Non profit organization - Page II

Advertising Or Charitable Donation

Non Profit organizations can publicly acknowledge donors for their contributions. However, if the non profit organization conducts advertising for the donor, the donation would be considered taxable income to the non profit organization. Donations to non profit organizations are taxable income if the non profit organization, in return, provides a valuable benefit or service to the donor. Mere recognition of a contributor as a benefactor normally is of little or no value to the donor and is incidental to the contribution. Non profit organizations that go beyond recognition and extensively promote the donor are engaging in advertising, which is unrelated to the mission of non profit organizations. In these cases, non profit organizations must pay unrelated business income tax (UBIT) on the payment received in exchange for advertising services provided. All the facts and circumstances of the relationship between the sponsor and the non profit organization must be considered. Items to consider include the value of the service provided in exchange for  the payment and the terms under which payments and services are rendered. [IRS Announcement 92-15]

Qualified sponsorship payments are not subject to unrelated business income tax. A qualified sponsorship payment is a payment by a business for which it will receive no substantial benefit other than the use of its name, logo, or product lines by the non profit organization. Reg. §1.512(b)-1 excludes income from "notional principal contracts" from unrelated business taxable income (UBTI) for contracts after August 30, 1991. "Notional principal contract" is an agreement to exchange payments based on a notional or hypothetical amount of money or units of a commodity.

   Gross unrelated business income 
– Deductions
= Net unrelated business income
± Modifications
= Unrelated business taxable income

Modifications in the tax formula include:

— POSITIVE Adjustments

• Deduction for charitable deductions that exceed 10% of unrelated business taxable income. 

• Unrelated debt-financed income.
– Debt-financed income is the gross income generated from debt-financed property. 
– Debt-financed property is all property of the non profit organization held to produce income and on which there is acquisition indebtedness, except for the following:
a) Property used for the achievement of the non profit purpose of the organization (85% or more). 
b) Property whose gross income is otherwise treated as unrelated business income. 
c) Property whose gross income is from the following sources and is not treated as unrelated business income:
i) Income from research performed for the U.S. or a state or political subdivision.
ii) Income from research for a college, university, or hospital.
iii) Income from research for an organization that performs fundamental research for the benefit of the general public.
d) Property used in a trade or business that is treated as not being an unrelated trade or business.

• Certain interest, annuity, royalty, and rental income received by the non profit organization from an organization it controls are included in unrelated business taxable income.

• Income from dividends, interest, and annuities net of deductions directly related to producing such income.
• Royalty income, unless from a working interest and the non profit organization is responsible for its share of development expenses.
• Rental income from real property and personal property net of all deductions. Personal property included is property leased with the real property which is incidental. Incidental means that it does not exceed 10% of total rental income under the lease.

Dual Use Of Assets Or Facilities

An asset or facility necessary to the conduct of non profit functions also may be used in a commercial endeavor. In such cases, the use of the asset or facility for non profit functions does not, by itself, make the income from the commercial endeavor gross income from a related trade or business. The test is whether the activities that produce the income in question contribute importantly to the accomplishment of non profit purposes. 

For assets placed in service after 1986, non profit organizations must use the ADS class lives for depreciation purposes [IRC §168(g)(1)(B) compared with IRC §168(h)]. 

All business expenses must be allocated between unrelated business income and non profit activities. Non profit organizations must maintain adequate records of expenses allocated to each activity.