Issue

For schools who file Form 990-T for UBIT activities, charitable contribution planning can make sense.

Situation

Marathon Bible College (MBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). This year, for the first time, MBC has unrelated business income that ultimately shows a profit. This requires another first: their filing of Form 990-T. The CFO calls us to ask about the charitable contributions deduction on Form 990-T, Part II, Line 20. She asks, “Can we deduct all the expenses for the college for the year on that line?” We tell her first, “Great job in catching that opportunity – many schools miss it.” And, second, sadly, “No.”

Because MBC is organized as a corporation, the deduction is limited to 10% of their unrelated business net income before the charitable contributions deduction (and other, less common, limitations) AND it has to be made up of “grants/contributions” to other charities.

Rules

From Form 990-T Instructions:
Line 20. Charitable Contributions Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c). Also, enter any unused contributions carried over from earlier years. The deduction for contributions will be allowed whether or not directly connected with the conduct of a trade or business.
Corporations. The total amount claimed normally can’t be more than 10% of unrelated business taxable income figured without regard to the following.
• Any deduction for contributions.
• The domestic production activities deduction under section 199.
• Any net operating loss (NOL) carryback to the tax year under section 172.
• Any capital loss carryback to the tax year under section 1212(a)(1).

From IRS Publication 598:
Charitable contributions deduction. An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business.
To be deductible, the contribution must be paid to another qualified organization. For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program.

Bottom Line

• If you file Form 990-T, remember the potential charitable contributions deduction on Part II, Line 20.
• To be deductible, the contribution must be paid to another qualified organization.
• There are limitations and carrybacks/carryforwards in play.
• It is a good idea to check your school’s Schedule I (Form 990) to ensure you are tracking which organizations you contributed to during the tax year – but that may not tell the whole story.

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.