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This course provides specific, practical coverage of the issues bedeviling CPAs who work for or advise nonprofits. You'll get the latest on avoiding unrelated business income (UBI), use of for-profit subsidiaries and joint ventures, excess benefit rules, compliance and lobbying - along with savvy solutions to the problems "taxing" today's NPO.
Objectives:736790
Chapter 0
Overview Learning Objectives
To identify, implement, and advise clients about practical solutions to complex nonprofit tax issues.
IntroductionTraditionally, tax exemption has been limited to situations in which a not-for-profit organization gains exemption as a result of a properly completed application. To take this even further, exemption has been divided into two subgroups:
The obvious advantage to meeting the operational and organizational test of §501(c)(3) is the ability to draw on a much broader base of public support.
Because of the obvious attraction to receiving support on a tax-exempt basis, many organizations have gone to great lengths to either protect their tax exemption or to take a for-profit activity and qualify it for exemption. With effective tax rates possibly in excess of 39% for federal and state purposes, tax-exempt status gives a decisive advantage to those organizations that qualify.
A further in-depth study of exempt organizations serves several useful purposes:
In keeping pace with advancements in the not-for-profit area, the IRS has stepped up its monitoring activity in order to curtail the real or perceived abuses to exempt status. The IRS has, in recent years, also stepped up examinations of"exploited activities."
Along with structural considerations, it is also important to have an in-depth understanding of how"exploited activities" relate to the rest of the organization. Sections 511 through 514 lay out the basic rules for unrelated business income as it relates to exempt organizations. However, they do not address the "how to" in handling a variety of issues related to such problems, such as allocation of staff time and dual use of facilities.
If an activity is conducted on a for-profit basis or the IRS determines that an activity has been improperly handled and should be taxed, another series of problems arises. Many CPAs do not realize the problems associated with the impact of
These issues are normally associated with for-profit activities but nevertheless have to be addressed when dealing with the for-profit activities of an exempt organization.
Finally, like all disciplines in accounting, the issues surrounding not-for-profit organizations are constantly changing. An in-depth understanding regarding current issues makes a difference how well clients are served.
The rationale behind not-for-profit organizations depends, in part, on the nature of the activity. Organizations that fall under the category described in §501(c)(3) and, to a lesser degree, §501(c)(4) are created for the most part to serve a public good. The Code describes §501(c)(3) organizations as those created for educational, religious, scientific, literary, and other related purposes. Section 501(c)(4) organizations generally fall under a category of"social welfare" activities that normally are perceived as meeting community needs.
When categorizing activities, it is important to make a distinction between"charitable" activities described in §501(c)(3) and those described in §501(c)(4). Although activities described in §501(c)(4) are generally considered "charitable," donations to these activities are usually not taxdeductible. Likewise, amounts paid for membership, services, or fees to the other types of organizations currently enjoying tax-exempt status are not deductible as charitable donations, with a few limited exceptions discussed in the course. Even though an item may not be deductible under §170 as a contribution, it may be deductible under another section of the Code, such as §162 as an ordinary and necessary business expense.
Exempt organizations of all types have grown into multimillion-dollar operations with intricate business structures that rival commercial business enterprises. Exempt organizations often conduct their businesses through both exempt and nonexempt divisions and companies. Much of this activity has gone beyond caring for community needs. At the present time, Congress is taking a hard look at the various aspects of exemption for nonprofits.
Exempt organization management is faced with the monumental task of adhering to the philosophies of its respective organization while trying to conduct its businesses in a complex environment.
For self study participants only, the CPE Standards require the inclusion of review questions that provide periodic learning feedback. Please go to the review section at the end of the course to access the review questions for this chapter.
Chapter 1
The Use of Multiple Structures with Exempt Organizations Learning ObjectivesThe use of multiple structures, whether exempt or taxable, has gained popularity over the past several years. It has become common for exempt organizations to structure their undertakings in a series of related organizations. In some cases these activities are conducted as tax-exempt and in other cases through taxable entities. This has been especially true where there was a chance the activity could cost the organization its exemption due to either the magnitude or the nature of a business venture or prohibited activity. An exempt organization may not engage in prohibited activities – even through its subsidiaries.
As stated above, there are a variety of reasons for the development of business combinations of tax-exempt organizations. Initially, state law created the framework for most exempt activities. Some examples of these types of activities include the following:
A common example would be the inclusion of a business that generates unrelated business income in a for-profit subsidiary.
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