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FASB Ruling Could Impact Not-for-Profits with Unrelated Business Income

Even if your not-for-profit is considered tax-exempt, it still might need to comply with a new accounting rule on uncertainty in income taxes.

The Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (FIN 48)”—effective for calendar year 2008 and later financial statements—could impact your not-for-profit, depending on your activities.

The requirements

FIN 48 requires organizations that prepare their financial statements according to accounting principles generally accepted in the United States of America (GAAP) to review their federal and state tax positions and determine whether they would “more likely than not” withstand a challenge by the IRS or a state taxing body.

If a position fails the more-likely-than-not test, the corresponding tax liability is recognized in the organization’s financial statements. For positions that meet the test, FIN 48 outlines a complex process for determining the portion of the benefit that should be recognized.

In either case, the organization must establish reserves for any tax liabilities not recognized and make financial statement disclosures about uncertain tax positions.

UBI uncertainty

Let’s say you’re a hospital with a gift shop. Selling flowers, greeting cards and calendars is unrelated to your tax-exempt purpose of treating patients. Your gift shop revenue might be unrelated business income (UBI) and fair game for federal and state taxing bodies. You’ll likely need to apply FIN 48 to your financial statement.

Also, if the IRS investigates your tax-exempt status for any reason, you might be required to apply FIN 48. Exemptions to UBI Whether UBI is subject to unrelated business income tax (UBIT) is another potential area of uncertainty. UBI may be exempt from UBIT if 1) your gross UBI is less than $1,000; 2) only volunteers run the money-making activities; 3) most of the merchandise you’re selling is donated; or 4) your organization’s “members” are primarily the people who benefit from the business—(e.g., outpatients who use the hospital’s heated swimming pool for physical therapy).

If that hospital with a pool offers a water aerobics class to the community in addition to providing outpatient physical therapy, that income might be subject to UBIT. That’s because the rules aren’t clear about how many patients vs. nonpatients use the swimming pool. If you’re unsure whether UBI is taxable, you’ll need to show that you’ve thought about FIN 48 on your financial statements.

Your ducks in a row

Like other FASB rulings, FIN 48 is a complex accounting issue. Your tax expert can help you determine whether it applies to you. Don’t leave this complicated matter until the 11th hour.

Questions on FIN 48?
Contact Gen Burns at 312-980-2910.

How to Determine Income Tax Uncertainty

Are you unsure whether some of your not-for-profit's income is taxable? The Financial Accounting Standards Board's (FASB's) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," (FIN 48) requires not-for-profits to address such uncertainty by applying this two-step process:

1. Determine how sure you are that a particular tax position will be upheld by the taxing authority. Use a "more likely than not" standard. For example, determine whether you're more than 50% sure that income you receive from a particular activity will be deemed tax-exempt by the IRS.
2. Determine the largest tax benefit that is more likely than not to ultimately be realized. This means the amount that's more than 50% likely to be allowed after settlement with the taxing authority. If, for example, you're more than 50% certain that 75% of income from a particular activity is exempt, you should recognize unrelated business income tax (UBIT) liability on 25% of the income on your financial statements.

Keep in mind that this is only a brief summary of a complex accounting matter. You'll want to work with your tax expert on this FIN 48 process.
 

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.