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

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.

1. Alternative investment types
2. Potential liquidity issues
3. Tax implications of alternative investments for private foundations
4. Valuation challenges
5. Potential for UBTI requiring tax reporting and payment
6. Impact of new partnership audit regulations on exempt organizations holding alternative investments
7. Potential for foreign asset information reporting

The co-presenters will discuss these and other important issues:

• What are the financial statement reporting challenges in presenting alternative investments on a nonprofit’s balance sheet?
• How will holding alternative investments affect the complexity, cost and time required for an external audit? What are the implications for internal financial reporting?
• How to identify UBTI traps in alternative investments
• Foreign information reporting requirements
• Planning considerations to maximize after-tax returns

Learning Objectives

After completing this course, you will be able to:

• Recognize the specific valuation and reporting requirements of alternative investments for nonprofit exempt organizations
• Identify potential UBTI consequences in alternative investments
• Decide on asset strategies to maximize after-tax returns on alternative investments
• Discern the foreign tax reporting implications of specified alternative investments
• Understand the specific financial statement reporting and disclosure requirements

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ non-profit business or public firm experience at mid-level within the organization, preparing financial statements and/or complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of tax-exempt entity income rules; familiarity with unrealized business taxable income definitions and unrelated business income tax reporting; familiarity with hedge fund and alternative fund identification.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).