USA: Beware of unrelated income tax
Renting out a concert hall, meeting space or gym may seem like an easy way to earn revenue when funding is down, but be aware that Uncle Sam may treat your nonprofit organization as if it were a business if you do. Colleges and universities, museums, health care institutions, plus religious, charitable, scientific and other organizations may be subject to Unrelated Business Income Tax (UBIT) even when their leaders are trying to find new revenue sources to fulfill their missions and benefit their communities.
UBIT falls under Internal Revenue Code Section 512(a), which says that an activity is unrelated to business if it is:
A for-profit trade or business
Regularly carried on by the organization
Not substantially related to the organization's exempt purpose.
Unrelated business income can be generated by the organization itself, such as from a fund-raising event, but net profits from activities that do not further a tax-exempt organization's exempt purposes are subject to taxation at normal corporate rates. Also, unrelated business income generated from alternative activities and investments can be more complicated to report to the IRS due to the fact that it is usually a mix of business income and exempt-purpose income. And inaccurately completed tax forms can bring greater scrutiny, especially when the IRS is ever more vigilant about enforcing tax laws.
Examples of activities that appear to be innocuous but may just be taxable include charging for parking; selling membership lists, endorsements and advertising; publishing; selling art and handicrafts, and more. IRS Publication 598: Tax on Unrelated Business Income of Exempt Organizations provides numerous examples of what constitutes unrelated business income and information for nonprofit institutions to consider regarding their operations.
Clifton Gunderson LLP has qualified accounting experts who can provide more information about unrelated business income for tax-exempt organizations.
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