Discussion:Rent at Nonprofit Property

An employee uses the facilities for their own for profit business after that employee's work hours with the nonprofit. The work that the employee does for his profit business fits the organization's mission/purpose. A small amount of rent is paid and expenses are reimbursed. There not an agreement. What are some of the issues with this? Besides the lack of a written agreement?

Is the employee an officer, director, key employee or relative of same? If so I would be concerned about the amount of rent being paid. It should not be less than fair market value, otherwise there could be an issue with private inurement.

If the employee is not an officer, etc., I would still be sure that the rent being paid is FMV, otherwise there could be impermissible private benefit to the employee.

Next is the question of whether the rental income is taxable unrelated business income to the c3. If the work of the employee contributes significantly to the exempt purpose of the c3 the rent income would most likely be considered program service revenue. An example comes to mind: A c3 organization that provides counseling services renting office space to a mental health counselor might be considered related. Depends on the facts of your situation.

If the for-profit business is not related then the rent income might be exempt as real property rental income unless the property is debt financed or if the rents are determined based on a percentage of profits or if more than 50% of the rent is attributed to the rental of personal property, etc...

Of course there should be an agreement and there should be some documentation in the board minutes as to how the FMV rent was determined. CPAdavid 20:27, 1 July 2009 (CDT)