Unintended tax consequences for not-for-profits

ALERT: Certain investments may have unintended consequences for not-for-profits

May 10, 2018

How not-for-profits can know when income is subject to tax.

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.

Questions?

For more information about how these rules impact your not-for-profit, contact your AGH tax professional or Jennifer Allen using the information below.

Ellen Decker

Manager
Tax Services

Ellen primarily serves clients in the oil and gas, construction and manufacturing industries, providing tax compliance and planning services. She is a member of the AICPA and the Kansas Society of CPAs. She holds a bachelor degree of business administration in accounting along with a master degree in accountancy from Wichita State University.

Ellen is a longstanding member of Young Professionals of Wichita, where she is currently serving as the Past Chair on the Board of Trustees. Additionally, she serves as a member of the Small Business Advisory Group and the Diversity and Inclusion Task Force at the Chamber of Commerce.

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.

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