Many Charities Avoid Tax on Business Income, IRS Figures Show

Only 40 percent of the nearly 13,200 charities that reported receiving business income not related to their missions wound up paying tax on those earnings for the 2005 tax year, according to new statistics released by the Internal Revenue Service.

These charities reported a collective gross income of more than $6-billion yet paid just $260-million in tax. (Both figures were the highest since the IRS began to keep track in the 1992 tax year.)

Under federal law, nonprofit organizations must pay tax on income generated from business activities that are not “substantially related” to their charitable mission.

Last year, a Chronicle study of the business practices of 91 of the nation’s largest charities found that many organizations take advantage of vague rules and specific exemptions built into statutes to legally avoid paying tax. Fifty-one percent of the charities in the study listed zero taxable income or a loss for activities after they took deductions and made other calculations.

The new IRS figures show that nearly 60 percent of charities that reported unrelated-business income in 2005 listed zero or negative taxable income.

Some tax experts have questioned whether Congress needs to revisit the laws governing the collection of the unrelated-business income tax, which was created to put charities and businesses on a more level playing field.

Business activities of charities include the sale of products, services, and advertising.

The IRS figures are estimates based on samples.