Tag Archives: schools

UBI Activity Loophole for Schools


Schools often rent their facilities to a third party when they’re not in use or have excess space. They usually do this as a community service; for instance, renting the facility to a daycare provider or a summer school, or to produce additional income. School business managers and CFOs should know that this type of activity typically has to be treated as Unrelated Business Income (UBI), and may be subject to tax. However, it warrants a closer look, as the rules are not “typical” and many exceptions exist.

Schools are not taxed on income generated from their mission or programs. However, the same rules do not apply when schools use their facilities for unrelated activities. The tax code contains numerous rules that designate what an unrelated income stream is and assist in determining if it is taxable. Unrelated activities are those that fit a three-pronged definition: the school is conducting a trade or business for the production of income from selling goods or services; the trade or business is regularly carried on; and, the activity is not substantially related to the organization’s exempt purpose. When schools lease or share space, and collect rental income, they should make sure that their accounting team is aware of the intricacies in the tax code as the facts and circumstances warrant.

In the event that a school rents out any part of a debt-financed property, the rules should be evaluated to determine if it is a taxable activity. There are exceptions to the acquisition indebtedness portion of the definition of a taxable activity for certain qualified organizations. A school described in section 170(b)(1)(a)(ii) is a qualified organization under one of the exception rules, which negates the acquisition indebtedness portion of the general rule. If applied properly, a school is not subject to unrelated business tax on such income.

Generally, when UBI rules are applied, revenue can easily be categorized as such. However, when all the exceptions are carefully considered, there are often rules that exist to negate certain revenues from being considered UBI – the trick is finding it. A nonprofit school, if organized under the correct section of the tax law, qualifies for this exception under the definition of acquisition indebtedness so that rental income on a debt-financed property is actually not subject to the UBI rules.

For more information or questions, please contact Aronson’s Kathy Cuddapah at 301.231.6200.

Private Schools Balance between Tuition and Contribution Revenue


Two of the most common revenue streams for private schools are tuition and contribution revenue.  Unfortunately, tuition alone does not cover the cost for private schools to run their programs and maintain their campuses. Contributions are a great addition to tuition for private schools. However, do you know how to account for both revenue sources?

Tuition revenue is accounted for as an exchange transaction that is recognized ratably over the term of the school year net of financial aid. Any money received in advance of revenue recognition treatment being met, should be recorded as deferred revenue liability. See how to account for delinquent tuition payments here.

Contributions are recorded when received or pledged as unrestricted, temporarily restricted, or permanently restricted depending on donor restrictions. Some private schools have capital campaigns that raise funds to improve facilities, initiate new programs, or to build an endowment. Capital campaigns usually have explicit or implied restrictions; the stated objective of the capital campaign usually makes the donor’s restriction clear. Pledges must be carefully reviewed to determine if they are conditional or unconditional. Unconditional pledges should be recognized at fair value as revenue in the year the pledge is made. Conditional pledges are to be recognized as revenue when the conditions are substantially met.

The federal tax code allows taxpayers to deduct contributions or donations made to qualified private nonprofit schools that operate to educate students in the community or serve some other approved purpose. However, a donation made to a nonprofit private school may not qualify for the deduction if the school significantly engages in additional activities that do not relate to charitable, scientific, humanitarian, or religious causes.

A private school may offer a gift or other benefit, such as tuition discounts, in appreciation of a donor’s generosity. Schools that choose to offer discounts should advise donors that they must reduce the deductible value of their donation by the value of all gifts and benefits from the private nonprofit school. For example, providing a $500 gift certificate in appreciation of a $20,000 donation may seem minimal, but it still requires the donor to report a charitable deduction of $19,500 rather than $20,000.

For more information about accounting for private schools or questions, please contact Melissa Musser at Mmusser@aronsonllc.com.

Private Schools: Accounting for Delinquent Accounts


Even schools with the most stringent of tuition policies can find themselves dealing with delinquent accounts. So, how do you account for them?

How to Write-off the Balance?

The accounting profession prefers the allowance method over the direct write-off method because it more accurately matches revenue with expenses. The accounts receivable will be presented on the balance sheet with a reduction called the allowance for doubtful accounts. This means the net amount of the accounts receivable will be lower and closer to the amount that will actually be collected. Bad debt expense is reported at the time the allowance for doubtful accounts is created and adjusted.

In the allowance method, the doubtful tuition collections are estimated and bad debt expense is recognized before the debts actually become uncollectible. A school can do this at the beginning of the school year by calculating a percentage of tuition that may never be paid. You don’t have to know which students won’t pay or the exact unpaid amount, but you can report a conservative estimate of the amount on the books that you don’t expect to collect.

Non-GAAP direct write-off method does not use any allowance or reserve account. Although the direct write-off method is simple and allows you to specifically identify the student account once known to be uncollectible, it often violates the matching principle of accounting because it recognizes bad debt expense which is likely related to a previous accounting period.

Evaluate Tuition Collection History

At the start of each school year, schools should evaluate tuition collection history, make an estimate of uncollectible tuition, and record an allowance for doubtful accounts. For example, tuition contracts total $1,000,000 and the school estimates that 5% or $50,000 will be uncollectible. When making the entry, the school will also record a monthly allowance for doubtful accounts ($50,000/10 months).

Bad Debt Expense – Other $5,000

Allowance for Doubtful Accounts $5,000

When recording an allowance for doubtful accounts, remember that you need to relieve the allowance when an obligation is determined to be uncollectible and therefore a bad debt. The allowance is eliminated, the accounts receivable is eliminated, and any difference is added to the bad debt expense. For example, receivables in the amount of $65,000 were determined to be uncollectible in June. No other write-offs occurred during the year and the Allowance for Doubtful Accounts = $50,000.

Allowance For Doubtful Accounts $50,000
Bad Debt Expense – Other $15,000

Accounts Rec – Tuition $65,000

Afterward the allowance account will be zero and bad debt expense will be $65,000.

Account for the Bad Debt Recovery

While collection efforts for certain students may initially result in a write-off, some families may desire to pay their outstanding balance after the account has been deemed uncollectible. To recover the payment on the school’s books, you will need to account for the bad debt recovery by reversing the original entry of a bad debt depending on what method was used.

  •  GAAP-allowance method – create a debit to the accounts receivable asset account in the amount of the recovery, with the offsetting credit to the allowance for doubtful accounts contra asset account.
  • Non-GAAP direct write-off method – if the original entry was instead a credit to accounts receivable and a debit to bad debt expense, then reverse this original entry when a recovery occurs.

Then record the cash receipt from the bad debt recovery, which is a debit to the cash account and a credit to the accounts receivable asset account.

For more information, please contact Melissa Musser, CPA, CISA at mmusser@aronsonllc.com.

Crowdfunding Classrooms: a Unique Approach for Obtaining School Supplies

In today’s educational environment, having a dynamic, innovative, and adaptive mentality toward your mission is essential.

For nonprofits and educational institutions, many struggle to carry out their mission because of budgets. Shannon Raftery, a kindergarten teacher faces the unrealistic task of providing her 25 students with a quality education each school year on a $200 supply budget. Shannon typically spends $100 – $150 each paycheck in an attempt to meet her students’ educational needs, but despite her philanthropic efforts the additional amount isn’t enough.

It has become clear that a different approach is necessary to create a nurturing learning environment for Shannon’s students and many others in similar situations. Shannon turned to Crowdfunding to acquire the necessities for her students and has been successful so far. Education campaigns through Crowdfunding websites have received significant contributions in recent years. In 2010, Crowdfunding raised $31.2 million that number grew over four times in 2015 to $140 million for education campaigns.

For now, schools and their teachers have been able to help close the gap for their budget deficits through Crowdfunding. However, in a constantly changing business environment, it is very likely that a different approach to acquire the necessary funding for their students’ education will be required in the near future. Therefore, the demand for individuals and organizations that are able to provide services for these types of organizations to prosper is exponential.

To read the full article, visit here.

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