPAs ExemptOrganizations Technical Resource Panel, where she assists with numerousinitiatives, including the TRPs Form 990 Task Force. American Institute of CPAs
  4. 4. “I’ve Just Found UBI!”  Is It As Bad As You Think?American Institute of CPAs
  5. 5. Unrelated Business Income Trade or Business Regularly Carried On Not Substantially Related American Institute of CPAs
  6. 6. Modifications in IRC Section 512(b) Investment income (interest, dividends, annuities) Royalties Real property rents Capital gains and losses Research (not testing) Exception for debt financed income Exception for income from controlled entities American Institute of CPAs
  7. 7. Exceptions in IRC Section 513 Substantially all work by volunteers (85%?) Convenience ((c)(3)s and colleges and universities only) • Members • Students • Patients • Officers and employees Sale of donated goods (substantially all) Qualified sponsorship payments American Institute of CPAs
  8. 8. Additional Exceptions in IRC Section 513 Bingo games Low cost articles Hospital services Pole rentals Fair entertainment Trade shows American Institute of CPAs
  9. 9. Fragmentation: IRC IRC Section 513(c)… an activity does not lose identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. American Institute of CPAs
  10. 10. Fragmentation: IRC IRC Section 513(c) PLR 200148057: sales of golf equipment and food and drink at snack bar related, but sales of clothing with course logo unrelated Publication of a journal two activities: publication of editorial content and publication of advertising Rev. Rul. 73-105: museum gift shop sales fragmented. Reproductions, copies, and books pertaining to the collection were related. Souvenirs were unrelated. American Institute of CPAs
  11. 11. Fragmentation: IRC IRC Section 513(c) Rev. Rul. 78-98: Fees for ski facility from general public use were unrelated. Use by students was related. PLR 9720035: golf course fees from students, faculty and staff was related. Fees from alumni, spouses and children of students, faculty and staff, general public was unrelated. PLR 9720035 not always followed by IRS American Institute of CPAs
  12. 12. Pass Through EntitiesAll income of S corporation, including gainon sale, is treated as unrelated businessincome.Income from partnerships and LLCs flowsthrough to partner or member, retaining itscharacter. American Institute of CPAs
  13. 13. The Attack on Loss ActivitiesWhere an activity carried on for profit constitutes anunrelated trade or business, no part of such trade orbusiness shall be excluded from such classificationmerely because it does not result in profit. 513(c). American Institute of CPAs
  14. 14. The Attack on Loss ActivitiesForm 5701 issued by the IRS: the facts clearlyshow no desire on X’s part to operate its cateringand recreation center activities at a profit. First, Xhas reported losses in nine consecutive years ...Second, X indicated that these activities arebudgeted to operate at breakeven or a loss withno future plans to make a profit.... Accordingly, X’slosses from its catering and recreation centeractivities are being disallowed in full because therequired profit motive is not present … . American Institute of CPAs
  15. 15. History of LossesWeller, TC Memo 2011-224: 4 consecutive yrs.Dennis, TC Memo 2010-216: 5 consecutive yrsLamb, TC Memo 1996-166: 6 consecutive yrs.Storey, TC Memo 2012-115: 6 consecutive yrs.Helmick, TC Memo 2009-220: 11 consecutive yrs.Engdahl, 72 TC 659: 12 consecutive yrs.Allen, 72 TC 28: 12 consecutive yrs.Eldridge TC Memo 1995-384: 14 consecutive yrs.Haladay, TC Memo 1990-45: 15 consecutive yrs.Rinehart, TC Memo 2002-9: start up period for horsebreeding 5-10 yrs. American Institute of CPAs
  16. 16. The Attack on Loss Activities Have a business plan Document purpose of the activity Document changes to that plan in the event of multiple year losses Conduct operations in a business-like manner American Institute of CPAs
  17. 17. “What Expenses May I Use?”  The G/L and BeyondAmerican Institute of CPAs
  18. 18. Expense Allocation: Directly Connected 512(a)(1) and 1.512(a)-1(a) Depreciation, and similar items attributable solely to the conduct of unrelated activity Must meet requirements of 162 and 167 Dual use of facilities and personnel • A reasonable basis • Proximately and primarily related • Example of president: approximately 10% of his time American Institute of CPAs
  19. 19. Reasonable Allocation MethodsNACUBO draft revenue procedure from 1997Proposes use of OMB Circular A-21 methodologyRegulation example: advertising activity - deductdirect costs, allocable portion dual use expenses,but no portion of costs of developing membershipand carrying on exempt activitiesNo guidance from IRS American Institute of CPAs
  20. 20. Reasonable Allocation MethodsGross receiptsActual use or time spentMust be able to substantiate expense as well asallocation between exempt and unrelated activity.Core Special Purpose Fund, TC Memo 1985-48.GCM 39843 (4/15/91) held that hospital could not useMedicare costs reported to HCFA for UBI purposes American Institute of CPAs
  21. 21. Reasonable Allocation Methods Regulation example: exhibit catalog advertising Ad income $100,000 Direct expense (25,000) 75,000 Catalog inc 60,000 Catalog exp (110,000) (50,000) UBI 25,000 None of the expenses related to exhibit allowable American Institute of CPAs
  22. 22. Rensselaer Polytechnic InstituteAllocation based on actual use or availableuse?Variable expenses were allocated based onactual use.Allocation of a fixed expenses was the issueIRS position: allocate based on availableuse.Taxpayer position: allocate based on actualuse. American Institute of CPAs
  23. 23. Rensselaer Polytechnic InstituteExample: • 150 days of related use • 100 days of unrelated use • $300,000 of fixed expensesAllocation to unrelated useIRS: • 100/365 X $300,00 = $82,192Taxpayer: • 100/250 X $300,000 = $120,000 American Institute of CPAs
  24. 24. Exploitation of Exempt Activities1.512(a)-1(d)Unrelated activity is kind carried on for profit bytaxable organizationsExempt activity exploited is a type normallyconducted by taxable organizationExempt expenses in excess of exempt income maybe deducted against unrelated incomeCannot produce unrelated loss American Institute of CPAs
  25. 25. Exploitation ExampleAd income $100,000Direct expense (25,000) 75,000Program inc 60,000Program exp (110,000) (50,000)UBI 25,000Football loss (25,000)UBI 0 American Institute of CPAs
  26. 26. “Where Does It All Go?”  Form 990-TAmerican Institute of CPAs
  27. 27. The Unrelated Business Income Tax Imposed by the Revenue Act of 1950 Tax originally levied on “supplement U net income” Initially applied only to §501(c)(2), (3) (except churches), (5), (6) organizations Tax Reform Act of 1969 expanded to virtually all organizations Form 990-T substantially revised in 1970, periodical advertising section added in 1971 No substantial revisions since American Institute of CPAs
  28. 28. 1971 – Not Too Different! American Institute of CPAs
  29. 29. The 1971 990-T Introduced . . . Schedule H – Exploited Exempt Activity Income (other than advertising income) Schedule I – Advertising Income and Advertising Loss (consolidated and separate) In 1970 there was a single “Allowable Exempt Activity Expenses” schedule In 1971, IRS split off advertising from other “exploited exempt activities” American Institute of CPAs
  30. 30. Form 990-T Has Changed Little . . .… but unrelated activities (especially advertising)have changed a lot! 1971 . . . 2012 . . . • Magazines • Magazines • Newsletters • Newsletters • Internet • Show guides • Phone/tablet apps (all printed, of course) • Social media • Facebook • Twitter • Linked-In • YouTube • Podcasts American Institute of CPAs
  31. 31. Who Has To File a 990-T? Organizations exempt under §501(a) with gross income >= $1,000 from a UTB Organizations liable for the “proxy tax” Organizations liable for certain other taxes Fiduciaries for certain trusts that have >= $1,000 of UTB gross income American Institute of CPAs
  32. 32. When to File the 990-T Surprise! There’s more than one due date Most entities must file by the 15th day of the 5th month after year end But! §401(a) employees’ trusts, IRAs, SEPs, SIMPLEs, Roth IRAs, Coverdell ESAs, and Archer MSAs must file by . . . The 15th day of the 4th month A maximum 6-month extension is permitted American Institute of CPAs
  33. 33. What To Report, and Where Activity Where it goes on the 990-TRent from personal or personal/real property Schedule CUnrelated debt-financed income Schedule EInterest, annuities, etc. from controlled orgs Schedule F§501(c)(7), (9), (17) investment income Schedule GNon-periodical advertising Schedule I (no better place!)Periodical advertising Schedule JGoods/services sales, gains/losses, passthrus Part I, specific linesEverything else . . . Parts I, line 12There are exceptions . . .§501(c)(7), (9), (17)’s report advertising, other exploited activity in Part I§501(c)(7), (9), (17)’s report rental activity in Part I American Institute of CPAs
  34. 34. What Is A Periodical? Regularly scheduled and printed material . . . … not associated with a specific event Periodical rules are specific; little ‘wiggle room’ If periodical rules do NOT apply, an “ad” may not actually be taxable American Institute of CPAs
  35. 35. Non-Periodical – Ad vs. Acknowledgement American Institute of CPAs
  36. 36. A Word About Circulation Income … Circulation income = a portion of member dues PLUS actual sales To allocate dues, use only the method that applies • Method 1: >= 20% of total circulation is nonmember sales - Use the subscription price charged to nonmembers • Method 2: >= 20% of members get no periodical and pay less - Use the reduction in member dues • Method 3 – neither of the first two applies - Use this allocation formula: Total periodical costs Dues x ------------------------------------------------------------------------------- Total periodical costs + other exempt costs American Institute of CPAs
  37. 37. Consolidated Periodical Election For organizations publishing 2 or more periodicals Treats ALL periodicals as if they were one Eligible periodicals are those: • Actively engaged in for profit • With gross ad revenue at least 25% of readership costs To elect, fill out Schedule J, Part I You may NOT un-elect without IRS permission American Institute of CPAs
  38. 38. Consolidated Periodicals - ExampleNo excess readership costs on a consolidated basis American Institute of CPAs
  39. 39. Do NOT Do This!! You MUST include all items of income and expense in a consolidated calculation! American Institute of CPAs
  40. 40. Exploited Exempt Activity - Example• Remember that especially on the Web, an “ad” may actually be a non-taxable “acknowledgement”• “Related” gross income may be -0- in many instances, as here• For web sites, directly-connected advertising costs may be hard to calculate American Institute of CPAs
  41. 41. “Everything Else” - IncomeLine 1 – sales of goods and services (also § 501(c)(7), (9), (17) items)Line 4 – taxable capital (UDFI) gains, ordinary gains on sales of businessproperty, disposal of debt-financed propertyLine 5 – taxable income/losses from partnerships and S corporationsLine 12 – other income American Institute of CPAs
  42. 42. “Everything Else” – Other DeductionsFew of these lines will be used if UBI is reported in the separate schedules. American Institute of CPAs
  43. 43. Can You File a Consolidated 990-T? Organizations with §501(c)(2) title holding companies may consolidate their 990-T’s A Form 1122 authorization is required for the first year Form 851, “Affiliations Schedule,” is required for all years American Institute of CPAs
  44. 44. “What ‘Regular’ Tax Rules Apply?” Book-Tax Differences and MoreAmerican Institute of CPAs
  45. 45. Net Operating Loss Deduction Deductible only if incurred in a UBI activity Allowable only in a year where UBI occurs Losses go back 2 years; forward 20 years Non-UBI years do count toward expiration Excess exploited exempt activity expense and excess readership costs do NOT create an NOL Activities that continually lose money may not have a profit motive … NOLs may be denied American Institute of CPAs
  46. 46. Differing Tax Rates• Controlled group bracket apportionment rules also apply • Parent/subsidiary • Brother-sister • Combined group• Adoption and amendments – consents must be attached American Institute of CPAs
  47. 47. Book-Tax Differences: Not Just For 1120s Book vs. tax depreciation Special depreciation rules Passive activity loss limitations Travel, meals and entertainment expense • 50% M&E rule applies • No deduction for spousal travel Advance payments (see Rev. Proc. 2004-34) Nonaccrual experience method (services) Transactions between related taxpayers • Accrual-basis taxpayers may only deduct expenses owed a related party in the year that it’s income to the related party Uniform capitalization rules - §263A Organizational and start-up costs American Institute of CPAs
  48. 48. Tax Credits Also May Apply General business credit Credit for prior year minimum tax Foreign tax credit Credit for certain Federal excise taxes Credit for small employer health insurance premiums Qualified plug-in electric and electric vehicle credit And more American Institute of CPAs
  49. 49. Potential Form AttachmentsOpen to Public Inspection (501(c)(3) NOT Open to Public InspectionForm 4626 (alternative minimum tax) Form 926 (US transferor to foreign corp)Form 4562 (depreciation) Form 5471 (ownership in foreign corps)Form 2220 (underpayment penalty) Form 8271 (tax shelter registration #) Form 8594 (1060 asset acquisition) Form 8621 (passive foreign investment co) Form 8832 (entity classification election) Form 8858 (info return/disregarded entities) Form 8865 (certain foreign partnerships) Form 8886 (reportable transaction disclosure) Form 8913 (Federal telephone excise tax) Form 8925 (employer-owned life insurance) Form 8941 (health insurance premiums credit) --This is not an exhaustive list-- American Institute of CPAs
  50. 50. Questions? Don’t forget to fill out your online evaluations! http://data.express-evaluations.com/eval/aicpa/web/main.php American Institute of CPAs
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