Upload
others
View
0
Download
0
Embed Size (px)
Citation preview
WHO TO CONTACT DURING THE LIVE EVENT
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford
accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code. You will have to write
down only the final verification code on the attestation form, which will be emailed to registered
attendees.
• To earn full credit, you must remain connected for the entire program.
State Tax Treatment of UBTI for Exempt Organizations:
Calculations, Conformance and Apportionment Navigating States' Partial- or Non-Conformance With Federal Treatment; Multi-State Apportionment Rules
TUESDAY, SEPTEMBER 19, 2017, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
Tips for Optimal Quality
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
immediately so we can address the problem.
FOR LIVE PROGRAM ONLY
Sept. 19, 2017
State Tax Treatment of UBTI for Exempt Organizations
Brenda A. Blunt, CPA, CGMA, Tax Partner
Eide Bailly, Phoenix
Dr. Laura Robichaud, DBA, MBA, State and Local Tax Senior Manager
Eide Bailly, Phoenix
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
w w w . e i d e b a i l l y . c o m
Brenda A. Blunt, CPA, CGMA, Exempt Organizations Tax Partner [email protected]
602-264-8607 Laura Robichaud, State and Local Tax Senior Manager
[email protected] 602.264.8038
State Tax Treatment of UBTI for
Exempt Organizations: Calculations,
Conformance and Apportionment
5
Federal Treatment of Unrelated
Business Taxable Income
6
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Activity must be:
•Unrelated
•Business and must
•Generate Income
Note: §§501(c)(7), (9) or (17) organizations do not follow the
same rules for identifying UBTI.
7
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Unrelated
•Activity will generate UBIT unless it
contributes importantly to the primary
exempt purpose
Example: Retail sales
8
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Trade or Business
•Profit Motive
• Incidental activities
•Regularly carried on
• Investment v. business
9
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Activity Exclusions
• Volunteer exceptions (85%) • Convenience • Donated goods (85%) • Conventions & Trade Shows • Bingo • Public Entertainment at fairs • Low cost articles • Mailing list rentals to other (c)(3)’s
10
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Income Exclusions
• Investment income
• Royalties
• Rental income • Real estate v. personal property
• Gain/Loss on sale of organization’s property
11
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Income Exclusions
• Debt Financed Income • Reverses the benefit of the Income Exclusions
• Applies when Income Exclusion items stem from
assets that were debt financed • Securities purchased on margin
• Debt financed real estate
• Partnership–level debt
12
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Income Exclusions
• Debt Financed Income • Income is taxable to the extent the asset is
leveraged
• Numerous exceptions • Research activities
• Substantially all is used for exempt purpose
• Neighborhood Land Rule
• Property acquired by gift
13
w w w . e i d e b a i l l y . c o m
Identifying UBTI
Special Areas
• Partnership K-1
• S-corporation income
• Sponsorships
• Advertising
• Fragmentation Rule • PLR 9720035 – golf course fees
• Gift Shop
14
w w w . e i d e b a i l l y . c o m
Form 990-T Filing Thresholds
Organizations required to file form 990-T: • The following organizations with gross UBI of $1,000 or
more: • Exempt organizations under §501(a); • Qualified Tuition Programs under §529; • Colleges and universities of states and other governmental
units (but not instrumentalities of the United States organized and exempt from tax by an Act of Congress);
• Trustees of IRA, SEP IRA, SIMPLE IRA, Roth IRA, Coverdell education savings accounts, Archer medical savings accounts and Health savings accounts trusts
• Applicable reinsurance entities under the ACA §1341(c)(1) Gross income = Gross receipts less Cost of Goods Sold
15
w w w . e i d e b a i l l y . c o m
Tax Computation
Unrelated Business Income Tax (“UBTI”) is based on the net
Unrelated Business Taxable Income (“UBTI”) times the
applicable income tax rate.
In other words, organizations will pay tax on the gross
income from UBI activities, less expenses directly connected
with generating that income, less charitable contributions, less
net operating losses carrying from other years, less the
“specific deduction”.
16
w w w . e i d e b a i l l y . c o m
Tax Computation
The “specific deduction” is $1,000 per tax return.
There is an exception for a diocese, province of a religious
order, or a convention or association of churches. They may
take a specific deduction of $1,000 per each parish,
individual church, district, or local unit (“component units”)
that regularly conducts unrelated trade or business up to the
gross UBI generated by each component unit and only if such
components are not separate legal entities.
17
w w w . e i d e b a i l l y . c o m
Tax Computation
A charitable contribution is allowed for contributions made to
other governmental units and organizations (other than itself)
as described in §170(c).
The charitable contribution deduction does not need to be
directly connected to the activity that generated the UBI.
18
w w w . e i d e b a i l l y . c o m
Tax Computation
Beyond that, the limitations and definitions that apply to the charitable contribution deduction follow the rules for corporations or trusts, depending on the organizational structure of the filing entity. Example One An accrual corporation may deduct accrued contributions actually paid within two and ½ months following the year end, if the contributions are authorized by the board and the required statements are attached to the return. This rule is not available to trusts.
19
w w w . e i d e b a i l l y . c o m
Tax Computation
Example Two Corporations are limited to a deduction equal to 10% of taxable income before any deduction for contributions, the DPAD, NOL’s an any capital loss carrybacks. Trust contributions are limited to 50% of UBTI before the deduction for charitable contributions for contributions to §170(b)(1)(A) organizations. And limited to the smaller of 30% of UBTI before this deduction or the amount by which 50% of the UBTI is more than the deduction for 50% charitable contributions for contributions to other qualified charities.
20
w w w . e i d e b a i l l y . c o m
Tax Computation
Having arrived at taxable income, you must apply the applicable tax rate. Organizations taxed as corporations, which include incorporated exempt organizations, unincorporated associations and limited liability corporations who elected to be taxed as corporations, use the “C” corporation tax rates and rules. Trusts follow the trust rates and rules. Alternative minimum tax applies to both using the respective rules. 21
w w w . e i d e b a i l l y . c o m
Tax Computation
Corporate Tax Rates Trust Tax Rates
22
w w w . e i d e b a i l l y . c o m
Tax Computation – Credits allowed
23
w w w . e i d e b a i l l y . c o m
Allocation of Expense Deductions
Expenses can be deducted against UBI to the extent the expenses are “directly connected with the carrying on of such trade or business” (Reg. §1.512(a)-1) To be “directly connected, a “deduction must have a proximate and primary relationship to carrying on of that business”. Expenses must also be “ordinary and necessary” under §162 and other normal tax limitations – for example, meals and entertainment expenses are normally limited to 50%, UNICAP and tax depreciation rules – apply.
25
w w w . e i d e b a i l l y . c o m
Allocation of Expense Deductions
Dual use of personnel and facilities
Many times people and facilities are directly used in both
related and unrelated activities. In this case, the expense
may be allocated to the unrelated business activity using a
reasonable method consistently applied.
26
w w w . e i d e b a i l l y . c o m
Allocation of Expense Deductions
Dual use of personnel and facilities
Example One
Unrelated business income is 10% of the organization’s
overall revenues. The organization does not have records to
show how much time and facilities are dedicated to the
unrelated business activity so the organization allocates 10%
of all expenses to UBI.
This would NOT be considered a “reasonable” method.
27
w w w . e i d e b a i l l y . c o m
Allocation of Expense Deductions
Dual use of personnel and facilities
Example Two
Unrelated business income is 10% of the organization’s
overall revenues. Through the use of time cards or a time
study, the organization can show the executive directors
spends 5% of her time on the unrelated business activity.
It would be reasonable to allocate 5% of her salary and
benefits to the UBI activity. It may also be reasonable to
allocate 5% of her office space and related expenses.
28
w w w . e i d e b a i l l y . c o m
Rent Income – Sch C
Most organizations should use Schedule C to report:
1. Personal Property rentals that are rented with real estate
if the personal property rents are more than 10% of the
rental contract.
2. Rents from Real and Personal Property contracts if more
than 50% of the contract is for the rental of personal
property or the rent depends on the income or profits
derived by the person renting the property (except
amounts that are a fixed percentage of sales).
29
w w w . e i d e b a i l l y . c o m
Rent Income – Sch C
Schedule C does not apply to 501(c)(7), (9) or (17)
organizations. They should report Rent income on Part I and
expenses on Part II.
Debt-financed real estate rentals not meeting the description
in item 2 from the previous screen should be reported on
Schedule E.
Personal Property rented separately from Real Estate should
be reported on Part I, line 12.
30
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Debt-Financed Property – Property held to produce income when such property has acquisition indebtedness at any time during the year, or, if the property was disposed of, at any time during the 12 months prior to the disposition. Includes real estate rentals, interest, royalties, dividends, investment capital gains and similar other investment/passive income. There are numerous exceptions.
31
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Acquisition Indebtedness
• Debt incurred to acquire or improve the property
• Debt incurred before acquiring or improving the property
if the debt would not have been incurred but for the
acquisition or improvement
• Debt incurred after acquiring or improving the property if
the debt would not have been incurred but for the
acquisition or improvement and the need was reasonably
foreseeable
32
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Acquisition Indebtedness
• Property acquired is subject to a mortgage, the debt secured by the mortgage is acquisition indebtedness even if the organization does not assume or agree to pay the debt.
• If property acquired by bequest or gift is subject to a mortgage, the debt is not acquisition indebtedness for the first 10 years. • Includes bequest of a partnership interest with debt financed
income inside the partnership (Ltr. Rul. 2000011051) • This exception does not apply if the organization assumes,
agrees to pay, or makes payments on the debt.
33
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Report on Sch E:
Gross Rents (Col 2)
Directly Connected Expenses (Col 3a and 3b)
Note: Depreciation must use straight line method
34
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Average Acquisition Indebtedness (Col. 4)
• Outstanding debt on the first day of each month
• Add together
• Divide by the total number of months the organization held
the property (including any months the property is owned
after pay-off)
• In the year of disposition, use the highest debt balance
during the preceding 12 months.
35
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Average Adjusted Basis (Col. 5)
Adjusted Basis – Cost, plus additions less depreciation,
(allowed or allowable) since acquisition. Use depreciation
for all years the property was owned, not just subject to UBI.
Average Adjusted Basis – Adjusted Basis at the beginning
and end of the year divided by 2.
36
w w w . e i d e b a i l l y . c o m
Unrelated Debt Financed Income – Sch E
Col. 6 (Leverage)
Average Acquisition Indebtedness (Col 4)
Average Adjusted Basis of the Rental Property (Col 5)
37
w w w . e i d e b a i l l y . c o m
Interest, Royalties and Rents from Controlled
Organizations – Sch F
General Principle: When the reporting exempt organization has income from interest, annuities, royalties and rents that it received from a controlled organization subject to income tax, the income is UBI to the reporting exempt organization, if it reduces unrelated taxable income of the controlled organization. (IRC §512(b)(13)) Only UBI if amounts exceed FMV (Transfer Pricing rules) and paid pursuant to a written binding contract in place at 8/17/06
38
w w w . e i d e b a i l l y . c o m
Interest, Royalties and Rents from Controlled
Organizations – Sch F
The controlled organization could be either an exempt
organization or an nonexempt organization.
Either way, the “net unrelated taxable income” is the income
of the controlled organization that would be unrelated
(subject to UBIT) if it were an exempt organization AND had
the same exempt purpose as the controlling organization.
39
w w w . e i d e b a i l l y . c o m
Interest, Royalties and Rents from Controlled
Organizations – Sch F
An entity is a “Controlled Organization” if the reporting entity owns: • By vote OR by value more than 50% of a corporation’s
stock; • More than 50% of a partnership’s profits OR capital
interest; or • More than 50% of the beneficial interest in an
organization. • Ability to control more than 50% of the vote (through the power
of appointment or otherwise) of an exempt organization.
The constructive ownership rules of §318 apply. Use similar principles to determine interests in other organizations.
40
w w w . e i d e b a i l l y . c o m
Interest, Royalties and Rents from Controlled
Organizations – Sch F
41
w w w . e i d e b a i l l y . c o m
Other Schedules
Other Schedules in the Form 990-T include • Investment Income of §§501(c)(7), (9) or (17)
organizations; Schedule G • Exploited Exempt Activity Income, Other Than Advertising
Income; Schedule I • Advertising Income, Schedule J • Compensation of Officers, Directors, and Trustees;
Schedule K Due to the time allotted and the depth of the topics, we will only be covering Schedules G, I and J at an overview level.
42
w w w . e i d e b a i l l y . c o m
Other Schedules
Investment Income of §§501(c)(7), (9) or (17) organizations;
Schedule G
§§501(c)(7), (Social Clubs); (9), (Voluntary Employee
Beneficiary Associations (VEBA’s)); and (17) (Supplemental
Unemployment Benefit Trusts (SUBT’s)) fall under a complete
separate structure for UBTI. Generally, these organizations
are taxed on non-member (non-exempt function) income.
43
w w w . e i d e b a i l l y . c o m
Other Schedules
Investment Income of §§501(c)(7), (9) or (17) organizations;
Schedule G
These organizations are allowed a deduction against non-
exempt function income for amounts set aside for
1. Religious, charitable, scientific, literary or educational
purposes or for the prevention of cruelty to children or
animals;
2. Payment of life, health or accident insurance or other
benefits by VEBA’s and SUBT’s; and
3. Reasonable administration costs for the above.
44
w w w . e i d e b a i l l y . c o m
Other Schedules
Exploited Exempt Activity Income, Other Than Advertising
Schedule I
There are times when an organization’s exempt function
activities generate goodwill or other services and products
that can be exploited commercially. The revenue from the
exploitation is generally UBI. Organizations may offset net
UBI from exploited activities with the net losses of the exempt
activity that generated them, but may not create a UBTI loss.
45
w w w . e i d e b a i l l y . c o m
Other Schedules
Exploited Exempt Activity Income, Other Than Advertising
Schedule I
Example:
A photographic equipment manufacturer underwrites a
photography exhibit at a local museum. In return for the
underwriting, the manufacturer gets an advertisement in the
exhibition catalog with also includes educational materials,
pictures of the exhibited works, interviews with
photographers, and other exempt-function content. The
advertising revenue is exploited activity income.
46
w w w . e i d e b a i l l y . c o m
Other Schedules
Advertising Income
Schedule J
This is a subset of the Exploited Exempt Activity category
and includes income from advertising sold in periodicals.
Other advertising revenue should be reported on Schedule I.
The general principles applicable to Exploited Exempt
Activities apply here as well.
47
w w w . e i d e b a i l l y . c o m
Other Schedules
Advertising Income
Schedule J
Unique aspects include the ability to elect to combine all
periodical advertising as a single activity (Sch I, Part I), or
separately (Sch I, Part II). Also, if there is not a separate
charge for the periodical, known as circulation income, then a
portion of the member revenue is deemed to be circulation
income, to determine the exempt function income from the
periodical, (Rev. Rul. 81-101).
48
w w w . e i d e b a i l l y . c o m
Other Schedules
Compensation of Officers, Directors, and Trustees
Schedule K
List here all of the organization’s Officers, Directors and
Trustees where some or all of their compensation was directly
attributable to unrelated business income. If a particular
Officer, Director or Trustee spent 10% of his time (col. 3)
devoted to the unrelated business activity, the deductible
compensation is 10% of the total compensation (col. 4).
This should include total compensation – salary, allowances
and other benefits.
49
UBTI – State Level Issues
51
w w w . e i d e b a i l l y . c o m
Learning Objectives
• Understand problem states
• Important reporting differences
• Recognize NOL carry-backs or forward treatments
• Understand state challenges
52
w w w . e i d e b a i l l y . c o m
States that do not tax UBTI
Kentucky
New Jersey
Texas (if granted)
Delaware
New Hampshire
Pennsylvania
Ohio
South Dakota
Washington
Wyoming
53
w w w . e i d e b a i l l y . c o m
Who conforms with modifications?
Arizona
Arkansas
California
Hawaii
Idaho
Kansas*
Kentucky**
Maine
Missouri
Montana
New Mexico
North Dakota
Oregon
Pennsylvania
Utah
54
w w w . e i d e b a i l l y . c o m
Which states require information returns?
Arizona
California
Georgia
Indiana
Oklahoma
55
w w w . e i d e b a i l l y . c o m
Net Operating Loss Carryforwards
56
w w w . e i d e b a i l l y . c o m
Net Operating Loss Carrybacks
57
w w w . e i d e b a i l l y . c o m
Considering Reporting Differences
Connecticut
• Form REG-1
• Obtain a tax registration number
California
• Form 3500A
• Provide copy of IRS 501(c)(3) letter
• Alternative: Form 3500 – pay $25
58
w w w . e i d e b a i l l y . c o m
Other State Compliance Considerations
Nonresident Withholding on Nonresident
Partners/Members/Shareholders
Refunds
• Process
• Forms
• Documentation
Withholding Waivers
59
w w w . e i d e b a i l l y . c o m
Challenges
• Varying carryforward periods (5 years in some states)
• Electing to forego a carryback
• If you carryback for fed do you HAVE to carryback for
state? (some states would say "yes.")
• NOL deduction limitations
• Example: CO used to have $250K max deduction
carryforward periods (5 years in some states). You c
Electing to forego a carryback
What happens if you have a state that is a carryback state but there is no UBTI in the 2 preceding years?
60
w w w . e i d e b a i l l y . c o m
Apportionment
• Three-Factor Formula
• Three-Factor Formula with an extra weighting for sales
• Single-Factor
• Throw-out v. Throwback rules
61
w w w . e i d e b a i l l y . c o m
This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended
to be responsive to any individual situation or concerns, as the contents of this presentation are intended for general informational purposes only. Viewers are urged
not to act upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of
a particular factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session.
62
w w w . e i d e b a i l l y . c o m
Brenda A. Blunt, Exempt Organizations Tax Partner [email protected]
602.264.8607
Laura Robichaud, State and Local Tax Senior Manager [email protected]
602.264.8038
Thank You!