Unrelated Business Income Tax: - PowerPoint Presentation

Slide1

Unrelated Business Income Tax: Basics for Community Colleges and Foundations

Nikhil Bassi, EA CPA MST

Internal Auditor

Contra Costa Community College DistrictSlide2

IntroductionCommunity Colleges and their Foundations are tax-exempt organizations under state and Federal law.

Community Colleges are taxed on unrelated business income, which is income from any trade or business that is not substantially related to its tax exempt mission (e.g. education, training, and workforce development).Slide3

Have you come across the following?Facility Rentals?Parking Lot Rentals?

Rentals of Sports Fields?

Other income generating activities that you’re not sure is totally related to the educational mission of the college?Slide4

IntroductionIn order for income to be considered unrelated business income, it must meet all three criteria outlined below. The income is

:

Generated

from an activity that is not related to

the College’s or Foundation’s

tax exempt

mission.

Regularly

carried on.

Conducted

in a business-like manner.Slide5

Passive Income not subject to tax The Internal Revenue Code excludes most types of passive income from the definition of unrelated business taxable income.

IRC

§512(b)(1) excludes all dividends and interest from tax. IRC §512(b)(2) excludes royalties when measured by gross or taxable income from tax provided that services are not provided by the

organization in

exchange for the payment.

Rental income from real estate is normally excludable from unrelated business income (Reg. §1.512(b)-1(c)(ii)(a)). Slide6

Rental Income From Real Property Rental income from real estate is normally excludable from unrelated business income (Reg. §1.512(b)-1(c)(ii)(a)).

However

, amounts paid for the occupancy of space do not qualify as excludable rents if the owner of the property renders services for the convenience of the occupant.Slide7

Rental Income From Real PropertyServices are considered rendered to the occupant if they are primarily for his/her convenience and are other than those usually rendered in connection with the rental of rooms or other space for occupancy only (Reg. §1.512(b)-1(c)(5)).

For

example, the provision of maid, linen or food services constitute services rendered for the convenience of the occupant, whereas the furnishing of utilities, the cleaning of public areas (e.g. public entrances and exits, stairways, lobby) and collection of trash do not. Slide8

Rental Income From Real Property The operation of a box office and concession stand has been treated as services for the lessee of an auditorium.

The IRS has determined that the rental of parking spaces to the general public is not considered rent from real property, regardless of whether any services are being provided.

Rents dependent on profits or income derived from real property do not qualify for the exclusion unless they are based on a fixed percentage of gross receipts or sales. Rents based on a percentage of net profits are taxable (Reg. §1.512(b)-1 (c)(2)(iii)). Slide9

Mixed Leases of Real and Personal PropertyWhere both real and personal property are rented, the rents from personal property are excluded if the rents attributable to the personal property are an “incidental” part of the total rents received under the lease. Determination of the excludable portion of rentals attributable to personal property is based on the following rules

:

• 10% or less is considered incidental and not subject to tax

;

• 11-50% - taxable amount is the portion attributable solely to personal property

;

• 51% or more is considered 100% taxable (Reg. §1.512(b)-1(c)(ii)(b)).Slide10

Rental Income from Personal PropertyIncome generated by the rental of personal property (i.e. property other than real estate) is generally taxable unless the personal property is rented in conjunction with the rental of real

property.

Income

generated from rental of personal property may not be subject to unrelated business income tax under the following circumstances

:

• the rental is not regularly carried on,

• is substantially related to the University’s exempt purposes

• is rented for substantially below market rates

• or, the rental is primarily for the convenience of students, faculty or

staff

.Slide11

ExamplesFacility Rentals (with services & equipment)

Dorm Room Rentals

Parking Lot RentalsSlide12

Rentals with Services & EquipmentSlide13

Rentals with Services & EquipmentSlide14

College Dormitory Room RentalsSlide15

College Dormitory Room RentalsSlide16

Rental of Parking Lot SpacesSlide17

Rental of Parking Lot SpacesSlide18

POP QUIZ!Remember the basics:

Is the activity unrelated?

Is it regularly carried on?

Is it conducted in a business-like manner?Slide19

Question 1Rumble Ridge Community College rents their soccer field to private coaches to run soccer camps to supplement the Athletics department budget during off times. Field rental occurs on Saturdays, 40 days a year. Market rates are charged.

Change facts – does the answer change?Slide20

Question 2Los Flores Junior College rented a parcel of undeveloped land to serve as overflow parking for a music festival on 9/25/2015. Fair value rent was charged. Los Flores is in a rural area, and does not routinely do this sort of thing.

Change facts – does the answer change?Slide21

Question 3Kentfield Coast College rents their auditorium for meetings and conferences a couple times a week, year round to Nikola Tesla Corporation and Nippon

Hōsō

Kyōkai

, Inc. The businesses pay $3,000 to use KCC’s audio-visual equipment, and $35,000 to rent the auditorium.

What is rent paid for the auditorium was $25,000?Slide22

Wrap-upAny final questions or comments before we close today’s session?

Thank you for your participation!