As The Human Resources Specialist At The CPA Firm Where You

As The Human Resources Specialist At The Cpa Firm Where You Work You

As the human resources specialist at the CPA firm where you work, you recently joined the board of a local professional association of human resource managers, thinking it might be a good place to pick up new clients as well as hone your human resources skills. Because of your CPA background, other board members describe how the group puts on an annual conference for its members with educational workshops and speakers. This year, the board is considering the sale of exhibit space to vendors. The additional revenue could be substantial and help support the association’s mission. They have heard of unrelated business income (UBI) and how it might result in taxes or penalties for the nonprofit group. Discuss what questions you might have for the board to develop the appropriate facts, sources you would use to analyze potential UBI issues, and what advice you might provide.

Paper For Above instruction

As a human resources specialist with a CPA background, participating on the board of a professional association presents both opportunities and responsibilities in understanding the financial and legal implications of the organization’s activities. One critical issue that arises in this context is the potential for unrelated business income (UBI) to impact the tax-exempt status of the nonprofit association. Addressing this issue requires a comprehensive understanding of UBI, the pertinent questions to clarify the situation, sources of authoritative guidance, and strategic advice for managing potential UBI issues.

Understanding Unrelated Business Income (UBI)

Unrelated Business Income refers to income generated from a regularly carried-on trade or business that is not substantially related to the organization’s exempt purpose. According to the IRS, such income is subject to unrelated business income tax (UBIT). The primary concern for nonprofits, including professional associations, is that engaging in certain commercial activities, such as selling exhibit space to vendors, could trigger UBI, thereby jeopardizing their tax-exempt status if the activity is considered unrelated and substantial in scope.

Questions to Clarify UBI Implications

To properly assess the UBI risk, various specific questions should be posed to the board and clarified through research:

1. Nature of Exhibit Space Sales: Is selling exhibit space to vendors a core activity aligned with the association’s mission, or is it primarily a revenue-generating activity? Is this activity conducted regularly or as a one-time event?

2. Relation to Exempt Purpose: How does selling exhibit space relate to the association’s educational or professional mission? Does it serve as a means to support educational activities or fund the association’s objectives?

3. Extent of Revenue: What proportion of the association’s total income would come from selling exhibit space? Is this income a significant part of the budget or a minor supplement?

4. Activity Structure: Are vendors solicited actively, or is this more incidental? Will the activity involve hiring paid staff or external contractors? Could this be structured as a separate entity?

5. Historical Practice: Has the association previously engaged in similar revenue-generating activities? How were these activities classified and taxed?

Sources for Analyzing UBI Concerns

Analyzing potential UBI issues requires consulting authoritative sources:

1. IRS Regulations and Publications: The IRS Publication 598, "Tax on Unrelated Business Income," provides detailed guidance on what constitutes UBI and how to determine if specific activities trigger UBIT.

2. Internal Revenue Code (IRC) Section 513: This section defines the scope of unrelated business taxable income.

3. Legal and Tax Advisory Firms: Consulting with legal and tax professionals specializing in nonprofit law can offer nuanced interpretations.

4. Case Law: Reviewing relevant IRS rulings and court cases involving similar activities can illuminate how UBI is interpreted.

5. National and State Nonprofit Associations: Many provide guidance and best practices on managing UBI risks.

Advice for the Board

Based on the analysis, the following advice is prudent:

- Conduct a Formal UBI Analysis: Before proceeding, the association should conduct a thorough review of the proposed activity to determine if it constitutes UBI under IRS rules.

- Segregate Commercial Activities: If the activity is potentially unrelated, consider establishing a separate entity or a subsidiary to handle the sale of exhibit space. This separation can limit the scope of UBI and simplify tax issues.

- Capitalize on Related Activities: Where possible, structure activities to be substantially related to the association’s exempt purpose. For example, framing vendor activities as educational or promotional rather than purely commercial.

- Monitor Revenue Levels: Keep the revenue from such activities within limits prescribed by the IRS to avoid jeopardizing tax-exempt status. Significant unrelated income can threaten the organization’s exemption.

- Implement Compliance Procedures: Develop internal policies to track income and assess UBI regularly, ensuring ongoing compliance.

- Seek Professional Counsel: Engage with nonprofit tax specialists for periodic audits and to interpret complex IRS guidance.

Conclusion

Selling exhibit space at a professional association’s conference can be an excellent revenue stream but also poses notable UBI risks. By asking comprehensive questions, consulting authoritative sources, and considering structural and strategic options, the association can maximize its income potential while safeguarding its tax-exempt status. As a human resources professional with a CPA background, your role includes facilitating a balanced approach that aligns with legal requirements and the association’s mission, thus ensuring sustainable growth.

References

  • Internal Revenue Service. (2022). Publication 598: Tax on Unrelated Business Income. IRS.gov.
  • Internal Revenue Code Section 513. (2022). IRC.gov.
  • Weisbrod, B. A. (2016). The Nonprofit Sector: A Research Handbook. Routledge.
  • American Institute of CPAs. (2020). Nonprofit Tax & Financial Planning Resources.
  • Young, D. (2019). Nonprofit Organizations: Cases and Materials. Aspen Publishing.
  • IRS Exempt Organizations. (2023). Common Questions About UBIT. IRS.gov.
  • Brinckerhoff, P. C. (2014). Mission-Based Management: Leading Your Nonprofit Organization. Wiley.
  • Fisher, T. (2018). Nonprofit Law and Governance: How to Prevent and Handle Legal Problems. Nonprofit Quarterly.
  • National Council of Nonprofits. (2021). Managing Unrelated Business Income. CouncilofNonprofits.org.
  • Harvard Law School. (2020). IRS Rulings and Case Law on Nonprofit Activities. Harvard Law Review.

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