What you need to know
A not-for-profit may be subject to federal tax on income from certain business activities that are considered unrelated to the tax-exempt purpose of the entity. The IRS is more concerned with how this income was earned rather than whether it is used for the tax-exempt purpose. There can be instances where a not-for-profit invests funds and uses the income from the investments for the tax-exempt purpose. In this instance, the income is taxable.
Interest and dividends are not considered unrelated business income subject to tax. However, investments in partnerships and publicly traded partnerships are treated as unrelated business income and subject to tax. Sometimes investment advisors view investments in partnerships and publicly traded partnerships the same as investments in stocks and bonds. However, there are very different tax consequences. Not only is the income from a partnership or publicly traded partnership taxable (if it is income), but the gain on the sale of partnership or publicly traded partnership interest is usually taxable as well.
For more information about how these rules impact your not-for-profit, contact your AGH tax professional or Jennifer Allen using the information below.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.
Jennifer Allen, a certified public accountant, joined AGH in 2007. She has extensive experience working with not-for-profit clients, manufacturing, complex partnership structures, private equity and medical practices, as well as merger and acquisition transactions.
She is a member of the American Institute of CPAs, Kansas Society of CPAs, KSCPA 20 up to 40 class of 2012 and Young Professionals of Wichita. Jennifer is a past board member of the Wichita Chapter of the Kansas Society of CPAs, a United Way Young Leader and currently serves on the board of directors for the Down Syndrome Society of Wichita.