UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Getting Calculations Right and Avoiding Audit Traps TUESDAY , JULY 21, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down • only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. • WHO TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please e-mail sound@straffordpub.com immediately so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.
UBTI and UBIT for Exempt Organizations July 21, 2015 Brenda Blunt Michele A. W. McKinnon Eide Bailly McGuireWoods bblunt@eidebailly.com bblunt@eidebailly.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Unrelated Business Taxable Income: Overview Michele A. W. McKinnon McGuireWoods LLP Richmond, Virginia mmckinnon@mcguirewoods.com www.mcguirewoods.com
General Rule • Internal Revenue Code section 511 imposes a tax on the “unrelated business taxable income” of an exempt organization. – Applies to all 501(c) organizations and state educational instrumentalities under Internal Revenue Code section 115. • An activity must meet three criteria to be an “unrelated” trade or business: – It must be a trade or business. – It must be regularly carried on. – It must not be substantially related to the organization’s exempt purpose. • Exempt organizations report unrelated business income and compute the tax on Form 990-T. McGuireWoods LLP | 6 CONFIDENTIAL
Definition of Trade or Business • A trade or business is generally defined as any activity carried on for the production of income from the sale of goods or performance of services. McGuireWoods LLP | 7 CONFIDENTIAL
General Concepts • Fragmentation Rule – An activity will not lose its identity as a trade or business merely because it is carried on within a larger aggregate of similar activities that may, or may not, be related to an organization’s exempt purposes. • Examples: – Advertising – Museum gift shop – item by item analysis – PLR 201106019 – Seminary providing rental housing for students, faculty, potential students, family members of students, and guest speakers found to have UBTI from income from all users other than students because the housing was operated in a manner similar to a commercial hotel. McGuireWoods LLP | 8 CONFIDENTIAL
General Concepts (continued) • Exploitation Rule – Generally, selling items produced in connection with an exempt function activity is not an unrelated trade or business, but this rule will not apply if the organization has exploited the exempt function in excess of what is necessary to accomplish the exempt purpose. • Examples – – Sale of furniture that has been renovated by handicapped individuals. – Sale of apple butter at agricultural fair after demonstration on how to prepare apple butter. McGuireWoods LLP | 9 CONFIDENTIAL
General Concepts (continued) • Dual Use Rule – The dual use rule recognizes that a facility may be used for both exempt and nonexempt or commercial functions. • Example – A university-owned ski facility primarily for students is also made available to the general public. Income from the use of the ski lift by the general public is unrelated trade or business income. McGuireWoods LLP | 10 CONFIDENTIAL
Meaning of “Regularly Carried On” • A business is regularly carried on if it is conducted with a frequency and continuity that is similar to a commercial or for profit business. • If the organization conducts the business only infrequently or intermittently, the business will not be regularly carried on. • Examples – Fundraising gala held once every year. – Annual advertising book distributed to members at the annual convention, where advertising is solicited year- round. McGuireWoods LLP | 11 CONFIDENTIAL
Specific Exclusions from UBTI • There are a number of exclusions under the unrelated trade or business income rules. • Income will not be subject to unrelated business income tax if: – Substantially all of the work in carrying out the activity is carried out by volunteers. – The trade or business is carried on for the convenience of members, students, patients, etc. • Student bookstore or dormitory • Hospital pharmacy for patients • Hospital gift shop, parking lot, cafeteria – Substantially all of the merchandise sold is donated (referred to as the “thrift shop” exception). McGuireWoods LLP | 12 CONFIDENTIAL
Specific Exclusions from UBTI (continued) • Income will not be subject to unrelated business income tax if: – It is derived from bingo games that are legal under state law and are not regularly conducted by for profit organizations. – It is attributable to the distribution of low cost items in connection with a charitable solicitation. – It is a qualified sponsorship payment. McGuireWoods LLP | 13 CONFIDENTIAL
Modifications to Computation of UBTI • The following items are generally excluded from unrelated business taxable income (unless attributable to debt-financed property): – Dividends, interest, payments with respect to securities loans, and annuities. – Royalties (from intangible property rights but not services). – Rents. – Gains from the sale or exchange of property (unless inventory or held primarily for sale to customers in the ordinary course of a trade or business). • Additional income excluded from UBTI includes: – Income from charitable gift annuities over the life or lives of one or two individuals. – Certain research income. McGuireWoods LLP | 14 CONFIDENTIAL
Special Rules • All income from an S corporation, including gain on the sale of shares, is subject to UBIT. • Income from partnerships is analyzed under a look-through rule. • Special rules apply to income derived from a controlled subsidiary that would otherwise be excludable. – Under these rules a controlled entity is one owned more than 50% by the organization. – Interest, rents, royalties, or annuities will not be excluded from UBTI to the extent that such amounts reduced the net unrelated income or increased the net unrelated loss of the subsidiary. – Example – A university receives royalty income from a taxable subsidiary established for the purpose of commercializing pharmaceutical products resulting from scientific research conducted at the university. PLR 9720036. McGuireWoods LLP | 15 CONFIDENTIAL
Debt-Financed Property • Income otherwise exempt from UBIT is taxable to the extent it is derived from debt-financed property. • Debt-financed income can arise in a number of ways: – Investing on margin. – Investing in leveraged investment funds. – Investing in a partnership that carries on a trade or business or invests in a trade or business that is conducted by a partnership. McGuireWoods LLP | 16 CONFIDENTIAL
UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Form 990-T Filing Thresholds Brenda A. Blunt, CPA, CGMA bblunt@eidebailly.com 602-264-8607 17 www.eide ba i l l y . co m
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