General Excise Tax on Nonprofits
 
Many of us have had the chance to work with nonprofit associations, either as a board member, volunteer, or paid staff.  It isn’t clear to many people how our tax laws, specifically our GET, apply to these associations, so I am presenting a simplified guide to how the GET works.

A nonprofit can earn three kinds of income, which I call green, yellow, and red income.  These three categories cover most, but not all, of the income that a nonprofit can earn.

Green income is gifts, grants, contributions, and membership dues.  Green income is exempt from GET.  This kind of income is exempt from GET because it’s a gift, and it doesn’t matter if the recipient is nonprofit, for-profit, or an individual.  If the donor gets something substantial in return for the contribution, it’s not a gift and therefore not green income.

Yellow income is what some people call “exempt function income.”  To have exempt function income, the recipient must be registered as a tax-exempt organization.  An organization registers with the Department of Taxation on Form G-6, which these days is submitted online.  If the registration is approved, then exempt function income is income derived from the conduct of an activity that contributes importantly to the reason why the organization is exempt.  For example, if the exempt organization is a school, tuition is exempt function income.  If it’s a museum, admission fees are exempt function income.  For a hospital, charges for medical care are exempt function income.

There are further restrictions on some types of organizations.  For example, for a hospital the law says that exempt function income needs to be from the conduct of a hospital “as such.”  There was a court case that decided that if a hospital provides a parking lot for patients and visitors and charges parking fees, the parking fees are GET taxable because, although having relatives and friends visit a patient can make the patient get better faster, a parking lot is not a hospital “as such.”

Yellow income is exempt from GET if all these conditions are met.  This is the kind of income that is reported on the GET return as exempt and is listed in the second column of the return.  Again, an organization can’t have any yellow income unless it is registered on Form G-6 and approved by the State.  A determination letter from the IRS recognizing it as federally tax-exempt is not enough.

Red income is most of the other income a nonprofit receives.  Red income is income from fundraising.  Whether it be a bake sale, benefit dinner, or a silent auction, any income from an activity the primary purpose for which is raising money is GET taxable.

There are a couple of other categories of income that usually aren’t of significance.  A nonprofit earning income from dividends is exempt from GET because all dividends are exempt from GET.  If it earns some interest  from safekeeping funds in the bank, that is exempt because it’s not considered “business” subject to the tax.  If it gets a few bucks by auctioning off used property or other physical assets occasionally, there is a “casual sale” exemption that kicks in.

There are, of course, more complicated nonprofit organizations with different kinds of income.  This article can’t, and doesn’t, cover everything.  It does illustrate that the GET, as applied to nonprofits, is more complex than some folks would care to believe. 

We encourage nonprofits to get a qualified tax professional involved if they have some income that they aren’t sure how to report or classify.

To GET or Not to GET – SVOG and RRF Are the Questions
 
The COVID-19 pandemic made history both here and abroad, but for different reasons.  Here, it was remembered not only for the 1,400 lives it claimed, but also for the businesses it hurt or ruined.  Our experience was similar to other States across the country, and our federal government stepped in to give us some economic assistance that, we hoped, would blunt the impact of stay-at-home orders and forced business closures.

That economic assistance came in the form of some very different federal programs.

Everyone got a couple of rounds of stimulus checks.  The Feds and we said it’s not income and we won’t tax it.  No income tax, no GET.

The unemployed got some extra unemployment compensation.  The Feds didn’t tax it, up to $10,000 in 2020.  We did.  We made people pay income tax, but not GET.

Then came the forgivable loans:  PPP (Paycheck Protection Program) and EIDL (Economic Injury Disaster Loan) is what they were called.  They initially were loans to affected businesses, but the businesses obtained forgiveness of all or a part of the loans, meaning that the businesses could keep the money.  For tax purposes, loans you get aren’t income because you need to pay the money back.  But when the debt is forgiven, the amount of forgiven debt is income.  The Congress said that PPP forgiveness doesn’t count as income but EIDL forgiveness does.  So, we said that for income tax purposes we would do the same thing.

And then, for GET we said (in Tax Information Release 2020-06):  “The general rule is that amounts received by a business that replace income are subject to GET.  Thus, grants or other payments that replace or supplement income are normally subject to GET.  However, in light of the severity of the economic impact of the COVID-19 pandemic, GET will not be imposed on payments received under PUA, loan amounts forgiven under PPP, and EIDL Grants. These amounts will be treated as exclusions from gross receipts and should not be reported on GET returns.”

Usually, “severity of the economic impact” is not a legitimate reason why laws that apply to other people or in other situations independently of economic consequence don’t apply here.  If our lawmakers pass laws that modify the rules, that’s fine.  Or if they pass laws that say that the agency can consider economic impact, perhaps among other things, and grant relief from this or that legal requirement, that’s fine too.  Or the Governor could come in and suspend the laws because of the emergency, which he had been doing on a regular basis with emergency proclamations.  But no laws were passed modifying the rules or granting the Department of Taxation the authority to bend the laws, and the Governor’s proclamations didn’t suspend the tax code (except to shut off the flow of TAT money to the counties).

Now, we have restaurants and bars getting grants from the Restaurant Revitalization Fund (RRF).  And we have entertainment venues getting grants under the Shuttered Venue Operators Grant (SVOG) program.  The Department of Taxation has yet to officially tell us whether the GET will take a bite out of these grants, although Department staff have informally said that they would be taxable because of the “general rule” quoted above.

But what about severity of the economic impact?  Does that count anymore?  Restaurants and bars getting RRF money, or entertainment venues getting SVOG dollars, need to show pandemic-related revenue loss before the Feds will give them money.  Does that matter at all?

What say you, Department of Taxation?  To GET or not to GET, that is the question today.

A Tax Game-Changer for Nonprofits
 
This week again, we spotlight some legislation that has the potential to change our tax system in very bold ways.
Our focus is on  Senate Bill 3201, which fundamentally changes how the general excise tax (GET) applies to nonprofits.

Under federal tax law, exempt organizations such as charities are still taxable on certain kinds of income, called “unrelated business taxable income“ or UBIT. The idea is that if a tax-exempt organization is conducting a business activity that competes with a for-profit organization, it should pay the same tax on that business activity as the other organization does.

In contrast, our GET allows tax-exempt status to a number of organizations, including what we know of as charities, but then taxes almost anything that is considered “fund raising.”  If the primary purpose of the activity is to raise money, the activity is taxable even if the money supports the charitable aims of the organization.  So, under the GET, if someone buys a $100 ticket to a fundraising dinner, the charity is taxed on the $100 even though the stew and rice dinner that the ticket buys is worth $8, and everybody knows that all or most of the $100 is intended to be a donation to the charity.

In both the federal and state systems, income that is importantly related to the purpose of the charity, such as tuition charged by a school, is exempt.

A lot of people who help with or lead nonprofits get stuck here. Most people who have financial training know what UBIT is, so they have some idea of when federal income tax needs to be paid. Not so with “fundraising“ and the GET. That subject isn’t taught in schools, especially schools outside of Hawaii. Some people who are told the true scope of what the GET covers can’t believe what they’re hearing.

That’s where SB 3201 comes in. It would change the GET law so that income of a charity’s unrelated business would be exposed to GET (as it is now) but other “fundraising” would be left alone. 

Bill similar to this one have been introduced in the legislature before but haven’t made it very far. This one, as of the date of this writing, has crossed over to the House and, as of this writing, has cleared two of three House committees.  It shows some promise of being able to reach the finish line.

If enacted, this bill would make it much easier and simpler for nonprofits to understand where tax begins and ends. This would be a big help to the nonprofits, many of which operate on a shoestring budget and can’t normally afford sophisticated financial advisors like attorneys and CPAs. But—and this may be the point the legislative committees are trying to make—the difficultly in drawing that line shouldn’t be an excuse for not doing anything about the problem.  We have a social problem in that our tax system is regressive.  It hits people harder when they have less of an ability to pay it.  How do we address that problem in a fair and thoughtful manner, as opposed to simple-mindedly saying that we should enact more and larger taxes that really beat the heck out of those who have some money?