Tax-exempt organizations, such as charities and non-profits, are subject to taxation on income generated from unrelated business activities. Failure to comply with reporting requirements can result in penalties and fines for both the organization and its officers.
You need to know the ins and outs of Form 990-T to ensure the best outcome for your clients.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: Are churches required to file Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under Section 6033(e))?
A: While churches are exempt from business taxes for their activities consistent with their exempt (religious) purposes, they sometimes engage in activities that are unrelated to their exempt purposes, which may therefore become subject to federal taxation.
Q: Is the unrelated business taxable income (UBTI) exemption for interest, dividends, and investment income only for §501(c)(3) organizations and not for §501(c)(7) social clubs?
A: The exemption from UBTI for interest generally does not apply to social clubs. To limit the tax benefits to social clubs to allowing individuals to join together without tax consequences, the investment income of social clubs is subject to tax.
Q: Wouldn’t UBTI be generated by any activity that is not part of what gives the organization an exempt status?
A: Essentially, yes. However, it is not always clear if an activity is related or not, so activities must be monitored.
Q: Can indirect expenses such as utilities, officer salaries or depreciation be allocated to UBTI activities?
A: Yes, as seen in the examples provided in the handouts, allocated indirect expenses can offset UBT income to lower the potential tax liability.
To learn more about understanding the reporting requirements for Form 990-T, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.