Practical Issues Facing Nonprofits Structuring New Market Tax Credit Deals

July/August 2017

Taxation of Exempts

Since the Great Recession, nonprofits have been receiving less support from budget-constrained governmental agencies and fewer contributions from the private sector. Similarly, many state and other nonprofit universities have seen their budgets drastically reduced. Funding is not likely to increase under the Trump administration. As a result, charities need to develop new avenues, structures, and partners to conduct their programs. In some cases, charities have joined forces to accomplish fundraising or program related goals by forging partnerships and other co-investment relationships with for-profit entities to access otherwise unavailable capabilities, capital, and resources.

Over the years, the position taken by the IRS has evolved. Opposition to joint ventures between nonprofits and for-profit entities has given way to acknowledgement of the various bona fide purposes of such arrangements and the establishment of guidelines for nonprofits to protect their exempt status while engaged in such partnerships. Pursuant to these guidelines, nonprofits will not jeopardize their exemption by participating in a joint venture so long as they have sufficient control to ensure that the venture will further the nonprofit's exempt purposes and there will be no impermissible private benefit or inurement. Although there is no bright-line test, the nonprofit partner having at least 50% voting control of a venture in regard to matters that relate to its charitable goals is a positive factor. The IRS will examine all of the facts and circumstances to make a determination as to whether the joint venture is permissible, and will not issue advance rulings in this area. Thus, a nonprofit intending to participate in joint ventures must disclose such planned or potential activity on its exemption application. It is therefore important to have a joint venture policy in place and to carefully structure ventures pursuant to these guidelines.

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“Practical Issues Facing Nonprofits Structuring New Market Tax Credit Deals,” by Michael I. Sanders* was published in the July/August 2017 edition of Taxation of Exempts, a Thomson Reuters publication. Reprinted with permission.

This article was reprinted in Taxnet Pro, a Thomson Reuters publication, in September 2017.

* Mr. Sanders expresses his appreciation to Dustin Lauermann for his research contribution towards this article.