Exempt Entities Unward Inc: Exempt Organization Explanation

Exempt Entitiesonward Inc Is An Exempt Organization That Assists Di

Exempt Entitiesonward Inc. is an organization that assists disabled individuals by training them in digital TV repair. The organization receives donated digital TVs, some operational and some not, which are used in training programs. After repairs, the TVs are sold to the public, generating revenue. The organization incurs various expenses including administrative costs, materials for repairs, utilities, wages to disabled trainees, and rent. Revenue not spent is reserved for future activities. The assignment asks to determine whether the TV repair and sales activity constitutes an unrelated trade or business and to calculate the net income and potential federal tax liability of the organization.

Paper For Above instruction

The purpose of this paper is to address the specific tax-related questions concerning Exempt Entitiesonward Inc., focusing on whether its digital TV repair and sales activity qualifies as an unrelated trade or business, and to compute its net income and any associated federal income tax liability.

Introduction

Nonprofit organizations, particularly those classified as tax-exempt under section 501(c)(3) of the Internal Revenue Code, are generally exempt from federal income tax on income related to their exempt purposes. However, income derived from activities that are not substantially related to their exempt purposes may be considered unrelated business income (UBI), which can be subject to taxation. This analysis explores whether the activities of Exempt Entitiesonward Inc., in repairing and selling digital TVs, fall under the unrelated trade or business category and calculates the organization's net income and potential tax liability.

Determination of Unrelated Trade or Business

Under IRS rules, an activity constitutes an unrelated trade or business if it is a trade or business activity regularly carried on and not substantially related to the charitable, educational, or other exempt purpose of the organization (Internal Revenue Service, 2021). In this case, Exempt Entitiesonward Inc. repairs donated digital TVs and sells them to the general public, generating significant revenue beyond contributions and grants. While the primary exempt purpose is to assist disabled individuals through training, the activity of selling repaired TVs appears to be an operational activity aimed at raising funds rather than directly fulfilling the charitable purpose.

The IRS considers whether the activity is both a trade or business and whether it is regularly carried on and unrelated to the organization’s exempt purpose. Repairing digital TVs is part of training disabled individuals, a primary activity aligned with its mission. Nevertheless, the act of reselling repaired TVs to the public essentially constitutes commercial activity designed to generate income, which aligns with IRS definitions of unrelated business income if it is not substantially related to the exempt purpose.

In this context, because the organization’s sale of digital TVs is not primarily for educational purposes but for income generation, it is classified as an unrelated trade or business. The activity is systematic, ongoing, and profit-motivated, typical indicators of an unrelated trade or business under IRC regulations (Parker, 2014).

Calculation of Net Income

To compute the net income, total revenues and expenses are organized as follows:

• Revenues from digital TV sales: $3,600,000
• Contributions: $700,000 (excluded from unrelated business income for tax calculation)
• Expenses:
  • Administrative expenses: $500,000
  • Materials and supplies for repairs: $800,000
  • Utilities: $25,000
  • Wages to disabled individuals: $1,200,000
  • Rent: $250,000

Since wages paid to disabled individuals and materials for repairs are directly related to the sale activity, these costs are considered part of the cost of goods sold and operating expenses, reducing the gross income. Administrative expenses and utilities are administrative costs and generally not allocated unless directly tied to the sale activity. For simplicity, all expenses are considered attributable to the sale activity.

Calculating net income:

Gross revenue: $3,600,000

Total expenses: $500,000 + $800,000 + $25,000 + $1,200,000 + $250,000 = $2,775,000

Net income: $3,600,000 - $2,775,000 = $825,000

Federal Income Tax Liability

Under IRC § 511, a nonprofit organization is required to pay tax on unrelated business income at the corporate tax rate (currently 21% as per the Tax Cuts and Jobs Act, 2017). Therefore, assuming all net income is unrelated business income, the tax liability would be:

Tax Liability = $825,000 x 21% = $173,250

Conclusion

The activity of repairing and selling digital TVs by Exempt Entitiesonward Inc. constitutes an unrelated trade or business because it is regularly conducted, profit-motivated, and not substantially related to its exempt purpose of assisting disabled individuals through training. The organization's net income from this activity is approximately $825,000, and it would owe federal income tax of approximately $173,250 under current tax laws, unless specific exemptions or deductions apply.

References

• Internal Revenue Service. (2021). Brown Book: Income of Tax-Exempt Organizations. IRS Publication 598.
• Parker, R. (2014). Unrelated Business Income and Nonprofit Taxation. Journal of Taxation and Nonprofit Law, 26(2).
• Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2000 (2017).
• Shaping the Future of Nonprofit Tax Law (2020). Nonprofit Quarterly.
• Reed, M. (2019). Taxation of Unrelated Business Income. Nonprofit Law Review, 16, 45-58.
• IRS (2020). Qualification of Organ others as Tax-Exempt Organizations. IRS Publication 557.
• Niemeyer, C. (2018). Tax Implications for Nonprofits Engaged in Commercial Activities. Law Review, 22(3).
• Gordon, A. (2022). The Role of Unrelated Business Income in Nonprofit Finance. Nonprofit Management & Leadership, 32(1).
• Manes, R. (2016). Tax Planning for Nonprofit Organizations. Wiley Publishing.
• IRS (2022). Unrelated Business Income Tax (UBIT). IRS.gov.