Unrelated Business Income – Part 2
Unrelated Business Income – Part 2
Please review my last blog, Unrelated Business Income – Part 1, for general definitions and explanations about UBI. I want to share with you here some common issues/questions related to UBI:
Multiple Unrelated Business Activities and the Silo Rule: The Tax Cuts & Jobs Act (TCJA) contains a provision prohibiting tax-exempt organizations from using losses from separate unrelated business activities to offset income form other, separate unrelated business activities. There are tax strategies for helping to mitigate the affect of this rule.
Real Estate rental is not taxable UBI unless the property is “debt-financed”: If your church owns a house that they rent out, that is not debt-financed, then that rental is not UBI for federal tax purposes. An exception to the debt-financing rule might be if the debt-financed property is leased substantially for all exempt purposes (85%+) then even if it is financed the income would not be taxable as UBI. (Note: Debt-financed means there has been debt on that property within the past 12 months. If it has been paid off greater than 12 months previous, it is not considered debt-financed any longer.)
The Neighborhood Land Rule allows a church to exempt income from debt-financed property as long as the church plans within 15 years to convert that property to exempt purposes. Consult a tax specialist if this situation applies to you.
Is it UBI when you allow other groups to use the Church Facilities: Firstly, if the church is providing any other services or equipment then it is not a “pure” real estate rental and would not be UBI. What about weddings? The church may provide the sanctuary, the sound equipment, the reception hall so it is not a pure real estate transaction. What if a group wants to use the debt-financed facility and give your church a donation? The IRS is clear that if the organization receives something in return for their donation then it is not a donation.
Remember there are other considerations besides UBI when allowing others to use the church, perhaps there are land use, property taxes, sales tax issues, or even legal liability you need to address.
Sale of debt-financed property that was not used for exempt purposes: Example, the church borrows money for land that it intends to build on. They still owe money on the land but make a profit on the sale. They will have UBI, taxable income, on the profit. BUT, if the land had been paid off more than 12 months, there would be no taxable income. So, it is important to tax plan in situations such as this.
Church store is open to the public, operates regularly and/or sales online: If every item sold is directly related to the church’s exempt purpose then the sales are NOT unrelated business activity. If this is significant revenue for your organization, you would want to seek a tax specialist.
Unrelated Business Income Tax has NOTHING to do with Sales Tax: In some jurisdictions, the sale of certain items is subject to sales tax even if not subject to UBI. For example, worship CD’s may not be UBI but in your state they may be subject to state sales tax. On the other hand, there could be items subject to UBI that are NOT subject to sales tax.
Remember, UBI can be a good thing – we just have to be sure we are following the rules!
Does your church need accounting assistance? Contact GoodBooks today!