Our final post of resources referenced in our session at the 2013 Alliance for Community Media National Conference, Nuts and Bolts of Nonprofits and Their People, with Syvia Strobel (ACM) and Deborah Vinsel(Thurston Community Television).
Timely Nonprofit Issues
Unrelated Business Activities: IRS Examination Area
The underreporting of unrelated business taxable income (UBTI) was the first mentioned highlight of the IRS Colleges and Universities Compliance Project Final Report released on April 25, 2013. 90% of the examined institutions underreported UBTI! The primary reaons for such underreporting:
- Reporting losses as connected to unrelated business activities when they were not (recurrent losses from activities indicated no profit motive, causing them to fail to meet the trade or business requirement);
- Misallocating expenses that were used to carry out both exempt and unrelated business activities and then applying an excessive proportion to offset unrelated business income;
- Miscalculating net operating losses; and
- Reporting unrelated business activities as exempt activities, thereby not properly reporting the income from such activities as unrelated business income.
The Report reveals an enormous compliance problem and rare area in which the Exempt Organizations (EO) division of the IRS can generate additional tax revenues. EO Division Director Lois Lerner (before her recent suspension) noted: “Because these issues may well be present elsewhere across the tax-exempt sector, all exempt organizations need to be aware of the importance of accurately reporting unrelated business income ….” If you have earned income generated from activities that do not contribute importantly to accomplishing your charitable mission, disregarding how the profits from such activities are used, you need to look at these issues carefully. And note that net income from advertising is almost always UBTI subject to the unrelated business income tax.
- For unrelated business activities generating recurrent losses, determine whether there is a profit-motive and document such determination, including the business rationale for continuing such activities despite the recurrent losses;
- Determine and document a fair and reasonable basis for allocating shared expenses among exempt and unrelated business activities;
- Document the underlying detail for determining net operating losses;
- Use reasonable care (which may or may not require the assistance of legal counsel) in determining whether a business activity is exempt or unrelated.
See our earlier post on the Report here.
See also Tax on Unrelated Business Income of Exempt Organizations, IRS Publication 598 here.
Lobbying and Political Activities: Hitting the Fan
Lost amidst the politicization of the recent IRS scandal is the fact that 501(c)(3) nonprofit organizations can, and often should, lobby and engage in other forms of permissible advocacy in order to effectively and efficiently advance their respective missions. But these organizations need to understand the limitations and rules of the game. And they should protect their rights to engage in such advocacy, which might include advocating for greater clarity in the laws and stronger enforcement against those organizations that abuse the laws.
- For any charity with less than a $20 million annual budget, strongly consider making the 501(h) election that enables you to measure your lobbying activities on lobbying expenditures – see Maximize Your Lobbying Limit (Bolder Advocacy - AFJ);
- Consider whether a change in the laws could be of great advantage to advancing your charitable mission, and what your organization could do to effect such change;
- Get help in understanding the federal and state lobbing and election laws that may require registration and reporting for certain activities;
- Understand and strictly enforce the absolute ban on electioneering (including the prohibition against endorsing political candidates); and
- Develop policies and train your employees and volunteers to help ensure your compliance with respect to the applicable laws (this may not be so difficult) and the First Amendment rights of individuals to express their views.