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Not-for-Profit Enews Update: Entity Structure and UBIT

by Angela N. Crawford, CPA - Manager

February 20, 2014


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Exempt organizations may consider establishing a separate entity for business activities. Before making a legal entity choice for the new company, consider the impact each of the following options have on unrelated business income tax (UBIT).


Single Member LLCs

Single member LLCs are disregarded entities for federal tax purposes. All income would be considered the exempt organization’s own and would be evaluated for unrelated business income tax at the organization’s level. This may be a good option if there is a need for some separation from the exempt organization (i.e. the purchase of a building), but it would still remain under the organization and there would be no separate tax return.


Partnerships

Income and expense flow through to a partner and retain their tax attributes at the partner level. Thus, investment income in a partnership is investment income for the exempt organization. If your organization’s investment income is exempt from unrelated business income tax, all investment income from the partnership will be exempt as well. Ordinary income may or may not be subject to UBIT- the organization has to look at the underlying activity and determine if the income would be unrelated to the organization’s exempt purpose.


S Corporations

As in a partnership, S corporation income flows to the shareholders. However, the tax attributes do not remain with the income in the shareholders' hands. All income will be unrelated business income.


C Corporations

While income is taxed at the corporate level, exempt organizations need to be aware of some limitations if they control the C corporation (i.e. own 51% of the stock). Interest, annuities, royalties, and rents are often excluded from unrelated business income for many exempt organizations. However, if a controlled corporation pays any of these expenses to the exempt organization and lowers income tax liability, the exempt organization must recognize this income as unrelated business income.


Entity structure should be discussed with an attorney and your certified public accountant before making a decision. For more information on unrelated business income and the impact on your organization, contact your accounting professional at Blue.


If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE.