How to Report Not-for-Profit Rental Income on Your Taxes

Navigating the complexities of tax reporting can be challenging for not-for-profit organizations, especially regarding rental income. Properly reporting this income is essential for compliance with IRS regulations and maintaining the organization’s financial health.

Identifying Non-Profit Rental Activity

Identifying non-profit rental activity requires understanding when a not-for-profit organization engages in rental transactions. The IRS distinguishes between activities related to an organization’s exempt purpose and those that are not. For instance, if a non-profit rents out property to generate income that directly supports its mission, this may be considered related activity. However, renting property solely for income generation, without a link to the organization’s mission, could be classified as unrelated business income (UBI).

This distinction is critical because unrelated rental income may be subject to the Unrelated Business Income Tax (UBIT). UBIT applies to income from a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose. For example, if a non-profit hospital rents its parking lot to a nearby business during off-hours, this income might be subject to UBIT if it doesn’t support the hospital’s charitable mission.

Organizations should refer to IRS guidelines, such as those in IRS Publication 598, for more details on UBIT. Consulting tax professionals can help ensure proper classification of rental activities, as misclassification could lead to penalties or jeopardize tax-exempt status.

Reporting the Income

After identifying rental income, a not-for-profit organization must report it to the IRS. This involves determining whether the income is unrelated business income (UBI) and calculating any applicable Unrelated Business Income Tax (UBIT). For 2024, the standard corporate tax rate of 21% applies to UBI. Form 990-T must be filed to report UBI, with all income sources documented and categorized.

Maintaining detailed records of rental transactions, such as lease agreements, invoices, and payment receipts, is essential. These documents provide evidence in case of an audit and support the classification of rental activity. Organizations should also be aware of state or local tax obligations, which can vary significantly.

If a non-profit rents property to another exempt organization for related purposes, this income may not be subject to UBIT. However, rental terms that deviate from fair market value could attract IRS scrutiny. Reviewing rental agreements carefully is critical to ensure compliance.

Handling Related Costs

Managing costs associated with rental activities is vital for a not-for-profit organization’s financial health. These costs include maintenance, repairs, property management fees, insurance, and utilities. The IRS permits deductions for expenses directly connected to income-generating activities under Internal Revenue Code Section 162.

Organizations must allocate costs strategically, distinguishing between those directly tied to rental activities and broader organizational expenses. For example, if part of a building is rented out, expenses like property taxes or utilities should be prorated based on the percentage of the property used for rental purposes. Accurate allocation ensures only appropriate deductions and maximizes tax savings.

Depreciation is another key consideration. Rental property depreciation must follow IRS guidelines, typically using the Modified Accelerated Cost Recovery System (MACRS). Calculating depreciation accurately spreads the cost of property wear and tear over its useful life, reducing taxable income. This requires understanding the asset’s class life and applying the correct depreciation method.

Maintaining Financial Records

Maintaining accurate financial records is essential for not-for-profit organizations involved in rental activities. These records support income and expense reporting while promoting transparency and accountability. Organizations should use an accounting system aligned with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on their jurisdiction.

Effective record-keeping includes reconciling bank statements, tracking cash flows, and organizing financial documents. Periodic internal audits can identify discrepancies and evaluate the effectiveness of financial controls. These audits help address potential issues early, safeguarding the organization’s financial integrity.