Do Nonprofits have Uncertain Tax Positions?
Posted on Wednesday, September 12, 2012
ASC 740-10 (formerly FIN 48, Accounting for Uncertain Tax Positions) requires organizations to disclose material uncertain tax positions in their financial statements. The IRS also requires organizations to include the FIN 48 footnote from their financial statements in Form 990. It is common to think that since a nonprofit organization is tax-exempt that it does not have any uncertain tax positions; however, that is not true.
The one tax position that all tax-exempt organizations has is the very fact that they are tax-exempt. The organization is taking a position that it is in agreement with the purpose for which the organization received its exemption and is in compliance with all rules and regulations allowing the organization to continue to be tax-exempt. Has the organization changed its purpose from when it was first granted exemption? If it has, its original exemption may no longer apply to the new purpose. Other items to consider that may cause an organization to lose its tax-exempt status are:
- Political activity
- Too much lobbying
- Private inurement
- Private benefit
- Illegal activity
- Excessive unrelated business income
The second most common area for uncertain tax positions for nonprofit organizations is unrelated business income. Organizations may receive revenue from a source that the IRS could consider unrelated business income and, therefore, be taxable. Depending on certain circumstances, the organization may consider the revenue as related or exempt from tax while the IRS does not. Those areas that generate the most unrelated business income in nonprofits and are more likely to create issues for organizations are:
- Sale of merchandise that is not directly related to the exempt purpose
- Rental income from debt-financed property
Even if the organization and the IRS agree that a specific activity is unrelated business income, an additional uncertain tax position could exist for the allocation of expenses to offset unrelated business revenue (expenses that may not normally be thought to be directly related to an activity, allocating too much of a certain expense to the unrelated activity, or expenses that consistently generate losses).
One last item to note is that FIN 48 is not just applicable to federal tax positions. FIN 48 applies to federal, state, local and international levels.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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