Why do Nonprofits Have Taxable Subsidiaries?

Abstract

Nonprofit organizations operate taxable activities in two general ways: as unrelated businesses operated by the nonprofit or through controlled subsidiaries. Prior research and regulatory attention has focused on unrelated business activities, although taxable subsidiaries generate at least as much taxable revenue. We find that nonprofits place their taxable activities into subsidiaries when those taxable activities are relatively large, and when the taxable activities are relatively more risky. Nonprofits trade off possible benefits of the subsidiary form with the costs of reduced tax planning ability.

Keywords: nonprofit organizations, unrelated business income, taxable subsidiaries, tax planning

JEL Classification: G1, G18, G3, G38, L3, L30, L31, L38, M4, M41, M43, M48