Unrelated Business Income and Other IRS Recent Developments Brian Todd, CPA, Partner Mike Engle, CPA, Partner

Transcription

1 Unrelated Business Incme and Other IRS Recent Develpments Brian Tdd, CPA, Partner Mike Engle, CPA, Partner

2 Agenda Recent Develpments Cllege and University Cmpliance Reprt Camp Tax Prpsal Advisry Cmmittee n Tax Exempt and Gvernment Entities (ACT) Reprt n Unrelated Business Incme Tax Cmpliance Unrelated Business Incme Cmmn activities Deductins and credits IRS Examinatin Activity

3 RECENT DEVELOPMENTS

4 IRS Cllege & University Cmpliance Reprt Final reprt issued in 2013 Sent questinnaires t arund 400 tax-exempt clleges and universities Questinnaire tpics Demgraphic infrmatin Exempt activities Unrelated business incme (UBI) Endwment funds Executive cmpensatin Endwment funds 34 audits cnducted as a result

5 IRS Cllege & University Cmpliance Reprt Exams were designed t fcus n executive cmpensatin and UBI Exams fund widespread nncmpliance relating t reprting UBI Fcused n characterizatin f incme, methds fr allcating expenses, recurring lsses, and applicatin f mdificatins and exceptins

6 IRS Cllege & University Cmpliance Reprt Results Increases t unrelated business taxable incme fr 90% f rganizatins examined ttaling abut $90 millin Disallwance f mre than $179 millin in lsses and NOLs Primary reasns fr adjustments Misclassificatin as trade r business: lack f prfit mtive Misallcatin f expenses Errrs in cmputatin Misclassificatin f related activities

7 IRS Cllege & University Cmpliance Reprt Lack f prfit mtive Mst cmmn reasn fr disallwance IRS disallwed lsses in 70% f the examinatins Ttal amunted t mre than $150 millin Review f UBI reprting IRS als lked at whether advice was sught n UBIrelated matters

8 Camp Tax Prpsal Released n February 26 by Ways and Means Cmmittee Chairman Dave Camp 1,000 pages lng Five tpics f interest fr tax-exempt rganizatins

9 Camp Tax Prpsal Charitable Cntributins Establishes 2% flr n individual tax returns Electin t treat charitable cntributins made after the clse f the tax year but befre due date f the return as made in the tax year Limits charitable cntributin f appreciated prperty t the taxpayer s basis Unrelated Business Incme Cmpute UBIT separately fr each line f business (lsses frm ne activity can nt ffset incme frm anther activity) Mdifies exclusin fr qualified spnsrship payments Name and lg ryalties treated as unrelated Exclusin f research incme limited t publicly available research

10 Camp Tax Prpsal Excise Tax n Excess Tax-Exempt Organizatin Executive Cmpensatin Excise tax n emplyers equal t 25% f remuneratin in excess f $1 millin paid t a cvered emplyee Applies t excess parachute payments (even if payment des nt exceed $1 millin) Cvered emplyee is ne f the five highest cmpensated emplyees f the rganizatin (includes frmer emplyees) fr the current r any preceding tax year Tax Exempt Bnds Repeals exclusin frm grss incme interest paid n: Private activity bnds Advance refunding bnds

11 Camp Tax Prpsal Eliminatin f Rebuttable Presumptin f Reasnableness Entity level excise tax f 10% n any excess benefit transactin where minimum levels f due diligence were nt fllwed: Apprval by an independent bdy Reliance n apprpriate cmparability data Cncurrent dcumentatin f the basis fr apprval Abve steps n lnger giver rise t a presumptin f reasnableness Safe harbr fr rganizatin managers wh rely n prfessinal advice eliminated

12 ACT Reprt Analysis and Recmmendatins Regarding Unrelated Business Incme Tax Cmpliance f Clleges and Universities Released June 11, 2014 Cmmittee selected this due t IRS intentin t increase its fcus n UBIT reprting

13 ACT Reprt Key Cntents Overview f Unrelated Business Incme Tax (UBIT) Applicatin f UBIT rules t cllege and universities Key UBIT issues t be reslved Reprting and 990-T redesign Recmmendatins Prpsed Revenue Ruling addressing UBIT Draft Redesigned Frm 990T

14 ACT Reprt Recmmendatins Regulatins shuld be enacted s that prfits frm a substantial cmmercial activity will nt preclude exemptin under IRC Sect 501(c)(3) as lng as an rganizatin s incme and its financial resurces are used cmmensurate in scpe with its charitable prgram

15 ACT Reprt Recmmendatins Frmal guidance shuld be prvided t the field regarding prper methds fr allcating indirect csts where facilities and/r persnnel are used t carry n exempt activities and t cnduct unrelated trade r business.

16 ACT Reprt Recmmendatins A cmprehensive revenue ruling shuld be published addressing sme f the fllwing areas The ruling shuld prvide categries f activities that will be cnsidered related and unrelated Guidance n preparatry time spent n activities Scenaris f situatins invlving the activities frequently reprted n the cllege and university questinnaire, such as facility rentals and dual use prperties

17 ACT Reprt Recmmendatins A new Frm 990-T based upn the prpsed frmat enumerated in this reprt shuld be adpted Cntinue t leverage use f electrnic database and web based resurces t include cmmunicatin, educatin, and training

18 UNRELATED BUSINESS INCOME

19 Cmmn Activities Advertising Crprate spnsrships Participatin in partnerships Persnal prperty rentals and services Alternative investments

20 Advertising General rule is that advertising is cnsidered an unrelated trade f business if it is regularly carried n When is it nt unrelated? Nt regularly carried n Substantially related t the exempt purpse f the rganizatin (fr example, advertising in a student run newspaper when the advertising and ther activities prvide educatinal training) Cnducted substantially by vlunteers Examples f issues encuntered

21 Crprate Spnsrships Qualified spnsrship payments (QSP) A payment by an entity engaged in a trade r business t an exempt rganizatin withut an arrangement r expectatin that it will receive any substantial return benefit Excluded frm UBI Substantial return benefit Advertising Exclusive prvider arrangement Prviding services, facilities, r ther privileges t the payr r persns designated by the payr Granting the payr r persns designated by the payr an exclusive r nnexclusive right t use an intangible asset, such as a trademark, patent, lg, r designatin f the exempt rganizatin.

22 Crprate Spnsrships Substantial return benefit des nt include Recipient's use r acknwledgment f the spnsr's name, lg, r prduct lines Mentining the spnsr's lcatin(s), telephne numbers, internet address, slgans, and value-neutral descriptins f the spnsr's gds r services in acknwledging the spnsr's supprt Displaying the spnsr s prducts Exclusive prvider arrangement will nt qualify fr QSP treatment but may be excluded under general UBIT rules if services are nt prvided in cnnectin with the arrangement Trade agreements can be difficult t analyze Examples f issues encuntered

23 Participatin in Partnerships May generate UBIT if the partnership activity is unrelated with respect t the rganizatin r if it wns debt financed prperty Cntrl is a factr the IRS cmmnly fcuses, therefre a careful review f gverning dcuments is crucial Jint venture plicy? Many 990 questins related t jint ventures Examples f issues encuntered

24 Persnal Prperty Rentals and Services Rent is excluded frm UBIT, except when Prperty is debt financed Incme is frm a cntrlled crpratin Rent is calculated as a percentage f tenant s incme The payment includes cmpensatin fr services rendered t the lessee Mre than 50% f the rent is attributable t persnal prperty leased with the real prperty

25 Persnal Prperty Rentals and Services Rent can be based n a percentage f grss rather than net incme f the tenant Lessr generally may prvide utilities and janitrial services withut tainting the rent incme Separately stating charges fr services may be helpful Fr a mixed lease (i.e., ne that includes bth real and persnal prperty), all f the rental incme is excluded frm UBI if the prtin attributable t persnal prperty is incidental t the ttal payments Incidental means 10% r less f the ttal rents received r accrued under the lease Examples f issues encuntered

26 Alternative Investments Make certain yu understand all cmpliance requirements and csts when investing If structured as a partnership, Schedule K-1 will be received UBIT State incme tax reprting Freign disclsures Examples f issues encuntered

27 Cmputatin f Unrelated Business Taxable Incme Cmmnly verlked deductins Charitable cntributins Reprt cnsistent with Schedule I, Part I Obtain dnr acknwledgment letter State incme taxes Tax rate Generally taxed at regular crpratin rates unless a trust Cnsider cntrlled grup rules 27

28 Cmputatin f Unrelated Business Taxable Incme Credits available t ffset incme tax Freign tax credit Qualified electric vehicle credit Gasline and special fuels credit fr federal tax paid Small emplyer health insurance premiums tax credit Minimum tax credit 28

29 Tips Fr Tracking and Mnitring Internal pint persn Training Mck IRS exam Outside advisrs Checklists Mnitr new revenue surces

30 IRS EXAMINATION ACTIVITY

31 Observed IRS Examinatin Triggers Organizatin reprted lbbying activity as plitical activity n Schedule C Organizatin reprted intercmpany lans as lans t fficers, directrs, etc n balance sheet with n crrespnding Schedule L Organizatin reprted salary and emplyee infrmatin incnsistent with payrll filings

32 Observed IRS Examinatin Triggers Freign activity Unrelated business incme lsses Frm 1099 and W-2 prvided t same emplyees

33 What is the IRS lking at? Depends single issue exam r full exam? Freign activity Mnitring f grants t ther charities Unrelated business incme (r lss) Emplyment tax filings (1099 v. W-2) Minister husing allwances Business dealings with disqualified persns

34 Example 1 Exam likely triggered by UBI lsses Exam was initiated with several phne calls befre any crrespndence was received Exam suppsed t be fcused n UBI and cmpensatin Initial IRS estimate was t spend 1 week n-site per mnth fr at least 9 mnths, ttal exam time expected t be arund 18 mnths Currently n mnth 10 and still in the field

35 Example 1 Start with IT specialist t map lines f general ledger t Frm 990 and 990-T Obtain all payrll data, benefit dcuments, emplyment cntracts, executive cntracts, etc Review accunts payable data, W-9s, 1099s Review Gverning instruments, bard minutes, etc Initial interviews and cnferences with parties invlved in the examinatin Obtain data frm website

36 Example 1 Lking at specific areas f UBI Review verall activity and histry f prfits r lsses Sample methdlgy used t determine unrelated v. exempt revenue Review expense allcatin methdlgies Cnduct interviews with department heads and managers Lking very clsely at wrker classificatin issues

37 Example 2 Payrll tax examinatin Exam was already appraching a year when BKD assistance requested Agent again gathered significant amunt f data frm website

38 Example 2 Issues written up by agent: Settlement t frmer CFO Lan frgiveness prgrams Reclassificatin t emplyee frm independent cntractr fr several individuals H-1B Visa issues Incnsistent treatment amng grups f emplyees Expanding exam t all pen years

39 Resurces 2014 ACT Reprt - Camp Tax Prpsal - s_and_means_sectin_by_sectin_summary_final_ pdf IRS Cmpliance Questinnaire fr Clleges and Universities -

40 Resurces IRS Cllege and Universities Cmpliance Prject - IRS Publicatin 598 Thughtware at

41 Brian D Tdd Partner btdd@bkd.cm Mike J Engle Partner mengle@bkd.cm