Illinois CPA Society November 2013 Not-for-Profit Conference presentation regarding taxes, unrelated business income and other important NFP governance policies and procedures.

1. 2013 Tax Update
UBIT and Important Governance
Policies
James C. Provenza

2. Why Policies Are Important
• The IRS asks
• Improve transparency
• Provide guidance to staff and board members

3. Policies in form 990
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Conflict of interest
Document retention and destruction
Financial whistleblower
Form 990 review
Compensation setting

4. Gift acceptance policies
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What gifts to accept
What gifts do you turn down
What procedures do you follow?
When do you call for help?

5. Other important policies
• Endowment spending
– how much to spend annually
– How is it calculated under UPMIFA
• Investment policy
– Desired return
– Investment mix and degree of risk

6. Part 2 UBIT
• Enacted to address unfair competition
• Is a major IRS focus
• NFPs will encounter it as they look for revenue

7. Is it a business?
– Look at similar for profit activities
– Is there advertising
– Is there competition

8. Is it regularly carried on?
• Look at frequency
• Look at continuity

9. Is it substantially related?
• Does it contribute importantly to exempt
purpose
• Look at size and extent in relation to exempt
purpose

10. Sponsorship and advertising
• Advertising is UBTI, usually
– Involves marketing and promotion
– Expect future benefits
• Sponsorships are not
– Charity does not promote the sponsor
– Allows name, logo, and thank you
– No expectation of substantial future benefit

11. Exceptions
• Volunteer activities – if substantially all (85%)
labor is volunteered, is exempt by statute
• Donated merchandise – 85% threshold
• Interest and dividends
• Rent of space and royalties
– Rent must be passive.
– Rental of personal property must be incidental
(<10% of value)

12. Other common issues
• Affinity programs

13. College and University Compliance
Project
• IRS sent 400 questionnaires and examined
returns of 34 institutions
• Looked at UBTI and compensation
• Issues found are not unique to colleges and
universities

14. Conclusions-UBTI
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90% underreported UBTI
180 changes to reported UBTI on 990-T
Disallowance of $170 million in losses
Activities involved fitness centers, sports
camps, advertising, facility rentals, arenas and
golf-related activities

15. Reasons for changes to 990-T
• Losses not from a business-no profit motive
• Expenses allocated must be directly connected
to the business

16. Other case studies to analyze
• Thrift shop
• University golf fees from students v. alumni

17. Don't be afraid of it
• NFPs fear loss of tax exempt status
• What is too much UBIT?
• One common solution: for profit subsidiary