An IRS magnet – UBIT expense allocations draw scrutiny
Abstract: The IRS is turning its attention to how nonprofit organizations calculate the tax they pay on unrelated business activities. The agency is concerned that many nonprofits may be improperly reporting losses related to these activities and thus may not be paying unrelated business income tax (UBIT). This article discusses the circumstances in which unrelated business income is taxable, explains the distinction between “directly connected” and “dual use” expenses, and shows two methods of allocating the latter. A sidebar describes what nonprofits must face if they inaccurately report expenses related to unrelated business activities.