Money for Nothing... Part 2
As promised, here is a follow up to "Money for Nothing".
UBIT may sound scarier than it actually is. I invited Jonathan Gudema, a planned giving expert and lawyer at Changing Our World, to provide a few thoughts on this issue:
Q: Can you describe UBIT (in a non-scary way)?
Jonathan: Very simple. Congress got upset in the early 1950’s with people running for-profit enterprises within charitable structures. Not fair to the competition and by the way, isn’t it tax evasion? The solution: tax the profits of the “unrelated business” activity as if it were a for-profit business. Only the profits are taxed – any revenue received by the non-profit in its ordinary course of activity (such as tuition payments or investment income) is not taxed. The best example of this was actually the impetus for the law: NYU School of Law received a gift of all of the stock of the Mueller Macaroni Company in the 1940’s, making it the owner of the business. At that time, since Mueller’s was then owned by a tax-exempt entity, its general business profits were exempt from taxes, too. The government stepped in and created UBIT.
That is the simple part. Not so simple is figuring out what is considered an unrelated business activity. Every year, there are adjustments. Here are a few of the things you must ask yourself: Is this profitable business activity related to our charitable purpose (other than raising money)?
- Example: Sale of posters promoting organizational message is related and not taxable.
- Example 2: Sales of liquor by a veteran’s organization is NOT related and therefore taxable.
The IRS has ruled on hundreds of specific cases, issuing rulings as to whether or not a particular activity is “related” or “unrelated.”
The best advice I can give is to review proposed business-for-profit activities with your legal counsel and CFO. One critical fact: Should your organization earn too much unrelated business income, not only will you be paying taxes on that income, but you stand to lose your tax exempt status. This is not an area to fool around with: seek legal counsel!
Q: How much money would need to be generated from a non-traditional donation model for UBIT to be of concern?
Jonathan: Technically, any amount of profit from an unrelated business is taxable – but the general rule is that if an activity is not carried on regularly (like a one-time sale of shirts), the profits are typically not considered for UBIT.
Q: Nonprofits have sold branded shirts, mugs, and the like for years… but with an affiliate program, the charity doesn’t even need to sell a thing. They simply link a constituent to a third-party online store and receive a cut of the purchase. Is this UBIT-related all the way?
Jonathan: Depends on who is selling the goods. As mentioned above, if the message of the charity is being promoted on t-shirt, that may well not be considered for UBIT. But, again, if the scope of the shirt sales is out of sync with the needs of the organization, you may face UBIT and/or loss of tax exemption.
Q: Do you think there are IRS officers in Second Life? ;)
Jonathan: No.
Q: As I’m sure you’ll want me to remind readers that they should seek advice from their own legal council, could you provide a few simple guidelines to keep in mind when considering a new line of funding and how to avoid or plan for UBIT?
Jonathan: Keep your CFO and general counsel in the loop from the beginning of the process. It is their job to protect the organization in these circumstances. So, anytime you, one of your board members, or web team members comes up with a great money making scheme, bring in lawyers and accountants early before it gets a life of its own. There is plenty of reading on the Internet on UBIT – starting with the IRS website. Get your glasses ready.
Thanks to Jonathan for providing some insight into UBIT. onLine would love to hear from you if your organization is currently using an alternative revenue stream online. Let us know how it's going in the Comments.
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