United States Legal and Tax Considerations

501c3

Legal Status Definitions

501 (c) 2
501 (c) 3 Status for Nonprofit Centers

Online Resource Center Documents

NCN Webinar – Understanding UBIT (Unrelated Business Income Tax): What Does It Mean for Your Shared Space?
Articles of Incorporation of the United Human Services of Southeast Alaska
IRS Revenue Ruling 69-572: Tax Exempt Status for Organizations Created to Manage a Building to House Nonprofits
Multi-Tenant Nonprofit Centers and the Internal Revenue Services
Template of Nonprofit Center Objectives and Purpose for Founding Documents

Topics Below

Profit and Non-Profit Mixed Centers
Labor Law Postings
New Market Tax Credits


 

Legal Status

501 (c) 2

“IRC 501(c)(2) exempts from federal income tax corporations (as defined in IRC 7701(a)(3), “corporations” include associations) organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under IRC 501(a). The statutory provision exempting title-holding corporations has remained substantially the same through successive enactments beginning with section 11(a) Twelfth of the Revenue Act of 1916, in which it originated. The legislative history surrounding the original enactment of the provision makes no specific reference to the provision or to the purpose it was intended to serve. The general observation is made, however, that organizations accorded exemption in the 1916 Act were difficult to secure returns from, and that the Treasury collected little or no revenue from them. (See H. Rep. No. 922, 64th Cong., 1st Sess.) The statute has always authorized the turning over of income by title-holding corporations to any organization exempt under IRC 501(a) (or its predecessors), but we have been unable to find information indicating the numbers or kinds of exempt organizations that may have utilized title-holding subsidiaries at the time of the original enactment”


 

Profit and Non-Profit Mixed Centers

From an Ask-NCN Conversation

Mary Rose Accetturo, Clare Oasis, 9/19/13
We are considering a for profit and nonprofit tenant mix in our Center…Does anyone do this already? Need a confirmation that a for profit business can exist in a nonprofit center, if and only if, the for profit business furthers the mission of the nonprofit center?

Mike Gilbert, The Jones Center, 9/20/13
Be careful on mixing for profit and nonprofit if you are exempt from property taxes or you may lose the exemption.

Katie Edwards, The Nonprofit Centers Network, 9/20/13
Mike brings up a good point here. There could be a couple of different issues at hand here:

1. Is the organization that owns the building a 501c3? Are you worried about losing 501c3 status by creating a nonprofit center?
2. Is the property tax-exempt? This is usually handled at the state or county level, and is subject to different rules than 501c3 tax-exemption.
3. Are you concerned about paying unrelated business income tax (UBIT) on rental revenue?

I know there are some members in the network that have for-profit businesses as a part of their tenant mix. What has your experience been with these issues?

Glen H. Newby, New Path Foundation, 9/20/13
Great caution from the Canadian perspective as well. Check your CRA Objectives and Letters Patent very carefully or your charitable status may be at risk, let alone the property tax issues.

Jody Ensign, Third Street Center, 9/20/13
Third Street Center does have a for profit and nonprofit mix, but it is limited by our 501(c)3 status. We may only have 15% for profits, they pay a higher rent, more in line with the normal rental rates in town, and they need to compliment our nonprofits. A couple of examples are; we have many nonprofits that are concerned with energy efficiency and solar education/development. We have a small emerging for profit that designs solar equipment for towns and individuals. Another example is a for profit program working with young men who have just come out of rehab. Part of their training is to work with a variety of community nonprofits. They all work together hand-in-hand and are a healthy combination of organizations. And in terms of property taxes, they are billed directly for property taxes from the County.

Jonathan Spack, Third Sector New England, 9/20/13
Questions about the impact of for profit/unrelated business activities on tax exempt status can be complicated and the law isn’t settled in this area so it’s a good idea to consult an attorney with relevant expertise if you have any concerns. Having stated that caveat, I’ll also add that (1) if your U.S. property is funded by tax-exempt bonds, as ours is, you have VERY LITTLE leeway to use any of the space for non-501c3 activities; and (2) aside from that, in general a modest amount of for-profit activity, properly accounted for, carried out by a nonprofit is not going to jeopardize its exempt status. There have been published cases where even a substantial amount of for profit activity has been held to be OK.

John Powers, The Alliance Center, 9/20/13
Eco-Trust, Portland, OR, Jean Vollum Natural Capital Center http://www.ecotrust.org/ncc/

Related Conversation on Ask-NCN

Katharine Moore, The Jefferson Center for Learning & the Arts, 1/21/14
Greetings from the frigid Midwest! The Jefferson Center is a campus of historic properties established as a multiple tenant nonprofit in 1975. We have never had a tenant that wasn’t a 501 c3. We now have a vacancy and interest from a PR firm that knows us because so many of our organizations are clients. I thought I could build the case for, worst case scenario, considering the rental income from the for profit group as Unrelated Business Income and paying tax on it. When I read the IRS guidelines for unrelated business income, it excludes rent but, because it is the IRS, they have to have “exceptions.”

I have asked our Board attorney to look into it, but recalling that the majority of the centers at the conference I attended a couple of years ago have a mix of nonprofit and for-profit tenants, I wondered if anyone would share how they treat the issue. I will not use the information in any way that would call attention to a member, or the Nonprofit Centers…just curious about what must be a common issue among us and hoping there is a solution that is completely above board that would allow us to mix it up.

Mike Gilbert, The Jones Center, 1/21/14
We have three separate locations – all for nonprofit organizations. Some of these are medical clinics that serve uninsured. A local pharmacy wanted to provide services to this tenant and their clients by adding a satellite pharmacy to the building. This would impact our property tax exemption from the county. We were able to negotiate with the county and pay property tax on the area leased by the for profit corporation. It was a lot of work, but a high value to the clients served.

Secondly, we lease at far below market to our 501c3 partners, the lease on the pharmacy area is at market rate.

Jody Ensign, Third Street Center, 1/21/14
We also have both profits and nonprofits at Third Street Center, 28 nonprofits, 7 artists and 5 for profits that work collaboratively with our nonprofits. We have faced the same situation as Mike Gilbert on the property tax issue with the State and County. We are still in the middle of trying to get if figured out but basically, each nonprofit applies for a tax exemption with the state and the for profits pay the property tax. It gets a little more confusing when the County tries to figure out what percentage of for profits use all the common spaces. We are still waiting to get the final word. I am sure each County/State works a little differently so you will just need to pursue with your offices, good luck. It is a hassle, but an important one.

Katie Edwards, The Nonprofit Centers Network, 1/21/14
I just want to chime in to add a little clarity around the issue. There are two kinds of tax-exemption that most US nonprofit centers deal with – federal tax-exemption (501c3 status) and property tax exemption.

Is the Jefferson Center for Learning and the Arts run by a 501c3 nonprofit organization? Are you concerned about maintaining your 501c3 status with the IRS? You might be interested in checking out the IRS revenue ruling that several nonprofit centers have used to obtain 501c3 status in the first place, which is available here. I’m also interested in hearing if any nonprofit centers have had their 501c3 status challenged after renting to for-profit tenants.

Property tax exemption, which Mike and Jody have referred to, is dealt with at the state and local level – and is a different process in pretty much every state. Sometimes having 501c3 status is enough, but more often you have to negotiate with your state and county officials on a case by case basis. I’ve also heard that in many areas, property tax exemption is reviewed on an annual basis and can be harder to keep, as cash-strapped localities are doing everything they can to keep a strong property tax base.

Shelley White, Children and Family Services Center, Inc., 1/22/14
We currently have one for-profit tenant that leases about 2% of our total space. We do not report this as unrelated business income because rent is specifically excluded. For property tax purposes, our city/county requires us to pay tax on the proportionate share of the building that is leased to for-profit entities.

Thaddeus Squire, CultureWorks Greater Philadelphia, 1/22/14
We operate a 5,000 SF coworking space in Center City Philadelphia. We are a 501(c)(3) corporation and hold the master lease for the space. Our construct is not a sub-lease arrangement, but rather a month-to-month member licensing model, similar to a gym or sporting/social club business model. This allows us to have a mix of NPOs and for-profit/sole proprietors in our space. We have 140 members (transient + full time), and we make sure that the number of for-profit enterprises never exceed 50% of that quotient. We also require that any such businesses have a significant client service base in the NP sector. With these restrictions and legal structure, we have been able to remain exempt from Use & Occupancy tax (city) [the actual lease holder (CultureWorks) is a nonprofit), and any UBIT issues related to how we’ve defined our mission.

Katie Edwards
Shelley Hamilton of MarinSpace did some research into UBIT a few years ago and shared her findings with the community – the document is available on the Online Resource Center here: UBIT Research

Tom Olivas, Girl Scouts of Orange County
Our situation is very similar, except we have 3 for-profit tenants. We provide the county with the SF leased to for-profits (subject to audit) , and we pay property taxes on the SF of the space leased to for-profits. We pass this property tax cost and any increases due to tenant improvements to the tenant in a triple net lease or specific language in the full service gross lease.


Labor Law Postings

From Ask-NCN 3/10/17

Mariah Shell, The Alliance Center
Does anyone have any best practices for labor law postings in shared spaces? I had a tenant tell me that they’d received a notice in the mail asking if they’re compliant with labor law posting requirements and they asked if we had anything posted to comply. For shared spaces, if we have them posted would that make our tenants compliant? I’m not sure if ‘us’ posting would count for other organizations as it’s supposed to be the employer who posts. But I honestly don’t know a lot about it. What do other spaces do?

Charlene Altenhain, Glasser Schoenbaum Human Services Center
Each state may have their own requirements. That said, our organization is compliant with the labor law posting requirements, but that doesn’t protect the agencies on our campus. Each organization is responsible for meeting the requirements on their own.


 

New Market Tax Credits

From Ask-NCN 8/29/2017

Katherine Moore, The Jefferson Avenue Center
Has anyone used New Market Tax Credits to develop or expand a center? If so, would you be willing to briefly share the take-aways?

David Schrayer, Isles
We are mid-stream in that process and I’d be happy to discuss particulars with anyone off-line.
Here are the major factors to consider:
The entire process will take 1-3 years
The NMTC process is now very competitive. It is best to establish a relationship with a CDE and lender who are interested in your mission and/or focused on your area.
Projects that are shovel-ready or mostly complete will be preferred. All other sources should be identified.
The project will be underwritten like any commercial lending deal; your operating pro forma will have to show sufficient supporting income and withstand scrutiny.
Use an attorney and tax consultant who know the NMTC ropes.
The ownership structure of your center may have to change in order to avoid a “tax event” seven years after the deal closes.
Hope that helps

Alan Ziter, NTC Foundation
The NTC Foundation used New Market Tax Credits since 2005 to renovate Phase 1 and Phase 2 of our 26-building project. The pluses and minuses of the transactions are too numerous to detail in an email to the ASK-NCN, but I would be willing to have our CFO share with you the experience we have had (and still have). Please reach out directly ataziter@ntcfoundation.org

Matt Oldani, Deaconess Foundation
We are in the midst of closing a NMTC deal now. I’d be happy to share insights with anyone who desires them.
Some learnings: hire a consultant who could shop your deal as soon as possible as it may take time to find a CDE with allocations, make sure the deal is large enough to warrant the additional fees associated with NMTC compliance (ideally a deal totaling more than $5 million), and make sure all staff and the board understand the nature of NMTC’s and the process because they are complicated deals.

Katharine Moore
Very helpful as I had not heard of hiring a consultant to shop for an allocation, but rather to process the application. Thanks so much and best wishes with your project!


Last updated byNonprofit Centers Network