The IRS recently issued Private Letter Ruling (PLR) 201701002, which considered consulting services provided to other not-for-profits to be related to the organization’s exempt purpose. This means it’s possible that other not-for-profits wouldn’t be subject to unrelated business income (UBI) tax for providing similar services.
What Is Unrelated Business Income?
Income is generally considered UBI only if three elements are present for the income-generating activity:
- Activities rise to the level of a trade or business, demonstrating a profit motive
- The trade or business is regularly conducted
- Activities are substantially unrelated to the organization’s exempt purpose
PLR 201701002 looked at the 2008 Community Foundation rulings and B.S.W. Group, Inc. v. Commissioner.
2008 Community Foundation Rulings
In this pair of rulings, the IRS addressed whether payments made to a community foundation for providing grant-making, administrative, and clerical services to charities were taxable.
The grant-making was ruled as substantially related to the organization’s exempt purpose, but the administrative and clerical services weren’t, which resulted in them being subject to UBI tax (UBIT).
B.S.W. Group, Inc. v. Commissioner
In this 1978 Tax Court case, the IRS ruled that technical assistance services performed by the tax-exempt organization on behalf of social sector organizations—defined as not-for-profits, foundations, governmental agencies, and community organizations—were substantially related to the organization’s exempt purpose and not subject to UBIT.
Ruling's Key Factors
The following elements were present to help make the UBI determination:
- The services were an element of the organization’s exempt purpose.
- The projects accepted by the organization provided research and data to help serve its own charitable mission of improving the lives of low-income children and their families.
- The organization made the results of its projects available to the public on its Web site.
- The organization required that the results weren’t sold or used for anything but the organization’s exempt purpose.
- The organization had raw data that other entities didn’t have access to, and the services were performed by employees who had specific skills and knowledge regarding their exempt purpose.
- The organization determined fees on a case-by-case basis and occasionally didn’t charge for services that took fewer than four hours.
Based on this and other rulings, it’s possible for consulting services to be considered related income not subject to UBIT. However, the facts described above are specific to one tax-exempt organization’s circumstances, which means your facts and circumstances should be closely examined to determine the proper tax treatment.
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If you’d like more information about how this ruling might impact your organization’s tax burden, contact your Moss Adams professional.