Unrelated Business Income Tax (UBIT)


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Presentation for nonprofit organizations on the unexpected issue of Unrelated Business Income Tax (UBIT) what qualifies as UBIT and what they can do to prevent or plan for this tax in the yearly tax return - Tate Tryon CPAs - Nonprofit CPA Firm.

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Unrelated Business Income Tax (UBIT)

  1. 1. Thats Not UBIT! . . . Is It? presented by Deborah G. Kosnett, CPA Tate & Tryon, CPA’s, Washington, DC
  2. 2. 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 hasnearly 25 years 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 asnot-for-profit hospitals and multi-entity health systems.Ms. Kosnett is a frequent contributor to American Society of Association Executives(ASAE) publications; her most recent article is "Need-to-Knows in the New 990,"published in the January 2010 Associations Now Volunteer Leadership Issue. Sheis also a regular presenter at conferences held by AICPA, ASAE, the GreaterWashington Society of CPAs, and the Finance and Administration Roundtable, andis a co-author of ASAEs "Guide to the Newest Form 990.” Ms. Kosnett currentlyserves on the AICPAs Exempt Organizations Technical Resource Panel, whereshe assists with numerous initiatives, including the TRPs Form 990 Task Force. 2
  3. 3. UBIT is Easy to Spot. Right?? We all know what UBIT is . . . • A trade or business, • Regularly carried on, • That is not related to exempt purpose. Seems pretty simple . . . magazine ads, etc. Yes . . . but! There are other interesting creatures out there in the UBIT universe. Come along with me as we do some exploring! I promise to get you home before dark . . . Let’s GO! American Institute of CPAs 3
  4. 4. What’s Out There?UBIT may be hiding in: Property rentals Services Web and web-based media Goods and products Facilities operations And more . . . American Institute of CPAs 4
  5. 5. Property RentalAmerican Institute of CPAs 5
  6. 6. But Aren’t Rents Excluded?? Only for real property UBI can arise when: • Real property is leased with significant personal property • Rents are entirely from personal property • Rents are based on income or profits • Services are rendered • Property is debt-financed (UDFI) American Institute of CPAs 6
  7. 7. More on the UDFI Rules Applies to “property” . . . • Held to produce income • With acquisition indebtedness • Use of which is not “substantially related” to the organization’s exempt purpose Taxed to the extent of indebtedness: • Income stream • Capital gains UDFI rules do not trump UBI rules! American Institute of CPAs 7
  8. 8. ServicesAmerican Institute of CPAs 8
  9. 9. The Wide World of Services Accounting and administration Special projects • Being a “consultant,” not a “librarian” Mediation and arbitration Data processing Pathology and lab work Speakers’ bureau Language translation Catering Printing and mailing American Institute of CPAs 9
  10. 10. Particular Services Unique to membership associations Benefits purchaser over industry Particular service? • Does the activity provide an industry-wide benefit? - Require cooperative effort and/or sharing of expense? - Provide intangible, indirect benefit? • To whom do benefits flow? - Members and nonmembers equally? - Members more than nonmembers? - No benefit to nonmembers? But there may be an exception . . . American Institute of CPAs 10
  11. 11. “Best Practice” Documents TAXABLE EXCEPTED Standard documents: “Gold standard” docs: • “Boilerplate” contracts • Preprinted lease forms & • Merely a convenience • Landlord’s manual • Not markedly different from • Used in educational and commercially-available legislative programsWhere goods and services are “…the educational benefitsavailable on the open market, from TAAs dissemination of its“a trade association need not updated materials improvedprovide [them] to accomplish management practices in an exempt purpose.” Texas.”-Illinois Ass’n of Pro’s Ins Agents v. Comr., -Texas Apartment Assn v. U.S., 869 F.2d 801 F.2d 987 (7th Cir. 1986) 884 (5th Cir. 1989) American Institute of CPAs 11
  12. 12. Web and Web- Based MediaAmerican Institute of CPAs 12
  13. 13. Ads, Trade Shows, and More Banner and pop-up advertising Web-based periodicals E-mail and web-based newsletters “Virtual” trade shows Job boards Databases Business – to – business sites American Institute of CPAs 13
  14. 14. Goods and ProductsAmerican Institute of CPAs 14
  15. 15. Goods and Products . . . Insurance Pharmaceutical supplies Standard forms and agreements Housing Affinity products By-products of exempt function Even . . . cattle! American Institute of CPAs 15
  16. 16. Facilities OperationsAmerican Institute of CPAs 16
  17. 17. Operation of . . . Cafeterias, cafes, snack bars Shops and stores Stadiums, arenas, and theatres Health clubs, recreational facilities Storage facilities Parking garages Orchards and farms American Institute of CPAs 17
  18. 18. And More . . (the really WEIRD stuff!)American Institute of CPAs 18
  19. 19. Exotic UBI Specimens Income from partnerships/LLPs Securities purchased on margin “Cash out” refi investments Travel tours Associate member dues (rare) Certification activities of §501(c)(3)s 501(c)(7), (9), (17) and (20) – special rules Drug testing Mailing lists! American Institute of CPAs 19
  20. 20. And One Other Thing . . .The dreaded “commerciality doctrine!” “I often tell my Nonprofit Law students that the Commerciality Doctrine is like a “bludger” in a game of quiddich . . . The bludger is a small, hard ball that flies through the air knocking quiddich players off their broomsticks when they are concentrating on other aspects of the game . . The bludger produces anxiety in players because it is utterly unpredictable. No one knows when it will strike and what kind of damage it will cause.” -- Thomas A. Kelley III, Professor of Law, UNC School of Law “Nonprofit Law Prof Blog” American Institute of CPAs 20
  21. 21. The Commerciality Doctrine Reins in charities operating in a “commercial manner” Limits supposed “unfair competition” with for-profit sector Fabricated entirely by case law Is unevenly applied: • Hospitals and educational institutions frequently have a “commercial hue” Focuses on “means” rather than “ends” American Institute of CPAs 21
  22. 22. Commerciality Factors Competition with for-profit sector Generation and accumulation of profits Market-rate pricing “For-profit” business and marketing practices “Customer” base – general public vs. other charities Lack of donative support American Institute of CPAs 22
  23. 23. How Can I Make it “Not UBIT?”American Institute of CPAs 23
  24. 24. The Original Exceptions Not regularly carried on! The 1950 exceptions: • “Volunteer” exception • “Convenience” exception • “Donation” exception More than one can apply American Institute of CPAs 24
  25. 25. Other Common Exceptions Qualified public entertainment Qualified convention/trade show Certain hospital services Noncommercial bingo games Distribution of low-cost articles/solicitation Exchange/rental of certain membership lists American Institute of CPAs 25
  26. 26. Other Common Exceptions Qualified sponsorship payments Certain research activities Activities consistently losing money Dividends, interest, rents, royalties, etc. • But may be taxable if from controlled orgs (§512(b)(13)) Certain exceptions applying to social clubs and VEBAs American Institute of CPAs 26
  27. 27. Property Rental Keep personal property rentals to a minimum Lease your garage to a commercial enterprise Eschew income- or profit-based rents Leave catering and other services to lessees American Institute of CPAs 27
  28. 28. Debt-Financed Income Unrelated use not more than 15% Elimination of debt (“year and a day” rule for capital gains) Certain UBI exceptions and exclusions apply: • Property used for research & excluded under §512(b)(7), (8) or (9) • The “volunteer,” convenience,” and “donation” exceptions • Property used by a “related” org for exempt purposes Why only these exceptions, and not all of them? • (Hint: it has nothing to do with an exclusion’s merits) The “neighborhood land rule” American Institute of CPAs 28
  29. 29. Services Let a 3rd party operate • Especially for potential “particular services” • Try to avoid “agency” relationship • Lease name/logo/mail list and nothing else Try to meet “volunteer,” “convenience” exceptions Services to related EOs may escape UBI Be a “librarian;” avoid private projects Minimize/eliminate services in affinity contracts Make lessees provide their own services • Catering, music, security American Institute of CPAs 29
  30. 30. Web and Web-Based Media Job board: 3rd party operation • Consider a disclaimer: “All services offered on this page are products of JobsNow, LLC, and are not offered by the ABC Association” Frame potential ads as “acknowledgements” • Does not work for “periodicals” – online magazines, e-newsletters “Related” web costs usually -0- out tax Limit “virtual” trade shows – time and/or ad content American Institute of CPAs 30
  31. 31. Goods and Products As with services: • Let a 3rd party do the selling - Try to avoid “agency” relationship - Lease name/logo/mail list and nothing else Try to utilize “volunteer” and “donation” exceptions Qualified trade show – permits sales and order-taking American Institute of CPAs 31
  32. 32. Facilities Operations Use “convenience,” “volunteer,” and “donation” exceptions where possible Offer space rental but no additional services Make items sold relate to purpose Let a 3rd party operate • Avoid income or profit-based rents Be aware of “dual use” rules American Institute of CPAs 32
  33. 33. “Commerciality” Avoidance Charities relying heavily on goods and services revenue: • Periodically revisit pricing policies • Adjust advertising budgets • Boost charitable fundraising Large-scale operations: taxable subsidiary may be an option American Institute of CPAs 33
  34. 34. American Institute of CPAs 34