Phil
Winters, Center for Urban Transportation Research, University of South
Florida
(Reprinted from TMA Clearinghouse Quarterly - Spring 1995)
As this issue's article on fee based services reports, tightened budgets and increased competition for members have contributed to TMAs introducing a variety of income-producing activities. While this revenue potential is tempting, TMAs must also consider laws that apply to unrelated business income tax (UBIT) before initiating income producing activities. TMAs may be exposing themselves to substantial penalties and taxes for not reporting or underreporting taxable income.
UBIT is applied to income generated from a tax exempt organization's business activities when those activities are not substantially related to the organization's exempt purpose. Non-profit organizations of all types are scrutinized by the IRS regarding what revenue qualifies as unrelated business income and is subject to tax. In recent years, the IRS has been taking an even harder look at the "related business" definition. Tax accountants recommend that nonprofit executives ask themselves three questions about each potential income generating activity: Is the activity a trade or business, is the activity "regularly carried on," and is the activity "substantially related" to the organization's purpose?
A trade or business is generally defined as any activity that produces income from the performance of services or sale of goods. An activity that meets this definition is considered to be a trade or business whether it is conducted separately or as an integral part of a larger group of activities. For example, the advertising in a TMA's newsletter can be an unrelated business activity, even though the publication of the newsletter is not.
A TMA activity is ordinarily deemed to be "regularly carried on" if it is conducted in a manner comparable to the conduct of a taxable organization, such as a consultant, for the same or similar activity. Normally, an activity will not qualify as being "regularly carried on" if it is conducted infrequently, i.e. once or twice a year; for a much shorter period of the year than a taxable organization; and without the promotional efforts typical of for-profit organizations.
To be "substantially related", the business activity must contribute importantly to the accomplishment of a purpose for which the organization was granted an exemption other than the mere production of income to support such a purpose. To determine the extent of an organization's unrelated business income and whether it could jeopardize the organization's tax exempt status, non profit executives should consider both the time and financial resources devoted to the activity.
Activity work done by volunteers may be exempt from UBIT. In attempting to determine the portion of volunteer services, non-profit executives should consider in-kind contributions such as the monetary value of services rendered, the number of hours of service, and the degree of reliance on volunteers. It is helpful to conduct a thorough review of an organization's income-generating activities, isolating those activities that either clearly or potentially create revenue subject to tax.
The next step is to present those activities in a manner that clearly shows them as nontaxable. If an activity cannot be presented as nontaxable, the TMA need not refrain from the activity; it merely becomes taxable income.
However, changes in the accounting system may need to be made to ensure that the TMA is paying the appropriate tax. Such changes will ensure that all costs associated with a given activity are completely accounted for and appropriate cost allocations have been made.
TMAs are encouraged to contact their accountant or tax attorney prior to implementing any income-producing activity. Waiting to make accounting changes until the TMA is audited by the IRS can create costly and time consuming delays.