Tag Archive for: unrelated business income

Affordable Housing-Paying for Your Section 168(h) Election

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When a nonprofit is involved in an affordable housing or similar project with a for profit investor, the nonprofit generally uses a taxable for profit subsidiary to hold the property. The benefit of this is that the property can be depreciated over 27 ½ years rather than 40 years, which means a better tax results for the investor, and translates to a higher price for the tax credits.
However, to get this treatment the taxable subsidiary must make an election under Internal Revenue Code section 168(h)(6)(F)(ii). The effect of this election is that
dividends or interest, paid from the taxable subsidiary to the nonprofit parent, are taxable as Unrelated Business Income.
This requirement only exists when not all tax attributes between the project and its owners (share of income and loss, distributions, equity) are the same. But, that usually is the case for these joint venture projects
Additionally, any gain from disposition of an interest in the taxable subsidiary is also taxable as Unrelated Business Income to the nonprofit.
Techniques for reducing tax on dividends, interest or dispositions include, first repaying all loans and developer fees to the nonprofit sponsor. Additionally, the entity holding the project (usually a limited partnership) can make payments directly to the nonprofit as reimbursement for expenses. However, the nonprofit needs to document that these expenses are costs the nonprofit has incurred in behalf of the project.
Examples of allowable costs include payroll and related taxes, and benefits, as well as indirect costs that are necessary for providing services to the project. Indirect costs ​ typically include items such as occupancy, insurance, general accounting, and administration.

Nonprofits Check Your Website … IRS Will

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It wasn’t that many years ago that IRS seemed confused about what to do about nonprofit websites. Could links to for-profits be Unrelated Business Income? Can charities lobby or carry on political activity with links or messages on their website?
Now IRS considers your website and your social media postings a tool to check your activity and your compliance.

They will check these if your organization has been selected for audit. They will also check these for organizations that are applying for exempt status, or for a change in their status.
It’s very likely they will look at these if they are considering an audit of your organization based on inconsistencies identified in your form 990, or based on referrals from other agencies or from individuals.
The message is clear. Be sure your website and social media is up to date and properly describes your activities, and that those activities are consistent with your mission. Also be careful of any links or endorsements that might indicate Unrelated Business Income, political or lobbying activity.
It wasn’t that many years ago that IRS seemed confused about what to do about nonprofit websites. Could links to for-profits be Unrelated Business Income? Can charities lobby or carry on political activity with links or messages on their website?
Now IRS considers your website and your social media postings a tool to check your activity and your compliance.​
They will check these if your organization has been selected for audit. They will also check these for organizations that are applying for exempt status, or for a change in their status.
It’s very likely they will look at these if they are considering an audit of your organization based on inconsistencies identified in your form 990, or based on referrals from other agencies or from individuals.
The message is clear. Be sure your website and social media is up to date and properly describes your activities, and that those activities are consistent with your mission. Also be careful of any links or endorsements that might indicate Unrelated Business Income, political or lobbying activity.

When is Real Property Rental an Unrelated Business Activity?

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There are many special rules and exceptions for real estate rental.

First, if the rental furthers your charitable purpose, such as with affordable, emergency, or transitional housing, there is generally no unrelated business activity.

If your rental activity is unrelated, but there is no debt related to the property, rental income will be treated like dividends and interest (taxable to social clubs but exempt for most other nonprofits).

If there are loans related to the property, there are complex calculations of how much is taxable.

One of the twists in these rules applies when there is rental of personal property, like furnishings, with the real estate. This won’t affect you if 10% or less of the income is related to personal property. However, if personal property represents more than 10% but no more than 50% of the income, that percentage will be considered unrelated, and if more than 50% of the rent relates to personal property, all of the rent will be a unrelated business income.

If you operate a parking lot, that income is taxable but if you lease your parking lot to an operator it will qualify as a real property rental.

If services are provided as part of the rental, it can make the rental subject to unrelated business income treatment.

Be aware that the sale of real estate that is loan financed results in Unrelated Business Income.

A couple more exceptions you should be aware of include loan financed property that is purchased with an intention to use it as part of your program but which isn’t currently being used in that way, and property that is donated but which has a mortgage or other loan. In both of these cases there can be exceptions to unrelated business income treatment.

Finally, don’t forget your get out of jail free card. An activity must be “regularly carried on” to be treated as an unrelated business activity. A limited or occasional rental of property won’t be unrelated business income regardless of whether personal property is included, or whether there are outstanding loans against the property.