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If your nonprofit has investment income, dividends, interest, rents and annuities, they\u2019re generally excluded when calculating unrelated business income tax (UBIT). However, income from debt-financed property typically is taxable. So it\u2019s important to segregate income from such property and include it in UBIT calculations to help ensure you don\u2019t trigger unwanted IRS attention.<\/p>\n
What counts as UBI?<\/strong><\/p>\n Income produced from debt-financed property generally is taxable unrelated business income (UBI) in the same percentage as the debt is to the full acquisition cost. This means that 75% of any income or gain from a property with a loan for 75% of its cost will usually be taxable\u00a0UBI.<\/p>\n The most common type of income-producing debt-financed property for nonprofits is probably real estate \u2014 for example, an office building with income from rents unrelated to your nonprofit\u2019s mission. But such property might also include stocks or other investments purchased with borrowed\u00a0funds.<\/p>\n Income-producing property generally is treated as debt-financed for UBIT purposes if, at any time during the tax year, it had outstanding \u201cacquisition indebtedness.\u201d So if your nonprofit incurred debt before, during or shortly after it acquired or improved property (but wouldn\u2019t otherwise have incurred debt), the property may be considered acquisition indebted.<\/p>\n What doesn\u2019t count?<\/strong><\/p>\n Some types of debt-financed property aren\u2019t considered when calculating\u00a0UBIT:<\/p>\n Property related to your exempt purpose.<\/strong> If 85% or more of the use of the property is substantially related to your nonprofit\u2019s exempt purposes, it won\u2019t be considered debt-financed property. Therefore, income from the property won\u2019t be taxable. Simply using the income to support your programs doesn\u2019t make the property related to your organization\u2019s exempt purpose. The property must be used in providing program services.<\/p>\n Property used in certain excluded activities.<\/strong> This is property used in a trade or business that\u2019s excluded from the definition of \u201cunrelated trade or business.\u201d That\u2019s either because it\u2019s used in research activities or because the activity has a volunteer workforce, is conducted for the convenience of members, or operates to sell donated merchandise.<\/p>\n Real property covered by the neighborhood land rule.<\/strong> Your nonprofit must acquire the real estate intending to use it for exempt purposes within 10\u00a0years. Also, the property usually must be connected to other property your organization uses for exempt purposes. Favorable treatment will no longer apply if you abandon your intention to use the land for exempt purposes.<\/p>\n Who should you ask?<\/strong><\/p>\n There are other circumstances when dividends, interest, rents, annuities and other investment income may be taxable \u2014 for example, if it\u2019s paid directly from a subsidiary your nonprofit controls. Determining if and when income is subject to UBIT can be difficult. We encourage you to contact us for information and\u00a0help.<\/p>\n \u00a9 2024<\/em><\/p>\n <\/body> If your nonprofit has investment income, dividends, interest, rents and annuities, they\u2019re generally excluded when calculating unrelated business income tax (UBIT). However, income from debt-financed property typically is taxable. So it\u2019s important to segregate income from such property and include it in UBIT calculations to help ensure you don\u2019t trigger unwanted IRS attention. What counts […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,10,15],"tags":[8,11,12],"class_list":["post-17084","post","type-post","status-publish","format-standard","hentry","category-articles","category-news","category-not-for-profit","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17084","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=17084"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17084\/revisions"}],"predecessor-version":[{"id":17085,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17084\/revisions\/17085"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=17084"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=17084"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=17084"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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