Issue

More and more, Christian colleges are finding themselves required to report income from unrelated business activities Form 990-T.  As these schools “apply” expenses against this income, one of the oft-overlooked deductions is the “Domestic Production Activities Deduction.”

Situation

Saltwater Christian College (SCC) is a higher education institution that is exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).   SCC produces (MPGE) and sells, a monthly magazine entitled, “Baylight” within the United States. SCC’s gross receipts from the magazines include gross receipts derived from the sale of magazines to customers and payments from advertisers to publish display advertising or classified advertisements in “Baylight”. We meet with their CFO and Accounting Team members to work on completing Form 990-T.  As we accumulated and allocate expenses, their CFO asks about any “weird” deductions that might be available.  We answer that SCC’s income described above are “domestic production gross receipts” (DPGR) derived from the sale of “Baylight” magazine.  Thus, Bay University should be able to take advantage of the “Domestic Production Activities Deduction” on their Form 990-T.

The Domestic Production Activities Deduction is calculated on Form 8903, Domestic Production Activities Deduction and then reported on Form 990-T, Line 28.

Rules

From Proposed Treasury Regulation 1.199-3(h)(5):

(5) Advertising income.

(i) Tangible personal property. A taxpayer’s gross receipts that are derived from the lease, rental, license, sale, exchange, or other disposition of newspapers, magazines, telephone directories, or periodicals that are MPGE in whole or in significant part within the United States include advertising income from advertisements placed in those media, but only to the extent the gross receipts, if any, derived from the lease, rental, license, sale, exchange, or other disposition of the newspapers, magazines, telephone directories, or periodicals are DPGR (without regard to this paragraph (h)(5)(i)).

(iii) Examples. The following examples illustrate the application of this paragraph (i)(5):

Example (1). X MPGE, and sells, newspapers within the United States. X’s gross receipts from the newspapers include gross receipts derived from the sale of newspapers to customers and payments from advertisers to publish display advertising or classified advertisements in X’s newspapers. X’s gross receipts described above are DPGR derived from the sale of X’s newspapers.

Example (2). The facts are the same as in Example 1 except that X disposes of the newspapers free of charge to customers, rather than selling them. X’s gross receipts from the display advertising or classified advertisements are DPGR.

MPGE = manufactured, produced, grown, or extracted – the term MPGE includes manufacturing, producing, growing, extracting, installing, developing, improving, and creating QPP; making QPP out of scrap, salvage, or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles; cultivating soil, raising livestock, fishing, and mining minerals. The term MPGE also includes storage, handling, or other processing activities (other than transportation activities) within the United States related to the sale, exchange, or other disposition of agricultural products, provided the products are consumed in connection with or incorporated into the MPGE of QPP, whether or not by the taxpayer.

DPGR = Domestic production gross receipts – For this purpose, gross receipts include total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax-exempt interest within the meaning of section 103), dividends, rents, royalties, and annuities, regardless of whether the amounts are derived in the ordinary course of the taxpayer’s trade of business. Gross receipts are not reduced by cost of goods sold (CGS) or by the cost of property sold if such property is described in section 1221(a)(1), (2), (3), (4), or (5). Gross receipts do not include the amounts received in repayment of a loan or similar instrument (for example, a repayment of the principal amount of a loan held by a commercial lender) and, except to the extent of gain recognized, do not include gross receipts derived from a nonrecognition transaction, such as a section 1031 exchange.  Finally, gross receipts do not include amounts received by the taxpayer with respect to sales tax or other similar state and local taxes if, under the applicable state or local law, the tax is legally imposed on the purchaser of the good or service and the taxpayer merely collects and remits the tax to the taxing authority. If, in contrast, the tax is imposed on the taxpayer under the applicable law, then gross receipts include the amounts received that are allocable to the payment of such tax.

Bottom Line

Consult with a qualified tax advisor and get their guidance and assistance when you are required to file Form 990-T.  On many occasions, Christian colleges “leave deductions on the table” because they are not fully informed with respect to these issues.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.