Our 509(c)(3) charity makes some significant income from renting a portion of our real estate to an unrelated business. We don’t have to pay unrelated business income tax (“UBIT”) on the income because the property is not subject to a mortgage loan. If we apply for the forgivable loan available to nonprofits under the CARES Act, will that make our property “debt financed property” from which the income will be subject to UBIT?
I don’t think so. You are correct that Section 514 of the Tax Code requires an exempt organization to pay UBIT on a portion of the income from “debt financed property.” (See Ready Reference Page: “Nonprofits Often Worry About UBIT”) The basic definition of debt financed property is property on which there is “acquisition indebtedness” at any time during the tax year. Acquisition indebtedness is defined as (A) indebtedness incurred in acquiring or improving the property; (B) indebtedness incurred before acquisition or improvement if it would not have been incurred but for such acquisition or improvement; or (C) indebtedness incurred after acquisition or improvement if it would not have been incurred but for the acquisition or improvement and was reasonably foreseeable at the time of acquisition or improvement
I think you can readily say that a CARES loan was not reasonably foreseeable for any property you have been leasing for more than a month or two. I also think the outcry would be huge if the IRS were to try to argue otherwise.
Just be sure that you use the loan for staff salaries and other permitted costs, and don’t use it to buy more property to rent.