Note: The following discussion is provided for informational purposes only and is not intended to serve as legal or tax advice. For specific information about unrelated business income tax or disclosures for parent organizations that control subsidiary corporations, consult your attorney or tax adviser.
This month we begin a series of articles to help explain and highlight the regulatory changes for the nonprofit sector enacted by Congress as part of the Pension Protection Act of 2006. In this article, we look at new requirements for 501(c)(3) organizations that report unrelated business income and that control for-profit or nonprofit subsidiaries.
Congress enacted two important changes that went into effect August 17. They are:
- Form 990-T, used to report unrelated business income tax, has been designated a public record and
- Parent organizations that control subsidiary corporations have new disclosure requirements on IRS Form 990.
Public Disclosure of Form 990-TForm 990-T is used by nonprofits to report unrelated business income tax. In 2002, the IRS reported that some 32,000 tax-exempt organizations filed Form 990-T. About 13,000 of these organizations were 501(c)(3) organizations. The new public disclosure rules for Form 990-T filers only affect 501(c)(3) organizations.
The current tax code requires nonprofit organizations to report and pay taxes on unrelated business income. Unrelated business income comes from any activity that is regularly carried on if that activity is not substantially related to the organization's exempt purpose. The organization's need for income to conduct its program and further its mission does not affect the tax or the reporting obligations for unrelated business income.
Important facts and circumstances help determine whether a business is "regularly carried on" and whether or not that business is "substantially related" to the organization's exempt purpose. If you have questions about whether your organization should file Form 990-T, consult your attorney or tax adviser.
New Form 990 Public Disclosure Requirements for Nonprofits with SubsidiariesIn certain cases nonprofits do not engage in business directly but do so through subsidiary corporations. These subsidiary corporations may be nonprofit or for-profit entities. The subsidiary often pays interest, annuities, rents, or royalties to the nonprofit parent corporation. The tax treatment of these payments to the nonprofit parent corporation by its subsidiaries is generally excluded from unrelated business income tax. Certain facts and circumstances in this parent-subsidiary relationship, however, are subject to complex statutory provisions found in section 512(b)(13) of the Internal Revenue Code.
Activities between nonprofit parent corporations and their subsidiaries, particularly loans from nonprofits to their subsidiaries, have raised concerns in Congress that have led to greater transparency and increased reporting on these activities. New reporting requirements seek to track all funds transferred between nonprofit parents and their subsidiaries.
As of August 17, 2006, nonprofits with subsidiary corporations, as defined by IRS section 512(b)(13), that file Form 990, 990-EZ, or 990-PF are required to met the following IRC Section 6033(h) reporting requirements:
- List the amount of any interest, annuities, royalties, or rents received from each controlled entity;
- List any loans made to each controlled entity; and
- List any transfer of funds between the controlling organization and each controlled entity.
Dan Moore, September 2006
© 2006, Philanthropic Research, Inc. (GuideStar)
Dan Moore is GuideStar's vice president for public affairs.