Many of our not-for-profit clients express surprise when accounting conversations turn to income taxes. Most presume that since they have a federal income tax exemption, accounting consideration of income taxes and uncertain tax positions simply does not apply. However, while many not-for-profits may never owe a dime in income taxes, management of tax-exempt organizations should continue to stay on top of the organization’s filing requirements and any changing activities.
Maintaining tax-exempt status is a high priority for all not-for-profits, and threats can come in several forms. An organization that fails to file the required information return (Form 990, Form 990-EZ, Form 990-PF or e-Postcard Form 990-N) for three consecutive tax years will automatically lose its tax-exempt status, and late returns carry penalties that accrue daily. In addition, participation in lobbying activities, political campaigning, and private inurement (such as excessive officer compensation) may lead to a revocation.
Not-for-profits might also be engaged in business activities that are not related to its exempt purpose, which can result in an income tax liability. Some examples of non-traditional revenue streams which in certain instances are considered unrelated business income, or UBI, include operating parking lots, cafeterias/catering, sale of donor or membership lists, advertising revenues, and rental income from debt-financed property. Activities generating UBI need to be identified and accounted for separately in order for an organization to appropriately prepare and file Form 990-T, and any taxes due should be recorded in the period the activities occur. Organizations generating excessive unrelated business tax might also jeopardize their tax-exempt status.
An exempt organization may also have uncertain state and local tax positions if it operates in states in which it has not appropriately filed for an exemption, or if it has an investment in a partnership doing business in foreign country and has not filed the additional required forms.
If you have any questions regarding not-for-profit organizations and income tax-related matters, please contact a member of the Schneider Downs Not-for-Profit Services Team.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter