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Tax

Oct 23
0

When Education Meets Medicine: What the Mayo Clinic Case Means for Nonprofit Tax Exemptions

By | Accounting, Nonprofit, Tax | No Comments

The Mayo Clinic is famous both for its medical care and patient education. In fact, its website is often cited by news organizations and others when reporting on medical stories; it is known for its accuracy and excellence. When the IRS determined that the Mayo Clinic was not entitled to its refund claim for substantial Unrelated Business Income Tax (UBIT), which the Mayo Clinic claimed based on its educational activities, the Clinic took action. Here’s the whole story, and what it means for nonprofits.

What Is Unrelated Business Income Tax (UBIT?)

Financial/tax concept about Unrelated Business Taxable Income UBTI with phrase on piece of paper

UBIT stands for Unrelated Business Income Tax. It’s a tax imposed on income that tax-exempt organizations such as nonprofits earn from activities not substantially related to their core exempt purpose. The Mayo Clinic claimed education as an activity substantially related to its core purpose.

The IRS Said No

The IRS felt differently, however. They assessed $11,501,621 in unpaid acquisition indebtedness UBIT for tax years 2003, 2005-2007, and 2010-2012. This amount was based on the acquisition indebtedness of property held by the Mayo Clinic. The property produced income. While the Mayo Clinic paid the debt, they initiated the request for a refund in 2016, which brings us to the current ruling.

Why did the IRS question the Mayo Clinic’s report? The IRS concluded that for the years in question, the Mayo Clinic did not meet the definition of a § 170(b)(1)(A)(ii) qualified organization as defined in Treasury Regulation § 1.170A-9(c)(1). To sum up the regulation, if the Mayo Clinic claimed education, it must be formal instructional activities, not merely incidental educational activities. Given that the clinic’s primary purpose is to provide medical services, at first, this seemed reasonable.

The Case Winds Its Way Through the Courts

The Mayo Clinic contested these findings, and as the case wound its way through the court system, various courts interpreted the IRS rulings differently. At issue was whether the Mayo Clinic’s educational activities were in addition to or inexorably intertwined with its medical services.

After much debate, the final district court found that “primary” purpose in this case means “substantial” and that the Mayo Clinic did meet the definition of education in the context of a substantial portion of its activities. Equally as important, its educational context was not “non-essential” but deemed an essential part of its primary mission. Given this, the court ruled that the Mayo Clinic was entitled to a full refund. The government is appealing this decision.

Context for Nonprofits

This case highlights several nuances in assessing a nonprofit’s educational purpose. To government entities such as the IRS, it means that education must be the primary purpose of the nonprofit, such as the activities of a college, school, or other institution of learning. However, many nonprofits, such as the Mayo Clinic, engage in significant educational activities with their constituents, but primarily engage in other services, such as medical care.

At issue in the case is whether or not such activities count as “substantial” enough to justify the requested refunds, or whether the organization’s primary purpose must be education in order to qualify under the IRS ruling.

Why This Matters

This ruling sets a powerful precedent for nonprofit organizations with hybrid missions. It signals that substantial commercial activities do not automatically disqualify an institution from being considered educational, as long as those activities are integrated with and serve the educational purpose.

For CPAs, nonprofit advisors, and academic institutions, the case offers a roadmap for navigating UBIT exemptions. It emphasizes the importance of demonstrating how various functions support a unified, exempt purpose.

Final Thoughts

The Mayo Clinic case is more than a tax dispute. It’s a reaffirmation of how education can be effectively integrated into complex, real-world operations. It challenges narrow definitions and opens the door for more nuanced evaluations of nonprofit missions. For organizations walking the line between service and instruction, this decision offers clarity with context.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Sep 02
0

ACA Compliance for Nonprofits: New Penalties, New Priorities in 2026

By | Accounting, Government, Nonprofit, Tax | No Comments
clipboard with paper which says ACA affordable care act compliance for nonprofits 2026

The IRS recently released Rev. Proc. 2025-26, providing the indexing adjustments for the upcoming calendar year 2026. These indexing adjustments affect applicable large employers (ALEs) starting next year. ALEs are defined as entities having 50 or more employees. Such organizations must either offer minimum essential coverage that is affordable (i.e., provides minimum value to full-time employees and their dependents) or make an employer shared responsibility payment to the IRS, all part of the Affordable Care Act’s employer shared responsibility provisions.

Nonprofit status does not matter in the context of this law; it’s the number of full-time employees that counts. If your organization employs 50 or more full-time employees, it’s important to understand the indexing adjustments to ensure full compliance with the ACA and avoid potential penalties.

What Is an Employer Shared Responsibility Payment?

The Employer Shared Responsibility Payment is a financial penalty imposed by the IRS on ALEs who fail to meet specific health coverage obligations under the Affordable Care Act.

To avoid the ESRP, an ALE must offer its full-time employees and their dependents health insurance that:

  • Qualifies as minimum essential coverage
  • Is affordable based on IRS standards and
  • Provides minimum value, meaning it covers at least 60% of expected healthcare costs

If an ALE does not offer coverage to at least 95% of its full-time employees, or if the coverage offered is unaffordable or inadequate, and at least one employee receives a premium tax credit through the Health Insurance Marketplace, the employer may owe one of two types of ESRPs:

  • A penalty for not offering coverage to enough employees
  • A penalty for offering coverage that fails the affordability or value tests

These payments are calculated monthly and assessed annually, with amounts indexed for inflation. Importantly, ESRPs are non-deductible and apply regardless of an employer’s tax-exempt status.

IRS Implements Updated Penalty Amounts in 2026

Beginning in 2026, the IRS will implement updated penalty amounts under the Employer Shared Responsibility Provisions of the Affordable Care Act. Nonprofit organizations classified as Applicable Large Employers (ALEs) must be especially mindful of these changes. If an ALE does not offer minimum essential coverage to its full-time employees, it may face a penalty of $3,340 per employee annually. Alternatively, if coverage is offered but is deemed unaffordable or does not meet minimum value standards, the penalty rises to $5,010 for each affected employee. These penalties are indexed for inflation and apply to plan years starting after December 31, 2025.

ESRPs are non-deductible expenses, meaning nonprofits cannot offset them through tax savings. This can pose a significant financial strain, especially for organizations operating on tight budgets or relying heavily on grant funding and donations.

Avoid the Penalty and Stay in Compliance

To avoid the Employer Shared Responsibility Payment, companies must first determine whether they qualify as an Applicable Large Employer, which generally means having 50 or more full-time employees or full-time equivalents in the previous calendar year. If they meet this threshold, they are required to offer minimum essential health coverage to at least 95 percent of their full-time employees and their dependents. This coverage must be affordable according to IRS safe harbor standards. It must also provide minimum value, meaning it covers at least 60 percent of expected healthcare costs.

Employers should also accurately track employee hours to determine full-time status and use IRS-approved methods for measurement. In addition, they must report coverage information to both the IRS and employees using the appropriate forms, such as Form 1095-C and Form 1094-C. If contacted by the IRS regarding a potential penalty, employers have a 90-day window to respond and provide documentation. Monitoring and meeting these requirements can help your organization avoid steep penalties from the IRS.

Preparing Nonprofits for ACA Compliance: Why Early Action Matters

As the 2026 updates to the Employer Shared Responsibility Payment take effect, nonprofit organizations must recognize that compliance affects them too. These provisions apply equally to tax-exempt employers as well as for-profit companies. If you don’t follow the IRS rules, your organization will face a steep penalty.

By understanding the rules, evaluating coverage, and proactively preparing for the new thresholds, nonprofits can protect their budgets and continue focusing on their mission. Early planning and informed decision-making will ensure your organization remains compliant and avoids costly penalties in the years ahead.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Jul 16
0

The One Big, Beautiful Bill and Its Impact on Businesses

By | Accounting, Nonprofit, Tax | No Comments
One Big, Beautiful Bill

President Trump’s “One Big, Beautiful Bill” Act passed through Congress and was signed by the President on July 4, 2025. The bill codifies many of the tax breaks from Trump’s first term in office that were considered temporary measures and adds new items to the list for both personal and business tax impacts.

For a detailed list of the many items in the bill, please refer to the Journal of Accountancy’s article, Tax Provisions in the One Big Beautiful Bill.

Deductions for Charitable Contributions

The new bill offers taxpayers who do not elect to itemize the ability to claim a deduction of up to $1,000 for single filers ($2,000 for married taxpayers filing jointly) for certain charitable contributions. For those who itemize their deductions, there is a .5% floor on the charitable contribution deduction. This means that the charitable contributions for a tax year are reduced by .5% on the contribution base for the tax year. Corporations have a floor of 1% based on their taxable income. And, for corporations, charitable contributions cannot exceed the current 10% of taxable income limit.

Nonprofits can view this as a win. It may encourage more donations as it makes it easier for individuals to claim their donations as deductibles, even if they are non-itemizers.

No Tax on Tips

One of Trump’s campaign promises was to enact “No Tax on Tips,” and the One Big, Beautiful Bill includes this as a temporary provision. The bill offers a temporary tax deduction of up to $25,000 for individuals who earn tips in occupations where tipping is common. This deduction applies to both traditional employees who receive a W-2 form and independent contractors who receive a 1099-K, 1099-NEC, or report tips using Form 4317. Taxpayers can claim this deduction regardless of whether they take the standard deduction or itemize their expenses.

The benefit begins to phase out once a taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 for individuals or $300,000 for those filing jointly. This deduction is valid for tax years 2025 through 2028. Additionally, for the year 2025, employers who are required to report tips may use any reasonable method to estimate tip amounts.

No Tax on Overtime

This is another temporary provision in the bill. It includes a temporary deduction of up to $12,500 per qualified individual, or $25,000 for a joint return, during a given tax year. If an individual’s MAGI exceeds $150,000, or the MAGI for a joint return exceeds $300,000, the deduction is phased out. The bill defines overtime as per Section 7 of the Fair Labor Standards Act of 1938; this definition states that the pay must be over the individual’s regular rate. The no tax on overtime provision is only for non-itemizers and is effective from 2025 to 2028.

Trump Accounts

This is a new way to save a little nest egg for minors. A “Trump Account” refers to a tax-free savings account for minors. Individuals can save money in an individual retirement account (IRA) but not a Roth IRA for the benefit of minors under the age of 18. Contributions can only be made until the year the beneficiary turns 18, and distributions can only be made after the beneficiary turns 18. Eligible investments include indexed EFTs and mutual funds. Other than qualified rollover contributions, regular contributions are capped at $5,000 per year. Employers can contribute to a Trump account, and the contribution is not included in the employee’s income.

Another benefit: If you have a child born between January 1, 2025, and December 31, 2028, there is a tax credit of $1,000 for opening a Trump account for that child.

More Changes for Personal and Business Taxes

The One Big, Beautiful Bill contains many more changes, some permanent, some temporary. It is essential to consult with your accountant or CPA to find out which, if any, will impact you or your organization.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Jun 13
0

Important Tax Changes Coming to Washington State

By | Nonprofit, Tax | No Comments
"tax changes" on ticker tape

The Washington State legislature passed a new budget on April 27, 2025. The new budget updated several notable tax policies, some of which may affect you or your organization. These changes impact nonprofits, including colleges and universities, as well as nonprofits that host conferences and live events. We’ve summarized key points below and included links to the actual bills for your reference. The Washington Society of CPAs has also provided a more in-depth look and additional resources you may wish to review.

Engrossed Substitute House Bill 2081

Engrossed Substitute House Bill 2081 made changes to the state’s business and occupancy (B&O) tax. Rates have changed for service providers earning more than $5 million annually. The new rate is 2.1%. Previously, the rate was applied to businesses in this sector earning more than $1 million.

Additionally, the bill clarifies tax treatment for investments in response to the Antio, LLC vs. Department of Revenue court case. It formally defines “incidental investments” and establishes a 5% threshold for classification; a stricter limit compared to the Department of Revenue’s previous 5% safe harbor standard. While this change provides a clearer framework, some ambiguity remains regarding the definition of a business’s main purpose and how the 5% threshold should be applied across different reporting periods. To address outstanding tax questions, the Department of Revenue will issue additional guidance to further clarify tax policies and compliance expectations.

A key point in this bill affects nonprofits. Washington State’s Engrossed Substitute House Bill 2081 introduces tax exemptions for mutual funds and most nonprofit organizations, aiming to address concerns raised by the Antio, LLC vs. Dept. of Revenue case. This change benefits foundations, private colleges, and nonprofits by preventing their endowment funds and investments from being taxed under new B&O provisions. However, the exemption won’t take effect until January 1, 2026, as the Department of Revenue (DOR) indicated it needs time to implement the necessary administrative processes. Until then, nonprofits and other affected entities remain uncertain about their tax liabilities for the current and previous years. To provide additional clarity, the DOR will issue further guidance on how these exemptions will be applied under Washington’s evolving tax rules.

Engrossed Substitute Senate Bill 5814

Engrossed Substitute Senate Bill 5814 modifies the rules around sales tax. It removes a tax exemption for services that rely primarily on human effort, meaning that accounting and other professional services will now be subject to sales tax if they involve the use of digital tools. The bill defines Digitally Automated Services (DAS) as any service transferred electronically using one or more software applications.

Because many CPAs and professional service providers use online portals to communicate with clients, their engagements will likely be taxed. The legislature declined to restore the exemption, so this change will take effect on October 1, 2025. In response, the Washington Society of CPAs (WSCPA) and other professionals have asked Governor Ferguson to veto this section of the bill, arguing that more discussion is needed to assess its broader impact.

Another change is that “live presentations,” such as conferences, will now need to charge sales tax. This includes all professional development conferences. This provision requires further study, as it may also impact schools, colleges, and universities.

Nonprofits Need to Know Tax Law Changes

Having a tax-exempt status does not mean that your organization is entirely exempt from all taxes. As in the examples above, there are certainly situations in which nonprofits could be required to charge taxes, such as sales tax. Nonprofits must keep up to date with tax law changes in their states to ensure they’re in compliance with current regulations.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.