Nonprofits can also generate revenue from selling investments. This is known as capital gains. When a nonprofit sells an investment, such as a stock or bond, that generates income. Nonprofits are not exempt from paying capital gains taxes. However, they are taxed at a much lower rate than for-profit companies. For most nonprofits, the capital gains tax rate is 15%. This is significantly lower than the capital gains rate for for-profit companies, which can vary from 15% to 37%, depending on the amount of the gain.
Definition of Capital Gains Tax for Nonprofits
Capital gains tax is a tax on the profit made when an asset is sold for more than its original purchase price. Nonprofits are generally exempt from paying capital gains tax on the sale of most assets, including:
- Real estate
- Stocks
- Bonds
However, there are some exceptions to this rule. For example, nonprofits must pay capital gains tax on the sale of:
- Inventory
- Assets held for less than one year
- Assets that were used to generate unrelated business income
The rate of capital gains tax for nonprofits is the same as the rate for individuals. The rate depends on the taxpayer’s income and the length of time the asset was held.
Nonprofits should be aware of the capital gains tax implications of any asset sales they make. By understanding the rules, nonprofits can avoid paying unnecessary taxes.
Taxes on Unrelated Business Income
Nonprofits are also subject to taxes on unrelated business income (UBI). UBI is any income that a nonprofit generates from a trade or business that is not substantially related to its exempt purpose.
The rate of UBI tax is the same as the corporate income tax rate, which is currently 21%. Nonprofits can deduct expenses related to generating UBI from their UBI income before calculating their tax liability.
Nonprofits should be aware of the UBI tax implications of any business activities they undertake. By understanding the rules, nonprofits can avoid paying unnecessary taxes.
Table of Capital Gains Tax Rates
| Income | Short-Term Capital Gains Rate | Long-Term Capital Gains Rate |
|---|---|---|
| $0 – $41,675 | 10% | 0% |
| $41,675 – $441,500 | 15% | 15% |
| $441,500 – $501,900 | 20% | 20% |
| $501,900+ | 25% | 20% |
Exemptions and Deductions for Capital Gains Taxes
When a nonprofit organization sells an asset, such as real estate or stocks, for a profit, it may be subject to capital gains tax. While there are exemptions for certain types of assets, nonprofits should also consider deductions that can help to reduce their capital gains tax liability.
Exemptions
- Assets held for more than one year: Profits from investments or property held longer than one year qualify for a lower capital gains tax rate of 20% for corporations and 0% for most trusts.
- Gifts and bequests: Assets received as gifts or bequests are typically not subject to capital gains tax when sold.
- Sale of certain business assets: Nonprofits may qualify for a special tax rate of 25% on sales of certain business assets, such as depreciable property used in their trade or business.
Deductions
- Cost of acquisition: The cost of acquiring the asset, such as the purchase price plus any improvements or depreciation taken, can be deducted from the sale price to reduce the capital gain.
- Selling expenses: Expenses associated with selling the asset, such as commissions, advertising, and legal fees can also be deducted.
- Net operating losses: Nonprofits can use net operating losses from previous tax years to offset capital gains and reduce their tax liability.
Table of Capital Gains Tax Rates
| Entity Type | Short-Term (held less than 1 year) | Long-Term (held more than 1 year) |
|—|—|—|
| Corporations | Ordinary income tax rates | 20% |
| Trusts | Ordinary income tax rates | 0% |
| Individuals | Ordinary income tax rates | 0%, 15%, or 20% based on income bracket |
Capital Gains Tax and Nonprofits: A Financial Guide
Nonprofit organizations, while typically exempt from income tax, may encounter capital gains tax obligations under certain circumstances. Nonprofits must navigate the tax implications of capital gains to ensure proper financial management and tax compliance.
Impact of Capital Gains Tax on Nonprofit Finances
Capital gains tax is a tax on the profit earned from the sale of an asset, such as property or investments. Nonprofits are subject to capital gains tax if they engage in the sale of assets that are not used for their exempt purposes or held for investment.
- Taxable Assets: Nonprofits may be liable for capital gains tax on the sale of assets such as real estate, stocks, or bonds that are not directly related to their charitable mission.
- Investment Income: Capital gains derived from investments held for financial gain, rather than as part of the nonprofit’s core mission, may be subject to capital gains tax.
- Unrelated Business Income: If a nonprofit engages in unrelated business activities, such as running a commercial enterprise, the income from such activities may be taxable, including any capital gains generated.
Table: Tax Implications of Capital Gains for Nonprofits
| Type of Asset | Purpose | Tax Treatment |
|---|---|---|
| Real Estate | Used for charitable activities | No capital gains tax |
| Stocks | Held for investment | Capital gains tax may apply |
| Bonds | Used to fund mission-related programs | No capital gains tax |
| Unrelated Business Activity Income | Commercial enterprise | Capital gains tax may apply |
Strategies for Minimizing Capital Gains Tax
Nonprofits can implement strategies to minimize their capital gains tax liability:
- Using Assets for Exempt Purposes: Ensure that assets are used primarily for the nonprofit’s charitable mission to avoid capital gains tax on their sale.
- Long-Term Holding: Holding assets for a longer period can reduce the capital gains tax liability due to lower tax rates on long-term capital gains.
- Charitable Donations: Donating appreciated assets to other nonprofits can avoid capital gains tax.
- Consult a Tax Professional: Seek professional guidance from a tax accountant or attorney to understand specific tax implications and plan for tax minimization.
Strategies for Minimizing Capital Gains Tax Liability
Nonprofits are generally exempt from paying federal income taxes on their income, including capital gains. However, there are some exceptions to this rule. For example, if a nonprofit sells property that it has held for less than one year, the gain on the sale will be taxable as ordinary income. Additionally, if a nonprofit sells property that it has used in its mission for more than one year, but less than five years, the gain on the sale will be taxable at a reduced rate of 28%.
There are a number of strategies that nonprofits can use to minimize their capital gains tax liability. These strategies include:
- Holding property for more than one year before selling it
- Selling property that has been used in the nonprofit’s mission for more than five years
- Donating property to another nonprofit organization
- Selling property to a related party at a reduced price
- Using a like-kind exchange to defer capital gains taxes
In addition to these strategies, nonprofits can also reduce their capital gains tax liability by taking advantage of the following tax deductions:
- The charitable contribution deduction
- The net operating loss deduction
- The capital loss deduction
| Capital Gains Tax Rate | Holding Period |
|---|---|
| 0% | Property held for more than one year and used in the nonprofit’s mission for more than five years |
| 28% | Property held for more than one year and used in the nonprofit’s mission for less than five years |
| Ordinary income tax rate | Property held for less than one year |
That’s it, folks! We hope you enjoyed getting to the bottom of whether or not nonprofits pay capital gains tax. We know we did. If you have any more questions, feel free to drop us a line. In the meantime, keep calm and carry on, and we’ll see you soon!