Non-profit Organizations: Pay Unrelated Business Income Taxes and Document Executive Compensation

Non Profit AccountingAccording to the IRS Exempt Organizations final report on colleges and universities the IRS has identified “some significant issues.”  Two of them being Unrelated Business Income Tax (UBIT) and documentation of executive compensation.


The report finds that of all 990-T filed, only about half report any tax liability.  The IRS found that there was under reporting of taxable income due to the following: claiming losses from activities that did not qualify as a trade or business; misallocating expenses to offset unrelated business income, claiming income producing activities are substantially related; and miscalculating or failing to substantiate expenses or losses reported on 990-T.  Nonprofits should examine their activities for any activities not related to their tax-exempt purpose and treat appropriately.  As a Raleigh NC CPA  firm, Langdon & Company LLP has extensive experience that enables them to provide efficient, cost-effective services to a variety of nonprofit organizations, including UBIT consultation.

The report also stresses “the importance of using appropriate comparability data when setting compensation.”  Compensation for officers, directors, trustees and key employees must be reasonable.  To create a presumption of reasonableness nonprofits can use an independent body to review and determine the amount of compensation, rely on appropriate comparable data, and contemporaneously document the compensation setting process.

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