Nonprofits may consider a joint venture for a variety of reasons, ranging from taking advantage of investment vehicles to joining with other entities (including nonprofits) for operational enhancements. The joint ventures, or partnerships, can provide opportunities for a nonprofit to enhance or accelerate its ability to fulfill its mission.
When entering any form of joint venture or partnership, a nonprofit must be careful to consider the potential, and sometimes significant, tax implications these relationships can bring.
In addition to the consideration of whether these relationships generate Unrelated Business Income, which generate a tax liability for the nonprofit, there are also compliance issues to consider. Understanding these before officially entering into any form of partnership or joint venture (JV) is vital.
In the following overview, we dig deeper into these opportunities and how to ensure your nonprofit stays in compliance when entering a JV.
Even before tax considerations, nonprofit leaders would be wise to start by evaluating the optics of any potential partnership. Undertake due diligence and ensure your organization does not partner with an entity that conflicts with your mission. It’s also advisable to steer clear of political issues: if a tax-exempt organization aligns itself with a political party, its 501(c)(3) status may be at risk.
When choosing to allocate some portion of the organization’s capital to a new investment vehicle, there are several tax considerations that nonprofits must keep in mind:
Organizations must weigh these tax considerations before making an investment since these will often influence their overall judgment of the strength of an investment.
It’s important to remember that tax is just one input in the decision-making process. It may be the case that a certain investment will produce both UBIT and new filing requirements, but if it’s a highly promising investment, it may be worth these additional costs.
Proactively considering the tax impacts of proposed investments is key to being a wise steward of your organization’s capital. By taking a proactive approach, organizations have ample time to plan for additional filing requirements and to work with their tax advisors to create a plan to offset any potential UBIT.
Not all partnerships a nonprofit organization engages with will be investment vehicles. In some instances, a tax-exempt organization might choose to partner with another entity for more operational reasons. For example, a local art museum might partner with an educational nonprofit to provide art lessons to children in local schools.
In these instances, there are additional considerations that nonprofit leaders should weigh before entering any partnerships. These considerations may result in additional tax planning requirements, depending on the nature of the relationships.
Entering new relationships––whether they’re investments, project-oriented associations, or operational partnerships that extend your organization’s reach––can have significant tax implications. In any decision related to partnerships or joint ventures, an organization should ensure that its overall tax-exempt status is protected and it is still primarily focused on achieving its tax exempt mission.
If your nonprofit is considering a partnership approach, it is important to proactively consider the tax implications. The fact that a partnership has tax consequences does not necessarily make it a bad partnership. At Smith + Howard, our nonprofit tax professionals are well-equipped to help organizations evaluate the tax consequences of partnership opportunities. With our support, organizations can develop a sophisticated tax plan that weighs the tax considerations of different investment vehicles and partnerships.
If you’d like to engage with our nonprofit team for advice in this, or other matters specific to your nonprofit, please contact us today.
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