FOR LIVE PROGRAM ONLY UBTI and UBIT for Exempt Organizations: Mastering Form 990-T Getting Calculations Right and Avoiding Audit Traps WEDNESDAY , MAY 24, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM 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 DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live 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.
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UBTI and UBIT for Exempt Organizations May 24, 2017 Brenda A. Blunt, Tax Partner Frank H. Smith, CPA, Partner Eide Bailly, Phoenix Raffa, Washington, D.C. bblunt@eidebailly.com fsmith@raffa.com Michael N. Fine, Partner Wyatt Tarrant & Combs, Louisville, Ky. mfine@wyattfirm.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 Michael N. Fine Frank H. Smith Brenda A. Blunt, CPA, CGMA Partner CPA Tax Partner Wyatt, Tarrant & Combs LLP Raffa, P.C. Eide Bailly LLP 500 W. Jefferson St. 1899 L. Street, NW 1850 North Central Avenue, Suite 2800 Suite 850 Suite 400 Louisville, KY 40202 Washington, DC 20036 Phoenix, Arizona 85004 mfine@wyattfirm.com fsmith@raffa.com bblunt@eidebailly.com
Overview Unrelated Business Taxable Income (“UBTI”) overview Form 990-T filing thresholds UBTI calculations and schedules Tax computation Allocation of expense deductions Rent income (Schedule C) Unrelated debt-financed income (Schedule E) Exploited Activities (Schedule I) Advertising Income (Schedule J) Other Schedules IRS Audit "Triggers" leading to increases in UBTI 6
UBTI Overview Section 501(c)(3) Limitation – Org. Test Must be organized for one or more exempt purposes Charitable, scientific, educational, religious Must engage “primarily” in activities that further an exempt purpose No “more than an insubstantial part” of total activities may be non-exempt purpose activities No “bright line” for determining insubstantial Subjective test comparing many factors 7
UBTI Overview Purpose: Eliminate unfair competition Places business activities of EOs on the same tax footing as nonexempt business endeavors with which they compete Applies to organizations exempt under IRC §§ 501(a), 501(c)(3), and 511(2)(A) Taxed on income derived from: Trade or Business Regularly Carried On Not Substantially Related to Tax-Exempt Purposes 8
UBTI Overview Trade or Business Any activity carried on for the production of income Examples: Sale of goods or the performance of services Courts often look to profit motive, passivity, competition “Facts and circumstances” test A single business activity may be divided into related and unrelated aspects Commercial activities do not lose their business identity because they are conducted by tax-exempt organizations Generating funds to be used for mission-related activities does not make a trade or business activity an exempt purpose activity Merely recovering costs without a profit motive ≠ trade or business 9
UBTI Overview Regularly Carried On Frequency and continuity similar to comparable commercial activities of taxable organizations Example: Hospital-operated sandwich stand at annual state fair Not “regularly carried on” Example: One-time lease of donated Boeing 747 jumbo jet Not “regularly carried on” Example: Christmas card program operated by veterans org. Was “regularly carried on” 10
UBTI Overview Not Substantially Related Must demonstrate substantial causal relationship to exempt purposes Activity must “contribute importantly” to accomplishing exempt purposes Scale matters: Retail grocery store as therapeutic program for emotionally disturbed adolescents Substantially related: scale no larger than was reasonably necessary Relationship must be substantial; not merely incidental Proceeds from an art museum's sale of children's merchandise were not subject to UBIT But sale of scientific books and city souvenirs by museum of folk art considered unrelated trade or business 11
UBTI Overview Common UBIT Activities Selling advertising Example: Weekly bulletins, magazines, journals, or on websites Selling merch. w/ no relationship to exempt purposes Leasing space in debt-financed buildings Earning income from parking lots open to the public 12
UBTI Overview Statutory Exclusions (1) Primarily for the convenience of patients or employees – Example: Parking lot, cafeteria/coffee shop, pharmacy (2) Substantially all of the work (approx. 85%) is done by volunteers – Example: Gift shop staffed by auxiliary (3) Substantially all of merchandise sold (approx. 85%) was donated Example: Thrift Store 13
UBTI Overview Modifications Passive income with no active business participation or management Examples: Dividends, interest, annuities, and royalties Rent from real property May include rental of “incidental” personal property Distinguish “rents” versus “fees for services” Revenue from research activities Distinguish scientific research from ordinary and routine testing All research revenue, including commercially sponsored research Extends to SMLLC owned by the org. (PLR 200223067) 14
UBTI Overview Pass-through Entities and UBTI Partnership, LLC (two or more members), most REITs Taxed as pass-through entities No entity level tax but activities are attributed to partners/members Income and expenses retains character to you as a partner/member Note special rules for S Corporations Possible UBI issues: Activities may adversely impact tax-exempt status of partner/member Pass-through income may, or may not, be taxable as UBI Cash distributions may not match with income recognition Pass-through share of UBI loss may not be deductible 15
UBTI Overview Debt-Financed Income Taxed on dividends, interest, royalties, & rent if from “debt - financed” property Applies to property subject to “acquisition indebtedness” Property “substantially related” to the organization’s exempt purpose is not subject to the debt-financed property rules Leasing debt- financed MOB was ‘substantially related’ (Rev. Rul. 69 - 464): Makes medical care more accessible Improves the proximity of doctors to the hospital Increases use of the hospital’s facilities Makes it easier to admit patients Improves patient care 16
UBTI Overview Advertising versus Qualified Sponsorship Payments Soliciting, selling, and publishing commercial advertising is a trade or business that generates UBTI Advertising includes: Endorsements Inducements to purchase, sell, or use the products or services Messages containing qualitative or comparative language, price information, or other indications of savings or value 17
UBTI Overview Advertising versus Qualified Sponsorship Payments Qualified Sponsorship Recognizes a sponsor as a benefactor Uses or acknowledges the sponsor’s business name, logo, or product lines You can: Use logos or slogans that are part of the sponsor’s established identity Acknowledge a program underwriter on the air or during the broadcast Payment cannot be contingent on broadcast ratings or other factors indicating the degree of public exposure 18
UBTI Overview Advertising versus Qualified Sponsorship Payments Links to Website Link to sponsor’s website without any endorsement = qualified sponsorship Link to sponsor’s website with an endorsement = advertising Banner Advertisements Used generally on the website = advertising Used as part of an online periodical = advertising, but deductions available 19
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