Chapter 23 - power point

requirements for exempt state

- serve the "common good" (group served may be broadly defined (general public) or narrowly defined (credit union members)) - not for profit entity - net earnings of the entity do not benefit members or the organization - the entity is generally prohibited from attempting to influence legislation or participating in political campaigns

unrelated business income tax exceptions to the tax

- substantially all work is performed by volunteers - substantially all merchandise being sold was received as gifts or contributions - for 501(c)(3) organizations and for state colleges or universities, the business is conducted primarily for the benefit of the organization's members, students, patients, officers, or employees - for most employee unions, the trade or business consists of selling to members work related clothing and equipment and items normally sold through vending machines, snack bars, or food dispensing facilities

unrelated business income tax: entities subject to the tax

- the organization conducts a trade or business - the trade or business is not substantially related to the exempt purpose of the organization, and - the trade or business is regularly carried on by the organization

corporate sponsorship payments are not treated as unrelated trade or business if

- there is no arrangement or expectation of substantial benefits for the payment other than use of its name, logo, or product lines in connection with the activities of the exempt organization (not advertising the payor's products or services) - payment is not contingent on attendance, ratings, etc

some income and activities not subject to the feeder organization rules include

- trade or business where substantially all work is performed by volunteers - trade or business of selling goods where substantially all the goods were received as contributions or gifts

an exempt organization generally is not subject to

Federal income taxation

exempt purpose expenditures generally are the amounts paid or incurred for the taxable year to accomplish the following purposes:

religious, charitable, scientific, literary, educational, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals

may say earnings must be devoted to

specific cause

second level tax imposed on the disqualified person if

the excess benefit transaction is not corrected within the taxable period *this excise tax is imposed at a rate of 200% of the excess benefit

if the ceiling is not exceeded but there are excess lobbying expenditures

the organization will be taxed on the excess lobbying expenditures

chief justification for such exemption is

the social consideration objective of the Federal tax law

generally organizations will lose their exempt status if

they attempt to influence legislation or participate in political campaigns

organizations qualify for exempt status only if

they fit into one of the categories provided in the Code

unrelated business income tax purpose

to tax the entity on unrelated business income as if it were subject to the corporate income tax

excess benefit transactions include

transactions in which a disqualified person engages in a non fair market value transaction with the exempt organization or receives unreasonable compensation

if the ceiling is exceeded, there are disqualifying lobbying expenditures, and the organization will be subject to

a 5% tax on all lobbying expenditures and may lose its exempt status

feeder organization carries on

a trade or business for the benefit of an exempt organization and remits its profits to the exempt organization

code may preclude

"benefit of any private shareholder or individual"

low cost articles cost

$10,70 or less (indexed annually) e.g. pens, stamps, stickers, address labels

exempt purpose expenditures: over $500,000 but not over $1 million lobbying nontaxable amount is

$100,000 + 15% of the excess of exempt purpose expenditures over $500,000

exempt purpose expenditures: over $1,000,000 but not over $1.5 million lobbying nontaxable amount is

$175,000 + 10% of the excess of exempt purpose expenditures over $1 million

statutory ceiling of

$20,000 for any excess benefit transaction

exempt purpose expenditures: over $1.5 million lobbying nontaxable amount is

$225,000 + 5% of the excess of exempt purpose expenditures over $1.5 million

the lobbying nontaxable amount is the lesser of

- $1 million or - an amount determined based on exempt purpose expenditures

positive adjustments to unrelated business taxable income

- charitable contribution deduction in excess of 10% of UBTI - unrelated debt financed income net of unrelated debt financed deductions - certain interest, annuity, royalty, and rent income received from an organization it controls (80% test)

the following organizations are not private foundation

- churches, educations institutions, hospitals, medical research organizations, charitable organizations receiving a major portion of support from the general public or the US, a state or a political subdivision operated for the benefit of a college or university, and governmental units - organizations that are broadly supported by the general public, by government units, or by organizations described above - entities organized and operated exclusively for the benefit of organizations described in 1 or 2 above - entities organized and operated exclusively for testing for public safety

may be subject to Federal income tax associated with the following

- engaging in a prohibited transaction - being a feeder organization - being a private foundation - generating unrelated business taxable income

a ceiling applies to the amount of allowable lobbying expenditures under the election

- exceeding the ceiling can result in loss of exempt status - also, a tax may be imposed on a portion of lobbying expenditures

general consequences of exempt status

- exempt from federal income tax - exempt from most state income, franchise, sales, and property taxes - qualify for reductions in postage rates - gifts to the organization often can be deducted by donor

unrelated business income tax is only assessed if

- exempt organization regularly conducts the activity - the activity produces unrelated business income

examples of exempt organizations

- federal and related agencies - religious, charitable, educational, scientific, literary, etc organization - civic leagues and employee unions - labor, agricultural, and horticultural organizations - business leagues, chambers of commerce, real estate boards, etc - social and fraternal clubs and societies - teachers' retirement fund associations - cemetery companies - credit unions - mutual insurance companies - corporations organized by farmers' cooperatives for financing crop operations - armed forces members' posts or organizations - group legal service plans - religious organizations - cooperative hospital service organizations - cooperative service organizations of educational institutions - qualified state tuition programs

return filed

- form 990 (return of organization exempt from income tax) - due date is the 15th day of the fifth month after year end

a qualified bingo games is not an unrelated trade or business if

- game is legal under state and local law - commercial bingo games are not allowed in jurisdiction

negative adjustments

- income from dividends, interest, and annuities net of directly related deductions - royalty income net of directly related deductions

internal support test

- limits the amount of support normally received from the following sources to 1/3 of the organizations support - gross investment income (interest, dividends, rents, and royalties) - unrelated business taxable income minus the related tax

classification as private foundation may produce two negative consequences

- may have an adverse impact on the contributions received by the donee exempt organization - may result in taxation at the exempt organization level

external support test

- more than 1/3 of organization's support normally must come from the groups listed in 2 (above) in the following forms - gifts, grants, contributions, and membership fees - gross receipts from admissions, sales of merchandise, performance of services, or the furnishing of facilities in an activity that is not an unrelated trade or business - however, such gross receipts from any person or governmental agency in excess of the greater of $5,000 or 1 percent of the organizations support for the taxable year are not counted; amounts from disqualified persons is also not included

engaging in prohibited transactions may result in

- part or all of organization's income being subject to federal income tax - forfeiture of exempt status - imposition of intermediate sanctions on certain insiders

grass roots ceiling =

150% x grass roots nontaxable amount

statutory ceiling on lobbying expenditures =

150% x lobbying nontaxable amount

exempt purpose expenditures: not over $500,000 lobbying nontaxable amount is

20% of exempt purpose expenditures

grass roots nontaxable amount is

25% of lobbying nontaxable amount

grass roots tax =

25% x excess expenditures over grass roots nontaxable amount

lobbying tax =

25% x excess expenditures over lobbying nontaxable amount

unrelated business income tax exempt organizations to which applicable

all organizations exempt under 501(c) except Federal agencies also applies to state colleges and universities

feeder organization prevents exemption from tax simply because

all profits are payable to an exempt organization

most exempt organizations are required to file an

annual information return with the IRS

disqualified person

any individual who is in a position to exercise substantial influence over the affairs of the organization who engage in excess benefit transactions

unrelated business income tax to be related to the exempt purpose the activity must be

causally related and contribute importantly to the exempt purpose

lobbying expenditures defined

communicating with any legislator or staff member or with any government official or staff member who may participate in the formulation of legislation

unrelated business income tax applicable rates

corporate tax rates

intermediate sanctions take the form of

excise taxes imposed on disqualified persons and on exempt organization managers

grass roots expenditure

expenditures to influence legislation by attempting to affect the opinions of the general public or any segment there of

feeder organization not exempt from

federal tax

unrelated business taxable income equations

gross unrelated business income - less deductions = net unrelated business income +/- modifications __________________________ unrelated business taxable income (UBTI)

form 4720 (return of certain excise taxes on charities and other persons)

if an exempt organization is subject to any excise taxes imposed on private foundations

for 990-T (exempt organization business income tax return)

if at least $1000 gross income from unrelated trade or business

unrelated business income tax $1000 provision

if the gross income from an unrelated trade or business is less that $1000 it is not necessary to file a return associated with the unrelated business income tax

first level taxes on exempt organization manager

imposed at a rate of 10% of the excess benefit (unless such participation is not willful and is due to reasonable cause)

first level taxes on disqualified person

imposed at a rate of 25% of the excess benefit

unrelated business income tax trade or business is broadly defined

includes any activity for the production of income through the sale of merchandise or the performance of services

in general, a private foundation is classified as such because

it serves a more narrowly defined common good not viewed as being supported by and operated for the good of the public

the organizations management may also be subject to the same 5% tax if it knew that

lobbying expenditures were likely to result in the termination of the organization's exempt status under 501(c)(3)

limited lobbying can be conducted by

many of these 501(c)(3) organizations, if so elected

if organization distributes low cost items as part of its solicitation for charitable contributions

not treated as unrelated business