Tax Issues Facing
Exempt Organizations
TODAY’S AGENDA AND OBJECTIVES
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CHNA Timeline Refresher•
Unrelated Business Income•
Joint VenturesCHNA TIMING
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Effective for tax years beginning after March 23, 2012•
Conduct at least once every 3 years•
Must adopt implementation strategy in same tax year as CNHA•
Transition year example: a calendar year hospital completes its 1st CHNA in 2013, hospital has until May 15, 2014 to adopt IS,but next CHNA and IS must be both be done by end of 2016.
COMPLIANCE PROJECT REPORT
Underreporting of UBI:
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Lack of profit motive (using non-UBI losses to offset UBI)•
Improper expense allocation•
Errors in calculating or substantiating NOLs•
Commonly missed UBI: Fitness centers, advertising, facility rentalsExecutive Compensation:
UNRELATED BUSINESS INCOME
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Eliminate a source of unfair competition by placing the unrelated business activities of an EO on the same tax basis as thenonexempt business endeavors with which they compete.
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Form 990-T required if gross income > $1,000 (gross receipts less cost of goods sold)•
Tax calculated using graduated corporate rates which start at 15%• Statute of limitations generally 3 years
• Form 990 may start the statute of limitations if revenue
disclosed in enough detail to put the IRS on notice as to the nature of the activity and the gross receipts
• Filing a 990-T with zeroes most likely will not start the statutes running, IRS may not process it
UNRELATED BUSINESS INCOME
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An organization may be subject to tax if it is carrying on an activity that is:•
Trade or business•
Regularly carried on•
Not Substantially Related to Exempt PurposeUNRELATED BUSINESS INCOME TRADE OR BUSINESS
• The term "trade or business" includes any activity which is carried on for the production of income from the sale of goods or the performance of services.
• Must implicitly attach a profit motive, but profitability is not a prerequisite.
UNRELATED BUSINESS INCOME REGULARLY
CARRIED ON
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A trade or business ordinarily is deemed regularly carried on if it manifests a frequency and continuity and is pursued in a commercial manner.•
“Frequent and continuous” not defined - based on the facts and circumstances of each activity.UNRELATED BUSINESS INCOME
SUBSTANTIALLY RELATED
• An activity is considered “not substantially related” if it does not contribute importantly to accomplishing the exempt purpose of the EO
• Production of funds not considered related
• Facts and circumstances - size and extent of the activities
involved must be considered in relation to the nature and extent of the exempt function they intend to serve.
UNRELATED BUSINESS INCOME HOSPITAL
EXAMPLES
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Hospital Services Provided to Non-Patients•
Pharmacies (non-patient prescription filling is UBI)•
Lab Testing (non-patient lab revenue is UBI)•
Community Need Exception – can negate UBI treatment – fact driven•
Services Provided to Another Tax Exempt HospitalServices such as billing, labs, training, etc. are not UBI if:
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Services are provided at a fee that does not exceed actual costs (no profit motive)•
Serving a hospital with less than 100 patients•
Services are consistent with the recipient hospital’s exempt functionUNRELATED BUSINESS INCOME LOSSES
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Losses generated from unrelated activities can offset income from profitable activities.•
The loss must result from an activity which is a trade or business.IRS currently looking at UBI to understand why a high percentage of organizations conduct business activities that continually generate losses
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Timing of revenue and deductions?•
Organization not operating business in a profitable manner?•
Expense allocations overly aggressive? (continuing controversy)•
Activity mission related?• Exclude Dividends, Interest, Annuities and other Investment income
• Exclude Royalty Income, except for royalties received from a controlled corporation.
• Exclude rental income
• From real property
• Mixed lease: >10% rental from personal property, then taxable
• Rents based on net profits are taxable
• If debt-financed property, then possibly taxable
UNRELATED BUSINESS INCOME DEDUCTIONS
• Net Operating Losses are allowed• Charitable contribution deduction – 10% of UBTI before the contribution deduction.
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Debt Financed Income is included in UBI•
Defined as any property:•
Held to produce income, and•
Has acquisition indebtedness at any time during the year (if the property was disposed of during the tax year, at any time during the 12 months before the disposition).•
Includes rental real estate, tangible personal property, and corporate stock.•
Exceptions to the definition of Debt-Financed Property•
If substantially all of the property is used for theorganization's exempt purpose. (Substantially all = 85%)
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Property used in an unrelated trade or business•
Property related to research activities normally excluded from UBI•
Property used in certain excluded activities•
Property used by a related exempt organization for its exempt purposes will be counted in determining the 85% test.•
Property acquired for future exempt use (neighborhood land rule).UNRELATED BUSINESS INCOME
ALTERNATIVE INVESTMENTS
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Generally in the form of a partnership (S Corp income always UBI)•
Will receive a Form 1065 Schedule K-1 annually – usually on a calendar year basis•
Box 20 of Schedule K-1, Code V indicates unrelated business taxable income•
May possibly also trigger taxable income in a number of states (additional schedules attached to the K-1)JOINT VENTURES: FORM 990
PART VI QUESTION 16A
Did the organization
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invest in,•
contribute assets to,•
or participate in a joint venture or similar arrangement withPART VI QUESTION 16A
A joint venture = contractual arrangement with an agreement to jointly undertake a business enterprise, investment, or exempt-purpose activity without regard to:
1. Whether the organization controls the venture or arrangement
2. The legal structure of the venture or arrangement
3. Whether the arrangement is treated as a partnership for federal income tax purpose or as an association or corporation for
PART VI QUESTION 16B
Did the organization:
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Follow a written policy or procedure requiring the organization to evaluate its participation in joint venture arrangements under applicable federal tax law, and•
Take steps to safeguard the organization’s exempt status with respect to such arrangements?PART VI QUESTION 16B
Some examples of safeguard include:
1. Control over the venture sufficient to ensure that the venture furthers the exempt purpose of the EO.
2. Requirements that the venture give priority to exempt purposes over maximizing profits for the other participants.
3. The venture does not engage in activities that would jeopardize the EO’s exemption (i.e., political).
SCHEDULE H PART IV
Disclosure of management companies and joint ventures: Owned 10% or more by officers, directors, trustees, key employees, and physicians
1. Name of entity and description of primary activity
2. % owned by EO
3. % owned by officers, directors, trustees, or key employees
SCHEDULE H PART IV
Examples:
