September 2012

Unrelated Business Income:

All of us have heard the term unrelated business income. And many of us understand that whenever our nonprofit generates income from activities that are unrelated to our exempt purpose (as defined in our articles of incorporation and governance documents), that income is reportable and taxable under current federal tax regulations. But it is not always easy to actually determine if a given activity or event falls within our exempt purpose and there are so many exceptions and exemptions to the UBI Requirements that even the IRS continues to have a difficult time determining which income is related and which is not. Recently I came across this brief article published by The Chronicle of Philanthropy. Not only does it speak to this frustration, it suggests that there are some who believe the best way to resolve the issue is to begin taxing all commercial activities of nonprofits. This oversimplifies the situation and the solution, but is a good reminder that unless nonprofits begin to better police themselves and voluntarily report and pay tax on unrelated activities others will do it for us, and most probably to our detriment. If you have activities going on that generate income for your nonprofit I encourage you to consider the issues and whether or not it is placing your ministry in a reportable position. If you are unsure, give CMA a call or send us an email. We would be glad to help.

IRS Struggles to Know if Big Nonprofits Pay the Taxes They Owe
Four years after the Internal Revenue Service started requiring nonprofits to submit more information about their charitable and commercial activities, the agency still struggles to determine which income earned by colleges, hospitals, and other big institutions is taxable, an IRS official said today. Steven T. Miller, deputy IRS commissioner, made the comment at a Congressional hearing devoted to an issue that has vexed lawmakers and regulatorshow to ensure that charities pay taxes on income they generate through businesslike activities such as magazine publishing and retail sales.

Figuring out if an organizations business income is substantially related to its charitable mission, and therefore tax-exempt, is a remarkably difficult and soft sort of issue to deal with, Mr. Miller told the oversight subcommittee of the House Ways and Means Committee. For example, the agency has to determine questions like whether to tax money a nonprofit museum earns from post cards sold in its gift shop, he said. The rules governing unrelated business income taxes are an ongoing source of confusion, said Rep. Charles W. Boustany Jr., a Louisiana Republican who chairs the subcommittee, which oversees the IRS. A 2008 Chronicle investigation found that more than half of 91 large charities with unrelated business activities reported overall losses or no taxable income. Many were taking advantage of vague language or exemptions built into the law to avoid paying taxes, it found. Lawmakers and agency officials should consider taxing all commercial income earned by charities, regardless of whether it relates to the groups missions, said John Colombo, a law professor at the University of Illinois who specializes in tax-exempt organizations.

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Phone: 408-408-703-6568

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If you just tell charities all of their commercial activities are taxable, you eliminate this very difficult-to-enforce line between what is related and unrelated, Mr. Colombo told the panel. Im not sure that will have much effect on charities, other than giving them clarity that they can engage in commercial activities, and it will not cause them to lose their tax exemption. Source: The Chronicle of Philanthropy, July 2012
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This information is provided with the understanding that CMA is not rendering tax, accounting, legal, or other professional advice. Professional advice on specific issues should be sought from a qualified CPA, attorney, or other professional.

1825 Hamilton Ave, San Jose, CA 95125

Phone: 408-408-703-6568

E-mail: info@cmanational.org