In 2013, the IRS released their report regarding the results of their Compliance Project. The study found that 90% of the colleges and universities examined had underreported their unrelated business income. As a result, the IRS is focusing closely on this nonprofit sector to ensure institutions make identifying unrelated business activities and proper accounting for income and related deductions a priority. The following is a list of the primary reasons underreporting occurred, as reported by the IRS:
- Net operating losses were being claimed on activities that lacked a profit motive and thus were not considered a trade or business.
- Expenses were being deducted that did not have primary and proximate relationship to the unrelated activity for which they were deducted.
- Unrelated business activities were misclassified as related activities.
The Project results also indicate that more than 60% of the institutions examined did not rely on outside advice regarding unrelated business income issues. With the complexity of unrelated business income and reporting issues, outside advice can be critically important. In the event of an examination, the IRS many not agree with decisions about characterization of an activity or how income was reported. However, obtaining legal and accounting advice and documenting an organization’s decisions can help the organization defend its position during an IRS examination.
Some of the most common activities that may be classified as unrelated business income and subject to tax include:
- Advertising and corporate sponsorships via printed materials, internet and broadcasting (certain exemptions such as qualified sponsorship payments may apply)
- Renting facilities, including personal property, arena use, operation of fitness and recreation centers, sports camps, golf courses and parking lots
- Internet and catalog sales, travel tours, affinity cards, mailing list rentals, logo usage, commercial research, hotel, restaurant, and conference center operation
- Alternative investments, such as private equity, limited partnerships or foreign corporations (consider gathering Schedule K-1’s from partnerships in a central location and have the 990-T preparer work with the investment managers to ensure investments are considered for UBI purposes)Elliott Davis can help your institution avoid future issues with unrelated business income and the IRS by performing a comprehensive analysis of your institutions activities, including face to face interviews, on-site tours, interviews of audit team members and a detailed review of current, unrelated business income computations.
Elliott Davis can help your institution avoid future issues with unrelated business income and the IRS by performing a comprehensive analysis of your institutions activities, including face to face interviews, on-site tours, interviews of audit team members and a detailed review of current, unrelated business income computations.