Unrelated Business Income Tax

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Jen: This is the PKF Texas – Entrepreneur’s Playbook®. I’m Jen Lemanski, and I’m here today with Emily Smikal, a Director in our tax department and one of the faces of the PKF Texas not-for-profit team.  Emily, welcome to the Playbook.

Emily: Thanks, Jen. Thanks for having me.

Jen: So, I’ve heard you talk before about this thing called “unrelated business income tax.” How does that impact not-for-profits, and what should they know?

Emily: First, let’s call it UBI just to keep it more simple. UBIT, unrelated business income tax, is an income tax imposed on certain not-for-profit organizations that conduct certain activity that is not related to their tax-exempt purpose.

Jen: So, what would qualify for that?

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Continue Reading How Unrelated Business Income Tax Impacts Not-for-Profits

If your not-for-profit has lost financial support during the pandemic, you may be looking for ways to raise new revenue. But if your proposed solution is a side business, be careful. Even when business ventures are related to a not-for-profit’s exempt purpose, they can run afoul of the commerciality doctrine — and jeopardize an organization’s tax status.

woman holding hundred dollar bills fanned out; image used for blog post about commerciality doctrine for not-for-profits

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Continue Reading Not-for-Profits: Be Careful of the Commerciality Doctrine

Last week, the IRS issued proposed regulations, which will help to simplify the rules around how not-for-profit entities should calculate their unrelated business income tax (UBIT) for more than one unrelated trade or business.

close up angle of three people sitting at a wooden table near a window overlooking the city with pens and notepads; image used for blog post for IRS new regulations for not-for-profits UBIT calculation

UBIT is applicable to any trade or business activity a not-for-profit engages in that is not substantially related to the tax-exempt…

Internal Revenue Code (IRC) Section 512(a)(7) was recently retroactively repealed by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. Section 512(a)(7) increased unrelated business taxable income by amounts paid or incurred for qualified transportation fringes, and Congress originally enacted this provision for amounts paid or incurred after December 31, 2017.

A person typing on an Apple Mac laptop; image used for blog post about claiming a refund for UBIT or adjusting Form 990-T

As a result…

A much-hated tax on not-for-profit organizations is on the way out. At the end of 2019, Congress repealed a provision of 2017’s Tax Cuts and Jobs Act (TCJA), which triggered the unrelated business income tax (UBIT) of 21% on not-for-profit employers that provide employees with transportation fringe benefits.

a red monorail train speeding overhead people walking through a transportation terminal; image used for UBIT transportation fringe benefits blog post

Unequipped to handle the additional administrative burdens and compliance costs, thousands of not-for-profits had complained — and legislators apparently listened.

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Continue Reading Repealed: UBIT on Transportation Fringe Benefits

The commerciality doctrine was created along with the operational test to address concerns over not-for-profits competing at an unfair tax advantage with for-profit businesses. But even business activities related to your exempt purpose could fall prey to the commerciality doctrine, resulting in the potential loss of your organization’s exempt status.

Several Factors Considered
The operational…