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FALL 2013
M
any associations have
programs in place in
order to supplement
traditional membership
and trade show revenue, and also
to add value to membership. These
programs can take the form of an
affinity arrangement where the
association secures a discount on
products or services for its members,
the publication of a magazine,
including advertising from various
companies that serve the association’s
members, or royalty arrangements for
use of the association’s trademarks
or mailing lists, just to name a
few. Depending on the nature of
these programs and how they are
administered by the association, the
revenues related to these programs
are frequently considered unrelated
business income (UBI) by the IRS.
For most organizations, UBI is income
from a trade or business, regularly
carried on, that is not substantially
related to the charitable, educational
or other purpose that is the basis
of the organization’s exemption. An
exempt organization that has $1,000
or more of gross UBI is required to file
the Form 990-T and is subject to the
unrelated business income tax (UBIT)
on the net income for programs that
fall into this category.
UBIT is generally calculated at the
current corporate tax rates that the
IRS establishes for non-exempt
organizations. Similar to the corporate
tax structure, the percentage of tax that
is assessed on net income from these
activities increases as net income
increases. Also similar to the corporate
tax structure, organizations that have
UBI can deduct expenses related to the
UBI activity to reduce their ultimate
UBIT liability. For example, direct
expenses such as printing costs for the
magazine in which the advertisements
are published can be deducted against
gross UBI on the tax return. Also,
indirect costs that are substantially
related to the UBI activity, such as
personnel costs, facility costs, office
supplies, and depreciation, may
also be deducted on the tax return
to further lower the ultimate UBIT
liability for the association. However,
the association must be careful to
ensure that expenses deducted on the
tax return for UBI are truly related to
the UBI activity.
Earlier this year, the IRS issued its
2013 work plan, which provides an
update on various ongoing projects
undertaken by the exempt organization
division, as well as new projects that
will begin in 2013. One of the key
compliance projects highlighted
in the 2013 work plan involves
Form 990-T and UBI. As a result of
compliance checks performed on 400
organizations during 2012, the IRS
yielded more than $260,000 in tax
payments due to inaccurate reporting
of UBI activities and filing of
delinquent returns. In 2013, the IRS
By Ann Zawartkay, CPA (NJ), CGMA, Manager
The Mercaidien Group
IRS to Target
Affinity Arrangements
Education >>
By Ann Zawartkay, CPA (NJ), CGMA,
Manager, The Mercadien Group
