Contact us

[ return to list ]

When a Nonprofit Spins Off a Business

The unrelated business income tax (UBIT) is a major tax obstacle for nonprofit organizations these days. Not only do you face a stiff tax on unrelated business income, you might also jeopardize your tax-exempt status. However, there is a way to sidestep this potential tax pitfall.

Practical idea: You can arrange to spin off a for-profit corporation out of your nonprofit organization. Assuming the spin-off is handled properly, you avoid UBIT while preserving your organization's tax exemption.

If you spin off a subsidiary corporation from a parent organization, the earnings are taxed to the subsidiary rather than the parent as long as the parent does not exert too much control over the subsidiary. How much control is “too much” for this purpose? It depends on the facts and circumstances of the situation.

Key point: It doesn't matter whether or not the parent organization owns stock in the subsidiary—in fact, it may even own 100% of the subsidiary. Instead, the level of control refers to the influence that the parent exerts over the subsidiary on a daily basis. For example, if a nonprofit organization's board of directors also serves the same function for the subsidiary, the IRS is likely to say that the nonprofit has too much control over the subsidiary.

Of course, the affiliate still has to pay tax on its business earnings, so the tax obligation has just been shifted from one pocket to another. However, there's a decided advantage to this arrangement: The nonprofit organization can continue to operate without fear of tax reprisal.

If this approach seems appropriate for your nonprofit's situation or you are contemplating increased business-related activities, follow these three steps to preserve the organization's tax-exempt status.

*Select an independent board of directors for the subsidiary.

*Transfer overhead expenses from the nonprofit to the taxable corporation. This eliminates any concern over misuse of funds.

*Limit the nonprofit organization to nontaxable activities and have the subsidiary maintain all the taxable activities.

This is a complex area of the law best left to the experts. It is strongly recommended that you consult with experienced tax and legal advisers regarding the technicalities of a spin-off.

[ return to list ]




	[ return to list ] When a Nonprofit Spins Off a Business The unrelated business income tax (UBIT) is a major tax obstacle for nonprofit organizations these days. Not only do you face a stiff tax on unrelated business income, you might also jeopardize your tax-exempt status. However, there is a way to sidestep this potential tax pitfall. Practical idea: You can arrange to spin off a for-profit corporation out of your nonprofit organization. Assuming the spin-off is handled properly, you avoid UBIT while preserving your organization's tax exemption. If you spin off a subsidiary corporation from a parent organization, the earnings are taxed to the subsidiary rather than the parent as long as the parent does not exert too much control over the subsidiary. How much control is “too much” for this purpose? It depends on the facts and circumstances of the situation. Key point: It doesn't matter whether or not the parent organization owns stock in the subsidiary—in fact, it may even own 100% of the subsidiary. Instead, the level of control refers to the influence that the parent exerts over the subsidiary on a daily basis. For example, if a nonprofit organization's board of directors also serves the same function for the subsidiary, the IRS is likely to say that the nonprofit has too much control over the subsidiary. Of course, the affiliate still has to pay tax on its business earnings, so the tax obligation has just been shifted from one pocket to another. However, there's a decided advantage to this arrangement: The nonprofit organization can continue to operate without fear of tax reprisal. If this approach seems appropriate for your nonprofit's situation or you are contemplating increased business-related activities, follow these three steps to preserve the organization's tax-exempt status. Select an independent board of directors for the subsidiary. Transfer overhead expenses from the nonprofit to the taxable corporation. This eliminates any concern over misuse of funds. *Limit the nonprofit organization to nontaxable activities and have the subsidiary maintain all the taxable activities. This is a complex area of the law best left to the experts. It is strongly recommended that you consult with experienced tax and legal advisers regarding the technicalities of a spin-off. [ return to list ]
2423-B Plantation Center Drive, Suite B, Matthews NC 28105 Fax:704-845-0928 © Copyright 2004 Desai & Desai, LLP