Tax-Motivated Expense Shifting by Tax-Exempt Associations

Tax-exempt organizations are subject to the Unrelated Business Income Tax on the profits of business activities unrelated to their exempt mission. This study extends recent research on the expense allocations of charitable nonprofit organizations by examining a group of non-charitable nonprofits, primarily trade, labor and agricultural associations, which differ from charitable nonprofits on a number of dimensions. The paper tests for tax-motivated expense shifting by associations. Data is obtained from the IRS Statistics of Income Division, and is supplemented by data requested from associations. Reported unrelated business expenses are compared to those predicted by a regression model to estimate expense shifting. Associations are estimated to shift approximately 20-21% of their expenses to taxable income. Further analysis calls into question the validity of the estimation model, and suggests that expense shifting may be understated in this and previous studies.