Unrelated Business Tax Regs May Bring Nonprofits Headaches

Unrelated Business Tax Regs May Bring Nonprofits Headaches

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David L. Thompson, vice president of public policy for the National Council of Nonprofits, told Law360 the regulations were a good start because they do reduce some of the stress, but they are not perfect.

“It was helpful,” especially on the issue of advertising, “because that’s one we raised in our comments to IRS and Treasury,” he said.

The regulations said the NAICS six-digit code provides that all of an exempt organization’s advertising activities and related services, which is code 541800, are considered one unrelated trade or business activity and the source of the advertising income does not matter. This carve-out is helpful because a nonprofit can have a print magazine with ads, newsletters with ads and a website with ads, and all those are the same revenue stream under this approach, Thompson said.

“The problem is the real estate area,” he said. “The codes are wonderfully generic when it comes to advertising and terribly cumbersome when it comes to rental space.”

By way of example, rental income from a banquet hall, which is NAICS code 531120, would be put in a different bucket than rental income from the use of a vacant lot, NAICS code 531190, where an outdoor banquet is held. And if a roof of a building is rented for a cell tower, and other rooms are rented for events, those items would all be treated differently.

“So the rental usage will be a problem we have to work through,” he said. “There may be dozens more examples, like rental income stream versus another income stream. Fortunately, we have until Dec. 3 to address the challenges.”

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