Discussion:UBIT ?
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Mark Eason (talk|edits) said: | 13 November 2006 |
| 5 years ago the nonprofit started selling landscape boulders off of its property (They have many acres). The nonprofit does none of the work. The landscaper comes onto their property, searches for the boulders and then removes them. Landscaper is putting his own money into a road on nonprofit property to get to more boulders. Five years ago, the "income" was $3000 and 2 checks. This year it has grown to $30,000 and 7 checks (I do not know how many trips were made onto nonprofit's property). The $30,000 is 40% of gross receipts. Having problems interpreting section 512(B)(5).
Does UBIT apply? The tax is over $4,000. | |
Mark Eason (talk|edits) said: | 13 November 2006 |
| JR-It is being used to build a building on the property for the nonprofit's use. These sales do not fit the exempt purpose of the organization. | |
| 13 November 2006 | |
| If the income from boulder sales does not qualify as program revenue it would be subject to UBIT, even if the proceeds are used for the exempt purpose. Based on the OP, it seems the activity is carried on regularly. Thats one of the factors in determining UBIT liability. | |
| November 14, 2006 | |
| Is there a profit motive? That is another test of whether it is UBI. What is the exempt purpose? | |
| 14 November 2006 | |
| What if a church or a school runs a bingo (or casino night or raffle) and the "profits" are used to support their tax exempt purposes. Is that UBIT subject to income tax? My gawd, the national deficit has just disappeared! | |
| November 14, 2006 | |
| It depends. It (bingo) may be exempt if
1) for-profit companies are not allowed by law to play bingo games, 2) it is legal where it is played, and 3) it meets the legal definition of bingo. For more information see IRS Publication 598. By the way, Form 990-T is only required when gross proceeds from UBI are greater than $1,000. | |
| 15 November 2006 | |
| Looks like the "volunteer work force" exception removes any profit from these activities from UBIT.
I got a UBIT notice relating to a NYSE publicly traded limted partnership in an IRA a few years ago. The income was due to debt forgiveness on bankruptcy. I lost every dime I invested and now the IRS wants to tax me on this! I ignored it - so far so good. A friend had this LP in a taxable account. He got a 1099 on this UBIT and asked my advice. I told him to report the 1099 income and then take a corrsponding loss on Sch D. He had already written off the entire capital loss on the investment on a prior years return. My theory was as a cash basis taxpayeyer this phantom income was counterbalanced by this additional loss. If he had not reported the 1099 income then the IRS computer would likely have generated a deficiency notice. So far so good. | |
Mark Eason (talk|edits) said: | 15 November 2006 |
| Boulder sales have risen to being "carried on regularly". There is no cost to the non-profit, pure profit. Boulder sales have nothing to do with exempt purpose. Early years treated as non-UBIT. Maybe 2 sales a year for $2,000. Sales almost tripled from 2004 to 2005. Will treat as UBIT.
For Jake, specific exemption for Bingo. Thanks for the help. About 20 years ago, a non-profit I prepared got burned on net income of only $3,000 from concession sales. Taxed and penlaized on 3 years of returns. | |
| November 15, 2006 | |
| No expenses? What about the administrative time it takes to process the checks received? Other administrative costs? Any state taxes that might apply? Next year there'll be the tax preparation fees to allocate. Maybe the expenses are too small to worry about; or maybe there are things that haven't been considered. | |
| 16 November 2006 | |
| Concession sales? Every school with a sports team has concession sales. Our bingo has concession sales. All volunteer labor. If that is taxable UBIT income then our beloved Congress needs to take another look at UBIT. | |
| November 16, 2006 | |
| This is certainly a complicated area of the tax code. There are many different types of nonprofit organizations and several different ways to calculate unrelated business income (UBI). A 501(c)(3) public charity that has concession sales that are obtained through the use of volunteer labor are not UBI. A social or recreational club (501(c)(7)) organization that operates concession sales may or may not have a UBI issue, depending on the makeup of its income (members vs. nonmembers). So Jake, for 501(c)(3) organizations (and governmental units such as public schools as I understand it), as long as volunteers provide substantially all of the work, then the revenue is not subject to unrelated business income tax (UBIT). | |
| 18 November 2006 | |
| In this week's Kiplinger Tax Letter -
"Headed for more IRS scrutiny next year: Gambling activities run by exempt groups. The Service wants to find out if charities pay tax on profits from casino nights, etc. Those gains are taxable because IRS considers gaming unrelated to a nonprofit's exempt purpose." | |
| November 18, 2006 | |
| Yes, the IRS' position regarding gaming activities is that the volunteer exception is not applicable. It's important for a nonprofit organization to make sure it follows the legal definition of bingo, otherwise it will most likely be considered a gaming activity subject to UBIT. | |
