Special Tax Considerations For Nonprofits

Nonprofits are an important part of our communities, providing services to the general public and helping boost our local economies. However, they do have special tax considerations that can impact their financial status and operations. Nonprofits can be impacted by a variety of taxes, including unrelated business income tax (UBIT), real estate tax, and revocation of tax-exempt status. This blog will discuss some of these tax issues and provide you with some information about how they affect nonprofits.

Unrelated Business Income Tax (UBIT)

As tax-exempt organizations, nonprofits operate for a purpose that is charitable or beneficial to the community. However, as they carry out their mission, they engage in certain activities that are not directly related to their exempt purposes and are therefore subject to federal income tax. The IRS defines unrelated business income (UBIT) as net income derived from a trade or business regularly carried on by the organization that is not substantially related to its exempt purpose. UBTI is typically taxed at for-profit business rates, although certain exceptions and modifications under Section 512 and 513 may apply.

Real Estate Tax

Real estate taxes are government-levied payments charged annually on immovable land (usually buildings or homes). These funds are used to fund local services, including roads, schools and community projects. These taxes can be levied on a property’s assessed value, BIR zonal value or the highest value among these. They vary widely from state to state, and can also include a special assessment tax. Nonprofits often need to consider how to generate revenue without affecting their exemption. For example, an organization may lease its buildings to a for-profit entity, in order to generate income for charitable purposes. While this may be an attractive method, it must be done carefully so as not to lose the organization’s tax exemption. In addition, the organization should perform a cost-benefit analysis to determine whether the added real estate tax burden is offset by the rental income generated from the for-profit entity.

Revocation Of Tax-Exempt Status

Revocation of an organization’s tax-exempt status is a painful experience. It means the nonprofit will no longer be able to collect donations from donors or to qualify for state sales and use tax exemptions, among other things. But there are ways to get your exempt status back. The IRS has a process for reinstating an organization’s tax-exempt status after it has been automatically revoked because the organization failed to file annual returns (IRS Forms 990, 990-EZ, 990-N, or 990-PF) for three consecutive years. The reinstatement application process has four different options, based on the type of organization and how long it has been since it was revoked. Each requires a significant level of detail and compliance. The best way to ensure your organization’s exempt status stays in place is to have a qualified attorney and tax advisor help you navigate the process.

Tax-Exempt Organizations

The rules and regulations governing nonprofits and tax-exempt organizations are constantly evolving. In addition to federal tax benefits, nonprofits are also exempt from paying sales and use taxes on goods donated to them or bailed by them. This is an important benefit to nonprofits, as it allows them to make contributions to a cause while avoiding the higher business and occupation (B&O) or retail sales taxes that apply to commercial entities. In some instances, a nonprofit may want to engage in for-profit activities, but these transactions must be carefully planned and implemented to ensure that they will not impact their tax-exempt status. For example, if a nonprofit operates a for-profit entity that conducts a literary event and sells books on behalf of the nonprofit, it must be clear to the IRS that the activity is merely a way for the nonprofit to promote its charitable purposes rather than for-profit profit. Got questions? Priscilla A. Chesler CPA PC is on the forefront of these developments and can help your organization successfully navigate through them. Contact us here today: https://pchesler.com/tax-preparation/