Skip to Content
boardrooom with wood table and white office chairs
Article

Hidden consequences of alternative investments for not-for-profits

November 29, 2016 / 4 min read

If you lead a not-for-profit or serve on the board of one, you need to know that some investments trigger reporting and/or tax payment obligations that might not otherwise exist. Here are a few commonly-missed forms and penalties.

 boardrooom with wood table and white office chairs

The search for higher returns has made the investment landscape significantly more complex in recent years. Fund managers have created increasingly specialized entities and instruments in order to help investors maximize returns while targeting and managing risk more effectively. Not-for-profits (NFPs) looking to improve investment returns face some extra challenges. Because of their tax-exempt status, many fail to realize that ownership of certain investments can trigger a reporting and/or tax payment obligation where one might not otherwise exist. Failure to meet these obligations can result in significant penalties and interest charges for unwary NFPs.

One of the most frequent causes of unexpected tax filing obligations is investment outside of the United States. In order to avoid being surprised by these requirements, exempt organizations need to ask one key question before committing funds: Will the activity involve investment outside of the United States or investment in a partnership that will place investments outside of the United States? If the answer is “yes,” the organization needs to understand any additional filing requirements up front in order to factor the costs of compliance into the rate of return.

Commonly missed forms and related penalties

The following forms provide an example of the typical filings that tax-exempt organizations often miss and the resulting penalties that can be assessed:

Depending on the form that was overlooked and the size of the accounts, an organization could face a sizable tax bill before it even realizes it has a problem.\

Best practices for managing the impact of foreign investments
Perhaps the best defense against finding out too late that an investment requires extra tax compliance from an organization is open and frequent communication between the people who manage investments and the finance/accounting department. Those who manage the entity’s investments should also stay in contact with the fund managers who can help inform them when assets are invested in a way that might trigger an obligation.

In addition, these tips can help an organization avoid surprises and comply with reporting rules:

Never assume that an investment won’t have a tax consequence just because a nonprofit is doing the investing.

Share all documentation on the initial investment and subsequent information with the finance/accounting department. All relevant parties should review the prospectus and other offering materials for potential tax impact before investing.

Never assume that an investment won’t have a tax consequence just because a nonprofit is doing the investing.

Consider additional tax compliance costs when calculating the rate of return on an investment that triggers a new obligation.

The organization’s finance professionals are uniquely positioned to support the investment team in analyzing new opportunities in order to determine if they will trigger additional reports and possible taxes or penalties. The key is to have the finance and investment teams consulting closely before an investment is made in order to understand the additional costs that a new investment might trigger.

If you’re learning about new investments that might require new filings, please contact a Plante Moran professional for additional information.

Related Thinking

Aerial view of city by a waterfront.
December 3, 2024

Transfer pricing: Navigating advance pricing agreements for Japanese MNEs

Article 3 min read
Close-up photo of architecture of a government building
November 27, 2024

State and local tax advisor: November 2024

Article 17 min read
View of government building reflected in water.
November 21, 2024

2025 tax legislation: The future of business tax

Article 15 min read