In this down-turned economy, all business entities are looking to enhance or supplement their current revenue sources, and not-for-profit organizations (NPO’s) are no exception.  Because a number of charitable organizations are exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, the revenue generated by these organizations must be in accordance with its stated mission in order to be tax-exempt. Go back and review the organization’s Form 1023 and the IRS determination letter and verify “why” your organization is exempt from taxation. 

So what if an opportunity presents itself to increase your bottom line that may not fit your mission? Does that mean as a NPO you can not take advantage of this opportunity?  Not necessarily.  The income can be earned, but depending on its source, it may be considered unrelated business income. If the revenue is unrelated, then net income in excess of $1,000 is subject to the excise tax.

What types of property or transactions are specifically exempt or subject to being taxed? Continue reading…

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Over the last few years, the IRS has become very concerned that tax-exempt organizations are using their nonprofit status to avoid paying taxes on certain transactions, investments or business activities that are unrelated to their tax-exempt purpose.

In October 2008, the IRS sent 400 letters to colleges and universities requesting detailed information about executive compensation and business activities. Now the IRS is considering expanding its investigation to include endowment investments.

Although schools are not required to respond to the inquiries, not doing so could invite further scrutiny by the IRS, or even an audit.

As quoted in a recent New York Times article, IRS commissioner Douglas H. Shulman said, “Universities are really part of a rapidly evolving sector, and as sectors evolve and the economy evolves, we’re going to periodically take a hard look.”

If the IRS finds that certain colleges and universities have avoided paying taxes on unrelated business income, my guess is that it won’t take the IRS long to expand the scope of its investigation to include private schools.  How will your institution respond?

If you’ve got questions about unrelated business income, take a look at this post.