nonprofit starts a for-profit -- a tax question

I haven't researched this, but my first reaction is that it would be considered a dividend rather than a tax exempt contribution. A nonprofit that runs a for-profit business that is unrelated to its tax exempt purpose, it is required to pay taxes on the unrelated business income. Trying to get around that by presenting it as a deductible donation rather than taxable income would, it seems to me, be challenged by the IRS.

___ Stu

I would agree. It would only be a contribution if the net profit were donated to an unrelated 501(c)3.

Ira Smilovitz Leonia, NJ

I would agree. It would only be a contribution if the net profit were donated to an unrelated 501(c)3.

Ira Smilovitz Leonia, NJ

I think that might work if you set up a religious organization and you were ordained and its clergyperson.

You could probably justify that because, don't your clients, when they see tax returns you prepare, generally shout, "Oh my God!!!" ? ___ Stu

to an unrelated 501(c)3.

i agree, but in addition, I think corporations can only deduct 10% of their AGI. Corporations with S election can donate 20% to 50% of AGI. Unused deductions are carried forward.

wrote

Huh? Charitable contributions made by an S Corp are passed through to the shareholders and deducted on each shareholders 1040. The "S" can donate all they want. Limits on deductions would apply for each shareholder.

Duh..., why didn't I think of that? What you and others wrote about this makes complete sense since the so-called "donation" would be to the owner of the for-profit corporation.

What I was mostly trying to think about was how to not have the for-profit have to pay taxes on its income. But, as someone suggested, I guess that could be achieved simply by setting up the for-profit as an S-corp with the nonprofit owning the shares.

For the nonprofit, I guess it would end up being unrelated business income -- which, of course, would be taxable to the nonprofit. I am not sure if the tax consequences would be different for the nonprofit if it received all of the income from its subsidiary in the form of dividends, but my guess is that the end result would be about the same.

We (the nonprofit) do have an email in to a local CPA to set up a consultation visit about this. We want to figure out with him what the best way to set this up would be -- an LLC, an S-corp, a C-corp, etc. But, while waiting to hear back about an appointment time, I thought I would float this idea here to get some initial feedback and ideas.

Thanks for all of the replies so far. They were really helpful.

P.S. I know this is a long shot but, since we are located in Southern New Jersey, does anyone know of a CPA or accounting firm that is located in our area that would have particular experience and expertise in the area of tax exempt organizations and multiple entity structures?

I know that some larger tax exempt organizations create multiple entity structures, including for profit and nonprofit entities such as management companies and subsidiaries etc. I also know that it is a complex area of law and taxation, so we would like to find an accounting firm near us with particular experience and expertise in that area. We have not heard back yet from the one CPA firm that we contacted, but we also do not yet know if they have any particular expertise or knowledge in this somewhat unique aspect on nonprofit law and taxation.

"NPOguy" wrote

For ease of operation, just have a for-profit branch/division of the not-for-profit entity. Much like a church run daycare might be taxed on their profits (if any). If that's not doable, then maybe consider setting up a for-profit company owned by one or more of the Officers or Directors of the not-for-profit. More complex I think, as most NPO's have some turnover in their Board from year to year.

Yeah, I meant that S corps can donate all they want, but the ultimate person who pays tax, namely the shareholder, is subject to limits.

What are the UBTI tax rates? From

8822,00.htmlit looks like they are the same as corporate tax rates. And theseseem to be:

Taxable income over Not over Tax rate

$ 0 $ 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38% 18,333,333 .......... 35%

It's rather strange that the rates drop.

Thanks. One of the reasons that we want to separate the for-profit business from the nonprofit has to do with liability exposure. The for-profit business will be very small compared to the nonprofit, and the for-profit will have very little in the way of assets while the nonprofit does have a significant amount of assets. Plus, the activities of the for-profit will be such that the there would be a greater amount of liability risk involved. So, we are thinking that by keeping the for-profit as a separate entity, there would be less risk exposure (virtually none) for the nonprofit and the nonprofit's insurance costs etc. would not go up.

On the other hand, having the officers of the nonprofit own the for-profit could create some conflict of interest issues -- even though the profits of the for-profit would only end up going to the nonprofit. I know there are some ways around that by doing such things as full disclosure and having the other nonprofit board members vote on the questions involving the for-profit etc. But, overall, we are thinking that a separate for-profit entity that is wholly owned by the nonprofit may be the best route.

If liability is an issue, then an LLC or a corporation might be the way to go. On the other hand doing that will involve additional cost. Normally (if you have to choose) a good insurance policy is considered better than the limited liability you get from a corporation or LLC.

___ Stu