UNRELATED BUSINESS INCOME TAX (UBIT) & PROPERTY TAX Diocese of Davenport UNRELATED BUSINESS INCOME TAX (UBIT) & PROPERTY TAX

WHY TALK ABOUT UBIT & PROPERTY TAX EXEMPTION? Parish and school interest Education Can result in signification tax, interest and penalties charges Covers two areas: UBIT - Federal Income Tax Property Tax – State Property Tax

WHAT IS UBIT? UBIT (Unrelated Business Income Tax) Is a tax that Congress imposed on income earned by tax exempt entities in order to keep tax exempt entities from having an unfair advantage in competing with business entities which pay the normal income tax.

TYPES OF INCOME EXEMPT FROM UBIT Envelope Tuition Dividends Interest Income Gains Bingo Income** Real Property**

HOW DOES A PARISH DECIDE IF IT HAS “UBIT”? FIRST TEST If the business activity is regularly conducted and is pursued in the same manner as a regular business. SECOND TEST If the activity is not substantially related to the parish’s tax exempt purpose.

EXAMPLES - FIRST TEST Example #1 A parish operates a sandwich stand for 2 weeks at the Iowa State Fair. The income earned is EXEMPT because it is not a regular, ongoing conduct of a trade or business. Example #2 A parish operates a sandwich stand: every weekend year round using paid employees. The income IS “UBIT” because it would be the regular conduct of a trade or business .

EXAMPLES - SECOND TEST Example #1 A parish operates a handicraft shop that sells articles made by its students in the regular course of their instruction. The sales income is EXEMPT because the sales are substantially related to its exempt purpose of instructing students. Example #2 A parish operates a handicraft shop that sells articles made by local residents. The income IS “UBIT” because local residents are not substantially related to its exempt purpose.

TYPES OF INCOME EXEMPT FROM UBIT Envelope Tuition Dividends Interest Income Gains Bingo Income** Real Property**

** BINGO GAME INCOME It meets the legal definition It is legal where played Not competing with for-profit organizations Instant bingo, where the winner is determined by pull tabs does not meet the legal definition of bingo.

However, there are certain issues that must be carefully considered: ** REAL PROPERTY Income from real property is generally EXEMPT. However, there are certain issues that must be carefully considered: Loans on Property Personal Property

LOANS ON PROPERTY 1) If the real property has a loan payable by the parish which was used to purchase or renovate the property a certain percentage of the rent could be considered “UBIT”. But even in the case of the loan payable on the real property, the tax law excludes all of the rental income if 85% or more of the time it is rented to parishioners and parents of students. ***KEEPING GOOD RECORDS IS EXTREMELY IMPORTANT. THE BURDEN OF PROOF IS ON THE PARISH/SCHOOL.

LOANS ON PROPERTY-EXAMPLE A parish has a parish hall: Cost $400,000 to build Has a debt of $100,000 Rents the facility to parishioners 80% and non parishioners/businesses 20% To the extent that rent is received from non-parishioners or businesses, 1/4th of the income IS “UBIT” due to the indebtedness on the parish hall. To the extent that the facility is rented to parishioners the rent is EXEMPT.

PERSONAL PROPERTY 2) A parish has a parish hall with no indebtedness and would like to rent the facility out to both parishioners and non parishioners as well as some businesses. If less than 10% of the rental charge is based on the personal property, the rent is EXEMPT under the exclusion of rent from real property.

OTHER EXAMPLES

1) FARM PROPERTY - EXAMPLES A parish owns 200 acres of farm land: No indebtedness Receives rents from a farmer of $10,000 a year The rent is EXEMPT since it falls under the exclusion of rents from real property. 1)

One fourth of the rent WOULD BE CONSIDERED “UBIT” FARM PROPERTY - EXAMPLES A parish owns 200 acres of farm land: Purchased for $400,000 No intention of building a church or school Borrows $100,000 to finance it The parish receives rent of $10,000 a year One fourth of the rent WOULD BE CONSIDERED “UBIT” 2)

3) FARM PROPERTY - EXAMPLES A parish owns 200 acres of farm land with no indebtedness and receives rent of $10,000 per year If the rent is based on: The sales price of the prior year crops raised on the farmland. The rent is EXEMPT because it falls under the exclusion of rent from real property. If the rent is based on: The farmer’s net income (receipts less expenses) from farming the land The rent IS “UBIT” because it is operating in the form of a business.

DAYCARE 4) Daycare is considered substantially related to a church’s exempt purpose or serve an exempt purpose therefore, the income is EXEMPT.

HOW TO AVOID THE “UBIT”? Don’t compete with a regular tax paying business on an ongoing, regular basis. Monthly, or even quarterly, activity of the same type of event could be considered as a regular, ongoing trade or business. Always use unpaid volunteers to conduct the activity. Don’t sponsor bingo events if it does not meet the legal definition of bingo or if there is a for profit business that has bingo operations near your parish. Don’t purchase a building to rent if you need to borrow funds to make the purchase Always look for ways to make the activity related to the tax exempt purpose of the parish church or school.

SEE IRS PUBLICATION 598 FOR MORE INFORMATION PAYMENT OF UBIT The UBIT is computed on IRS Form 990-T Is due on the 15th day of the 5th month following the close of the parish’s fiscal or calendar year. June 30th Year End – DUE DATE NOVEMBER 15th. If the GROSS income of the “UBIT” is less than $1,000 for the year no return needs to be filed. The tax on the “UBIT” is the same as the corporate tax rate. The current tax rate is 15% of the first $50,000 of net income. SEE IRS PUBLICATION 598 FOR MORE INFORMATION

IOWA PROPERTY TAX EXEMPTION Iowa law provides a property tax exemption for church and school property under the following conditions: Property must be used by a charitable, religious, or educational institution for society. Actual use must be SOLELY for the church and/or school purposes. The property must not be used with a view toward profit. The law gives the local assessor the power to give a partial exemption where there is mixed use of the property but states that “any doubt will be resolved against exemption and in favor of taxation.”

THINGS TO NOTE State Property Tax Law does not follow Federal Income Tax Law directly. If a parish has “UBIT” it will also likely face problems with its Iowa property tax exemption. Federal agencies do share information State and Local tax authorities can access Federal returns Iowa Property Tax Law has its primary focus on the actual use of the property.

NEW PROVISIONS Cemetery Associations: Religious Institution or Society Section 24 of the Act permits a cemetery association to receive the exemption if it leases agricultural land to another person for agricultural use, and the revenues resulting from the lease are used exclusively for the maintenance and care of cemeteries owned by the cemetery association and devoted to interment of human bodies and human remains. Religious Institution or Society Section 24 of the Act also permits a religious institution or society to receive the exemption on grounds not exceeding a total of fifty acres even if the land is leased or not used for its appropriate objects, so long as all profits resulting from the use or lease of the grounds are used exclusively by the religious institution or society for its appropriate objects. Effective Date: July 1, 2015 Section 24 of 2015 Iowa Acts House File 616, amends Iowa Code section 427.1, subsections 6 and 8, 2015.

IOWA PROPERTY TAX - EXAMPLE Let’s look at an example: The parish has a building which had been the rectory but is no longer used. It would like to rent the building for $500 a month. The building would NOT qualify for the property tax exemption since the actual use of the building is not solely for the church’s purpose.

IOWA PROPERTY TAX - EXAMPLE Let’s look at an example: The parish has a parish hall that they would like to rent out to parishioners, non parishioners and businesses. The local assessor might decide that part of the building is not being used solely for church and/or school purposes and grant an exemption from property taxes only on the percentage of the use solely for church/school purposes. There is no specific metric prescribed by law but the decision is left up to the local assessor. ***KEEPING GOOD RECORDS IS EXTREMELY IMPORTANT. THE BURDEN OF PROOF IS ON THE PARISH/SCHOOL.

e-mail: gartner@davenportdiocese.org If you have further questions or concerns, please contact me at your convenience. Nikki Gartner Telephone: (563) 888-4365 or e-mail: gartner@davenportdiocese.org

TAX ON UNRELATED BUSINESS INCOME (UBIT) & PROPERTY TAX EXEMPTION Diocese of Davenport TAX ON UNRELATED BUSINESS INCOME (UBIT) & PROPERTY TAX EXEMPTION