Frequently, nonprofit organizations looking for ways to supplement their programs or business turn to the rental of unused or underutilized space as an additional source of revenue.  Beware, however. Generating revenue through the rental of property that is financed with a mortgage is the most common way unrelated business tax is generated. Income derived from the rental of real property is usually excluded from tax, but income generated by debt-financed property is always subject to unrelated business income tax.  Organizations are often surprised to discover unrelated business income is taxed at the same rates as for-profit corporations.

Debt-financed property is considered any property held to produce income, and the property has debt attached to it. This debt can be the result of acquiring the property or improving the property (IRC Sec. 514(b)(1)). 

As with every rule, there are several exceptions; two of the most common are:  1) substantially all of a property's use is directly related to the exercise or performance of an organization's exempt purpose, or 2) the property is rented to a related entity to the organization.

"Substantially all" of a property's use typically means greater than or equal to 85% of the property.  This is usually measured by square footage of the property.  For example, Organization A owns a building with 3 floors; each floor is 2,500 square feet or a total of 7,500 square feet.  Organization A rents a portion of the 1^st floor (1,000 square feet) as retail space to a local entrepreneur, and the remainder of the building is used by Organization A to further its exempt purpose.  Organization A's rental income is not considered debt-financed property and is not subject to UBIT, as 86.67% of the building is used for exempt purposes.

Organizations are considered to be related, if:

1.  One organization has control of the other organization; such as one board has the right to appoint or approve the other organization's board of directors.
2. More than 50% of one organization's members are members of the other organization.
3. Both organizations are local entities directly affiliated with a common state, national, or international organization that is also exempt.
4. One entity is an exempt title holding company, and the other organization receives profits from the first.

Debt-financed property can be a complicated process requiring careful consideration of all the facts, and the above discussion is just an overview. We would be happy to assist you with any questions you may have regarding debt-financed property specifically or unrelated business tax in general. 

Unclaimed property is property being held by an organization, also known as the 'Holder,' that belongs to an individual or another organization.  This unclaimed property needs to be escheated to the state after a specified dormant period.  For a nonprofit organization, the property would most likely be un-cashed vendor or payroll checks. 

Steps to be taken for unclaimed property are:

1. Identify any unclaimed property by looking at the outstanding check list for each checking account owned by the organization.

• An uncashed vendor check that would need to be escheated to the state would be at least five years old as of June 30 of the year being looked at.  Example: unclaimed vendor checks dated prior to July 1, 2009, would need to be escheated to the state by November 1, 2014.
• A payroll check that is uncashed with a date of at least one year on June 30 of the year being questioned should be escheated to the state. Example: unclaimed payroll checks dated prior to July 1, 2013, would need to be escheated to the state by November 1, 2014.

2. Try to locate the owners of the unclaimed property.  An example of a notification letter for Wisconsin and Minnesota can be located at the websites sites listed below.  Due diligence is necessary for a certain dollar amount of unclaimed property.  If an owner is found, the organization can void the old check and issue a new one.

3. For any unclaimed property where the owner cannot be contacted, these funds must be escheated to the state by November 1 of the present year.  Please visit the following websites for Wisconsin and Minnesota for the instructions and forms needed to escheat any unclaimed property to the state.

Minnesota Department of Commerce

Wisconsin Department of Revenue

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Generous donations and fundraising efforts totaling nearly $300,000 last year have allowed the Winona County Developmental Achievement Center (DAC) to expand its facility, thus accommodating its clients and growing its organization. In November 2014, the organization completed its first addition and plans to complete its second addition later this year.

The Winona DAC serves individuals with developmental disabilities throughout Winona County in Minnesota. The Winona DAC provides a work program where people do constructive, meaningful work, earn paychecks, and participate in their community. It also provides clients physical therapy, recreational activities, and programs that support communication and social skills, community awareness and volunteer opportunities.

The first 1,800-square-foot addition was added to the organization's large workroom and divides the once combined work and loading and staging areas. Clients now have their own space with large windows and new worktables.

"The new space creates a safer, more engaging work environment for our clients, and at the same time has opened the opportunity for more work to be available from local manufacturers," said Ryan Buhler, Vocational Coordinator.

Plans for the second addition are currently underway. The organization intends to use this space as a smaller work area, making some of its existing space into a permanent lunchroom.

To learn more about The Winona Developmental Achievement Center, visit their website, www.winonadac.org, or call 507-452-1798.

The AICPA will soon launch its first industry-specific group dedicated to nonprofit organizations.   The section will serve as a resource for those who work for nonprofit organizations and will include information on governance, assurance, financial reporting, and tax compliance.

The group's main objectives are to provide easily accessible and value-added resources, keep members informed on important industry-related topics and promote professional development.

Some of the resources expected to be available include:  

• Sample financial statements
• Tax compliance checklists
• Webinars
• Industry-specific articles
• Member discussions
• Networking events

There are also plans to develop an AICPA Not-For-Profit Certificate program through which members could participate in 40 hours of online training to obtain certification related to nonprofit governance, as well as organizational risk, audit, accounting, financial reporting, and tax related topics.

The section is expected to be open for membership in the second quarter of 2015.  Eligible members include all AICPA members, affiliate members, and leaders of nonprofit organizations who can join as non-CPA members.

Author: Stephanie Fischer, CPA

Contact: 920.337.4545 sfischer@hawkinsashcpas.com