Taxation for Universities and Colleges: Six Steps to a Successful Tax Compliance Program


Praise for Taxation for Universities and Colleges

"Thank you, Steve, for a book that is easy to understand and can be used to help provide guidance to our faculty and staff on tax-related matters that may have significant consequences to the institution. Quite often in higher education, we, in the area of finance and administration, are confronted with complex tax matters and questions. Further complicating the problem, tax matters are frequently just another hat worn by the controller or associate VP at many medium and smaller institutions. That is when Steve Hoffman, the 'Tax Translator,' becomes invaluable. Steve has a genuine way to make complex tax matters easier to understand, follow, and more importantly proactively prepare for. I have no doubt this book will be picked up and used often with many pages being marked and dog-eared for reference!"
—Tim Hurst, Assistant Vice President for Finance, Austin Peay State University

"Steve Hoffman is an excellent resource for college and university taxation issues. What a blessing it is to have him as a resource for our university. Everyone should know Steve Hoffman!"
—Tim Judd,Associate Vice President for Finance and Controller, Campbellsville University

"I read it in one evening! Finally, a book solely geared to the issues facing universities. Steve uses real-world examples and references the related IRS guidance in easy, understandable language."
—Maureen Ryan-Hoffman, CPA, MBA, Controller, Office of Finance, Georgian Court University

"Steve's practical experience shines throughout this book, which contains useful information for those just developing a tax compliance program or looking to improve an existing program at their institution."
—Perry Chaffin, Director of Audits, Marshall University

"Taxation for Universities and Colleges provides the building blocks necessary to develop a robust tax compliance program on any size campus. The book is full of many real-world examples and useful tips to help navigate the often murky waters of higher education taxation."
—Alicia Estey, Director of Tax Compliance, Boise State University

"Mr. Hoffman provides the GPS to navigate the road to implementing a robust tax compliance program. Most importantly, he stresses the importance that those ultimately responsible—such as the CFO, business officer, or VP—be knowledgeable, involved, and take responsibility for tax compliance at their institution. Mr. Hoffman's practical and commonsense approach makes this book a great resource for those wanting to implement a tax compliance program as well as those just needing to review their current programs."
—Jory Cummins, Tax Director, Hawai'i Pacific University

Steve Hoffman is a tax professional with long experience in taxation for colleges and universities as well as nonprofit organizations. He is a former tax manager for The Ohio State University and George Washington University. He is also a former Director in the Business and Finance Division of West Virginia University. He publishes the Tax Update Newsletter for Colleges and Universities, which is distributed throughout the United States. He spent fifteen years at the Internal Revenue Service and is also a Certified Financial Planner.

Preface xiii

Acknowledgments xxi

About the Author xxiii

1 Awareness 1

Defining Tax Exempt 1

The Six Steps of Tax Compliance 2

The Five Things You Need to Do First 4

Task 1: Look at Management 4

Task 2: Assess the Current State of Your Tax Compliance Program 5

Task 3: Develop a Team Approach 7

Getting a Hold on the Process 7

The IRS Is Paying Attention 9

Why You Should Care 12

Task 4: Assess Your Risk 13

Task 5: Review IRS Communications 17

Open Them! 17

Statistics on Tax Staff 19

The Different Kinds of Tax 20

Employment Tax: The First Tax to Know about Because It’s the Largest One for Your University 20

Unrelated Business Income Tax (UBIT): Not a Distant Cousin Tax but a Close Relative to You Tax 21

Sales Tax: It Is Close to Home 21

Excise, or Exercise-Your-Checkbook Tax 22

Borrowed Money Can Mean Tax, Too 22

Overseas (International) Tax 22

In Summary: Build Your Village 24

2 Identification 25

Steps in Identifying Your Needs 26

Independent Contractors 27

Unrelated Business Income Tax (And What Does Macaroni Have to Do With It?) 30

UBIT Applies to All and Can Be Necessary 31

It’s Okay to Have Unrelated Business Income 32

The IRS Cares about UBIT 32

The Three Tests for UBIT 34

The Trade, or Business, Test 35

Regularly Carried on Test 36

The Not Substantially Related Test 37

Advertising Is Always Subject to UBIT 40

Things You Generally Don’t Have to Worry About: Common Exceptions to UBIT 40

Convenience Exception 41

Go Ahead, Ask Around: The UBIT Questionnaire on Campus 41

Allowable Deductions from UBIT 43

Allocating Expenses: The IRS Hasn’t Clarified 43

Unrelated Debt-Financed Income: Got a Bonded Building? 45

Research as UBIT 45

Foreign Students: The IRS Calls Them Nonresident Aliens 46

Sales Tax 48

Identifying Sales Tax Savings in Other States 50

Employment Tax and Fringe Benefits 50

Excise Tax 52

Overseas and International Tax 53

In Summary 54

3 Compliance 55

Policies 56

Enforcing Policies 58

Give Them the Right Tools for the Job 60

Centralize the Tax Responsibilities 63

Keep Tax at the Forefront of Your Mind 64

Fringe Benefits 67

No Additional Cost Services 68

Qualified Employee Discounts 69

Working Condition Fringes 69

De Minimis Fringes 70

Qualified Transportation Fringes 71

Examples of Common Fringe Benefits 72

University-Owned Automobiles 72

University-Owned Airplanes 73

Professional Dues, Publications, and Meetings 73

Travel and Entertainment Expense Reimbursements 73

Supper Money and Taxi Fares 74

Gifts and Awards 74

Athletic Facilities 74

Spousal Travel 75

Free or Discounted Theater or Athletic Tickets 75

Club Memberships 76

Domestic Partners 77

Leave Donation or Sharing Programs 77

Cell Phones 77

In Summary 78

4 Reporting 81

Questions About Reporting Tax Obligations, Answered 81

When are the Tax Deposits and Tax Forms Due? 82

Who Is Preparing the Tax Forms? 82

How Do You Know They Are Done? 83

How Do You Learn about Lapses of Reporting? 83

When Reporting Begins 84

Payments to Human Research Subjects 85

Getting People Used to Thinking About Taxes 86

The Tax Calendar 87

In Summary 89

5 Monitoring 91

Policies And Procedures 92

Consistency and Ease of Use 93

Provide Multiple Paths to Information 94

Simulated Audit 98

Your Tax Manager Position 99

In Summary 100

6 Tax Nirvana 103

The Land of “ahh . . . ” 103

You Can Finally Rest 104

Passing the Baton to You 105

The Tax Pyramid Compliance Program Steps, Simplified 106

Awareness Simplified 107

Identification Simplified 107

Compliance Simplified 108

Monitoring Simplified 108

Reporting Simplified 108

Tax Nirvana Simplified 108

In Summary 109

7 Your Audit Defense 111

Building An Audit Defense 111

Setting the Tone 112

Types of Audits 114

Before the Audit 115

During the Audit 116

After an Audit 122

You Don’t Have to Go It Alone 125

Hire a Tax Manager 125

Centralize All Tax Reporting Functions to the Extent You Can 125

Monitor and Control Tax Compliance at Your University 126

Getting Your Bearings 126

Concluding Remarks 129

Appendix 131

What a VP Wants from a Tax Manager 131

A Knowledgeable Tax Staff That Understands Laws and Regulations as They Apply to Higher Education 132

A Tax Staff That Understands They Work for the University, Not the IRS 132

A Tax Staff with a Calm Approach 133

A Tax Staff That Solves Problems Creatively 133

A Tax Staff with Personal Detachment 134

A Tax Staff Willing to Work with Others to Achieve Reasonable Results in a Tax Issue 134

A Tax Staff Willing to Accept Risk 135

A Tax Staff That Knows the CEO/CFO Is in Charge 135

A Tax Translator Guide to UBIT Determination 137

UBIT Compliance Checklist 160

Unrelated Business Income 160

Description of Activity 162

General 162

Advertising and Sponsorship 163

Services 164

Products 165

Rental Arrangements 165

Rental of Property 165

Foreign Activities 166

Foreign Accounts 166

Foreign Offices 167

Foreign Grants 167

Foreign Employees 167

Investments in Foreign Entities 168

Other State Activities 168

Commercially Sponsored Research 168

Partnerships and Joint Ventures 169

Activities/Expenditures 169

Political 169

Definition 169

Lobbying 169

Definition 170

University of Central Florida UBIT Questionnaire 172

University of Notre Dame UBIT Questionnaire 175

Index 177