Schedule R, Part VI addresses a fairly specific niche, those non-profits who conduct part of their operations through a partnership that doesn’t constitute a related organization. You’ll have to report any organization that meets all of these conditions:
- The unrelated organization is treated as a partnership for federal tax purposes. This could be a partnership or an LLC that’s taxed as a partnership. S corporations are excluded.
- Your organization is a partner or member of the unrelated organization at any point during the fiscal year that you’re reporting on your Form 990.
- You conducted more than 5% of your activities through the unrelated partnership. “5% of your activities” is based on your total assets at the end of your fiscal year, or your total revenue for the year, whichever is greater.
If you’re calculating 5% of your activities based on your total assets, use the total assets listed on Part X, line 16 of your 990 as total assets. For the assets invested in the partnership, use your ending capital account balance for the partnership’s tax year that ended during or with your fiscal year. This would be reported on the Schedule K-1 you received from the partnership. Divide your capital account balance by your total assets to determine if it exceeds 5%.
If you’re calculating 5 of your activities based on your total revenue, use the total revenue on Part VIII, line 12 on your Form 990. For the revenue you received from the partnership, use your distributive share of the partnership’s gross revenue for the partnership’s tax year ending during or with your fiscal year. Divide your distributive share of the partnership’s income by your total revenue to determine if it exceeds 5%.
Consider the following example from the Schedule R instructions:
“X, a section 501(c)(3) organization, is a partner of Y, an unrelated partnership, which conducts an activity that constitutes an unrelated trade or business with respect to X. X’s distributive share of Y’s total income is $60,000 for Y’s tax year ending with or within X’s tax year. X has an ending capital account balance in Y of $120,000 as reported on Schedule K-1 (Form 1065). X’s total revenue and total assets for its tax year are $1,000,000 and $1,200,000, respectively. Because X’s total assets exceed X’s total revenue for its tax year, X must consider total assets in determining whether X conducted more than 5% of its activities through Y for X’s tax year. X conducted 10% of its activities through Y, as measured by X’s total assets ($120,000/$1,200,000), and thus must identify Y in Schedule R (Form 990), Part VI, and provide the required information. If, instead, X’s total revenue for its tax year was $1,300,000, then total revenue would be considered rather than total assets; X’s activities conducted through Y, as measured by X’s total revenue ($60,000/$1,300,000) wouldn’t be greater than 5% of X’s total activities, and therefore X wouldn’t be required to identify Y in Schedule R (Form 990), Part VI.”
You don’t need to report unrelated partnerships that meet both of these conditions:
- At least 95% of your revenue from the partnership, during its tax year that ended during or with your fiscal year, is described in sections 512(b)(1)-(3) and (5), e.g. interest, dividends, royalties, rents, and capital gains.
- Your primary purpose of investing in the partnership is to produce revenue or appreciation of property, and not conducting a section 501(c)(3) charitable activity such as program-related investing.
In columns (a), (b), and (c), enter the partnership’s name, address, EIN, its primary business activity or product or service provided, and the state, U.S. possession, or foreign country where the partnership is organized (the state or country whose laws governs its internal affairs). In column (d), report whether the predominant type of income you receive from the partnership as related, unrelated, or excluded from tax under section 512, 513, or 514. Use the type of income that’s most prevalent, using the definitions in the instructions for the Statement of Revenue in Part VIII, columns (B), (C), and (D) of your Form 990 (page 36 of this document).
In column (e), check “yes” if all partners of the partnership (or members of an LLC) are section 501(c)(3) organizations, governmental units, or wholly-owned subsidiaries of either of these. Otherwise, check “no.” In column (f), enter the dollar amount of your distributive share of the partnership’s total income, based on your profit interest in the partnership or LLC agreement, for the partnership’s tax year ending during or with the fiscal year you’re reporting on you Form 990. This would be reported on the Schedule K-1 you received from the partnership, and is the total of Part III, lines 1-11 and 18. In column (g), report the dollar amount of your distributive share of the partnership’s total assets, based on your capital interest in the partnership or LLC agreement, as of the end of the partnership’s tax year that ended during or with your fiscal year. Use the ending capital account reported on the Schedule K-1 you received from the partnership. In column (h), check “yes” if your share of any item of income, gain, loss, deduction, or credit, or any right to distributions from the partnership or LLC is was disproportionate to your investment in the partnership or LLC at any point during your fiscal year. Otherwise, check “no.”
In column (i), enter the dollar amount listed as the Code V amount (unrelated business taxable income) in box 20 of the Schedule K-1 you received from the partnership for the partnership’s tax year that ended during or with your fiscal year. If no Code V amount is listed in box 20, put “N/A.” In column (j), check “yes” if you were a general partner of the unrelated limited partnership, or managing partner or managing member of the unrelated general partnership, LLC, or other entity taxable as a partnership, at any point during your fiscal year. Otherwise, check “no.” In column (k), enter the greater of your percentage interest in the profits or in the capital of the related partnership.
Schedule R can be found here, and more detailed instructions for filling it out are provided here. I covered Parts I-IV and Part V in previous posts.