On June 26, 2020, Chris Moran was quoted in Bloomberg Tax discussing the potential benefits and pitfalls for nonprofits considering corporate structures in light of recent IRS proposed rules requiring individual businesses controlled by nonprofits to report their income separately.
According to the article, that practice, known as “siloing,” changes the ability for a nonprofit to use net operating losses (NOLs) in one business to another to decrease the nonprofits’ overall tax liability. Under a C corporation, nonprofits could merge different business lines and report the income they generate in a single report, avoiding the siloing rules and more importantly, taking advantage of tax breaks for the NOLs currently piling up. Establishing a C corporation, however, comes with its own potential regulatory pitfalls.
Moran said his team has been proposing the C corporation structure to clients since the proposed rules were released. His advice to clients: Carefully consider the option because there is a risk of losing tax-exempt status on many activities, which could yield more problems than benefits.
Moran said it’s likely nonprofits will wait a few years to apply the silo rules to see if they need to change tax strategies. “Maybe in a couple years, when they’ve done a couple more tax returns applying the silo rules, they might think of ways to simplify the return filing process,” he said.
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