Presenting a live 110 ‐ minute teleconference with interactive Q&A Non ‐ Profits and Unrelated Business Income: Evaluating Non ‐ Core Revenue Streams Evaluating Non Core Revenue Streams Preparing for Tougher Scrutiny of UBI by the IRS WEDNESDAY, AUGUST 10, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Carolyn Sechler Owner Sechler Phoenix Carolyn Sechler, Owner, Sechler , Phoenix David Dvorak, Owner, Dvorak CPA , Clearwater, Fla. Tyree Collier, Partner, Thompson & Knight , Dallas For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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Non ‐ Profits and Unrelated Business I Income: Evaluating Non ‐ Core Revenue E l ti N C R Streams Seminar Aug. 10, 2011 Carolyn Sechler, Sechler CPA PC Tyree Collier, Thompson & Knight carolyn@ azcpa.com tyree.collier@ tklaw.com David Dvorak, Dvorak CPA info@ dvorakcpa.com
Today’s Program Reasons For Renewed IRS Interest In UBI Slide 7 – Slide 12 [Carolyn S echler] What Constitutes UBI Under Current Law Slide 13 – Slide 20 [Tyree Collier] Latest UBI Triggers Slide 21 – Slide 35 [David Dvorak] Slide 36 – Slide 38, plus Planning Issues For Non-Profits To Consider see "Background [Carolyn S echler] Materials"
Carolyn Sechler, Sechler CPA PC REASONS FOR RENEWED IRS REASONS FOR RENEWED IRS INTEREST IN UBI
B Background k d Background Former IRS Tax Exempt Organization Director Marcus Owens (currently principal at Caplin & Drysdale) predicted at the Georgetown Tax Exempt Conference that the IRS’ next compliance check questionnaires would likely address unrelated business income taxes (UBIT) … (and possibly political activity). Reasons alluded to at this presentation were: • Possibility of underreporting of taxable income activities • Over reporting of allocations of expense to taxable activities p g p • A similar effort has been effective in the for-profit arena • The IRS simply had not looked at this area in a while (1986) 8
Wh When IRS Develops A Focus IRS D l A F I. Procedure A. As in other areas of focus, it is anticipated that questionnaires will be issued to exempt organizations quest o a es w ll be ssued to e e pt o ga at o s requesting they voluntarily respond to questions about a particular area of activity. B Th B. The questionnaire procedure (as performed with ti i d ( f d ith hospitals and universities) allows for an area to be targeted for audit. 9
Example For Your Consideration E l F Y C id i I. Distinguishing sponsorship vs. advertising A. A carefully and thoughtfully designed sponsorship program with guidance from your tax professional may result in a w t gu da ce o you ta p o ess o al ay esult a program free of UBI. B. To be considered a related activity, these components must contribute to the accomplishment of the t t ib t t th li h t f th organization’s exempt purpose. C. The recent IRS concern over the number of times the logo/brand is shown at an event and whether it is tipping toward advertising (taxable) 10
M Matching Methodologies hi M h d l i Expense allocations Carefully match expenditures which occurred as a result • of this activity o t s act v ty Would not have expended funds in this area if not for this • activity Consistent methodology for computing allocated costs, • documented 11
O Th H On The Horizon i I Fundraising activity I.Fundraising activity A. Appears to have the elements of unrelated activity B. Fundraisers paid internally or externally might be construed as operating a trade or business which is regularly carried on and i d b i hi h i l l i d d for which funds are raised in a manner which does not further the mission of the organization. C. For now, the IRS is taking the position that this is more of a management activity than a business enterprise activity. In addition there does not seem to be any “unfair competition” issue with for-profit entities relative to this activity. i ith f fit titi l ti t thi ti it D. Scrutinize affinity card programs, “Groupon” type activities, and other forms of cause marketing for potential exposure to UBIT . 12
Tyree Collier, Thompson & Knight WHAT CONSTITUTES UBI WHAT CONSTITUTES UBI UNDER CURRENT LAW
Hi History And Purpose A d P I. I Effective in 1951 Eff ti i 1951 II. Response to commercial business operations of charities A. New York University case y 1. Corporation operated macaroni factory 2. Earnings supported NYU Law School 3. IRS attempted to tax earnings but lost the case. . Mueller Co. v. Commissioner , 190 F .2d 120 a. C. F (3 d Ci 1951) (3rd Cir. 1951). b. Congress responded with the first UBIT rules. B B. Proposed to level playing field reduce non exempt Proposed to level playing field, reduce non-exempt activities 14
O Organizations Subject To UBI Tax i i S bj T UBI T I. Tax Imposed by IRC § 511 A. Applies to all organizations tax exempt under I.R.C. § 501(a) 501(a) 1. 501(c)(3) organizations 2. All other 501(c) organizations ( ) g 3. All 401(a) organizations a. Pension plans b. IRAs c. Etc. B. Applies to state colleges and universities 15
UBI T UBI Tax Rates R I I. T Tax rate depends on type of entity t d d t f tit II. Corporations and associations A. A Taxed at regular corporate rates Taxed at regular corporate rates 1. 15% for first $50,000 of net taxable income 2. 2. 34% to 39% over $75,000 of net taxable income 34% to 39% over $75,000 of net taxable income III. Trusts A. Taxed at complex trust rates 1. 15% for first $2,300 of net taxable income 2. 25% to 33% for $2,301 to $11,500 3. 35% for net taxable income above $11,500 16
What Is Taxed? I. Unrelated business taxable income (UBTI) A. Gross income, less deductions, with modifications. IRC § 512(a) B. B. Only from certain activities Only from certain activities 1. Trade or business 2. Regularly carried on a. Frequency and continuity comparable to similar commercial operations b. Annual events usually not regularly carried on i. Advertising in programs for sports, concerts (Treas. Reg. § 1.513-1(c)(2)(ii)) ii. Income from annual fundraisers (Treas. Reg. § 1.513- 1( )(2)(iii)) 1(c)(2)(iii)) 3. Unrelated to exempt purpose i. Not substantially related to exempt purpose or function ii. Irrelevant that funds generated will support exempt function 17
S Statutory Exceptions To UBTI E i T UBTI I. I. Sect. 513(a) exceptions Sect. 513(a) exceptions A. Substantially all work performed by volunteers B. Activities conducted for the convenience of members, employees or the persons being served by the organization 1. Examples: Hospital cafeteria and college student housing housing C. Selling merchandise, substantially all of which was contributed to the organization II. Other specific situations A. Trade shows ( § 513(d)), sponsorship payments ( § 513(i)), etc. 18
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