Alternative Investments for Nonprofits and Exempt Organizations: Avoiding Unforeseen Tax Consequences

Description

Nonprofit organizations continue to increase their holdings in alternative investments, defined for financial reporting purposes as assets that do not have a readily ascertainable and fair value. These investments present specific challenges to tax advisers and financial officers of nonprofit organizations and their auditors, from presentation of asset values on financial statements to identifying tax payment and reporting obligations.

In selecting alternative investments for an exempt organization, advisers to nonprofits must identify funds and other assets that could be UBTI. Officers of nonprofit organizations should discern whether the after-tax return on an alternative investment is worth the additional tax reporting and payment obligations that go along with UBTI-generating assets. The challenge increases with the implementation of the new IRS partnership audit rules, which allow the Service to impose tax assessments on partnerships at the entity level.

Another key consideration is whether an alternative investment contains foreign holdings that require additional reporting under the FBAR or FATCA reporting regime. Advisers should identify potential foreign requirements before investing in an alternative investment to avoid costly tax penalties.

Considerations with regard to financial reporting for alternative investments include additional due diligence and monitoring required for each investment, future funding obligations that may affect the liquidity of the nonprofit organization, additional disclosures in audited financial statements, and the increased complexity and cost of an external audit.

Listen as our panel of experienced nonprofit tax advisers and auditors provides a deep dive into the rules and reporting requirements governing UBTI for exempt organizations.