State Tax Treatment of UBTI for Exempt Organizations: Calculations, Conformance and Apportionment

Description

A significant challenge for exempt organizations is navigating federal and state rules on Unrelated Business Taxable Income (UBTI). The federal rules are often complex even with existing guidance; however, the variances in how states treat UBTI create additional difficulties for advisers to nonprofits. While most states conform to the federal government in both classifying an organization as tax exempt and in defining UBTI, there are numerous deviations from federal treatment.

With very few exceptions, most states impose a state-level tax on UBTI. Many of these states start with the federal definition of UBTI, but make state-specific modifications, generally in the form of required "add-backs." Additionally, many states do not allow exempt entities to carry-back net operating losses; some of these states permit loss carry-forwards for UBTI calculation purposes.

Perhaps the most complicated task for exempt organizations operating in multiple states is apportioning UBTI between the various states in which the nonprofit operates. Many states require exempt entities to use different apportionment formula approaches than they impose on for-profit companies. Advisers to exempt organizations must be able to reconcile various apportionment formulas and recognize where a state requires a specific apportionment requirement for UBTI.

Listen as our panel of experienced nonprofit tax advisers provides a practical guide to navigating multi-state tax treatment of UBTI for exempt organizations.