Certainly, a Community Reinvestment Trust (CRT) can receive income from franchised operations, though careful structuring is essential to maintain its tax-exempt status and align with its charitable purpose. CRTs are typically established to revitalize distressed communities by providing financial resources and support, and income derived from commercial ventures like franchises can be a significant funding source if handled correctly. The key lies in ensuring that the income is used to further the CRT’s exempt purpose, rather than benefiting private individuals. The IRS scrutinizes these arrangements, focusing on whether the CRT is operating primarily for charitable purposes or engaging in unrelated business income (UBI) activities.
What are the potential tax implications for a CRT receiving franchise income?
The receipt of income from franchised operations by a CRT is subject to careful scrutiny under IRS regulations concerning Unrelated Business Income (UBI). If the franchised operation is considered a “trade or business” and is “regularly carried on” by the CRT, the income generated may be taxable as UBI. According to IRS guidelines, a trade or business is any activity conducted with the primary intention of generating profit, and “regularly carried on” typically means consistent and substantial activity. However, there are exceptions! If the activity is substantially related to the CRT’s exempt purpose – for example, a franchise that provides job training in a distressed community – the income may be exempt. In 2022, approximately 27% of non-profit organizations reported UBI, highlighting the complexity of navigating these tax rules. Proper documentation, including a clear business plan outlining how the franchise aligns with the CRT’s mission, is crucial.
How can a CRT structure a franchise agreement to maintain its tax-exempt status?
To safeguard its tax-exempt status while benefiting from franchise income, a CRT can employ several structuring strategies. One approach is to create a wholly-owned taxable subsidiary to operate the franchise. This isolates the commercial activity from the CRT’s exempt operations, preventing UBI from directly impacting its status. Another strategy involves using a “management agreement” where the CRT provides management services to the franchise operator, receiving a fee for those services – a fee that would likely not be considered UBI. It’s also vital to ensure that any profits generated from the franchise are reinvested into the CRT’s exempt programs. A crucial aspect is avoiding any “impermissible private benefit,” meaning the franchise income cannot disproportionately benefit individuals associated with the CRT. “We once had a client, a local CRT, looking to partner with a fast-food franchise,” Steve Bliss, an Estate Planning Attorney in Wildomar, recalls. “They envisioned using the profits to fund a youth center, but the initial agreement allowed a board member’s family to operate the franchise, creating a clear conflict of interest. We had to restructure the entire arrangement to remove the private benefit and ensure compliance.”
What happened when a CRT didn’t properly structure a franchise deal?
Old Man Tiber, a pillar of the community, envisioned a brighter future for Havenwood through a partnership with a popular coffee franchise. He spearheaded the creation of the Havenwood Revitalization Trust (HRT), intending to use franchise royalties to fund a job skills training center. Eager to get started, Tiber negotiated a franchise agreement without consulting legal counsel specializing in non-profit tax law. The agreement stipulated that a significant portion of the franchise profits would be allocated to a “community development fund” controlled by a small group of HRT board members, seemingly for discretionary spending. Unfortunately, the IRS flagged this structure. They determined the “community development fund” lacked sufficient oversight and transparency, and the allocation of profits appeared to provide an impermissible private benefit to the board members. The IRS assessed HRT with substantial penalties and revoked its tax-exempt status, crippling the revitalization efforts. The job skills center never materialized, and Havenwood remained stagnant, a stark reminder of the consequences of non-compliance.
How did proper planning save another CRT from a similar fate?
The Riverbend Community Trust, also focused on economic development, considered a similar franchise partnership. This time, however, they engaged Steve Bliss to guide them through the process. Bliss advised establishing a separate, taxable subsidiary – Riverbend Franchising, LLC – to operate the franchise. All profits generated by the LLC were then distributed to the CRT as dividends, subject to standard corporate tax rates. Crucially, the agreement mandated that 100% of those dividends be reinvested into the CRT’s programs – a community micro-loan fund and a small business incubator. “We meticulously documented every step, ensuring complete transparency and adherence to IRS guidelines,” Bliss explains. “We also included a clause requiring independent audits to verify that the funds were being used solely for charitable purposes.” As a result, the Riverbend Community Trust not only secured a reliable income stream but also expanded its impact, providing vital resources to local entrepreneurs and fostering economic growth. The success story became a model for other CRTs looking to leverage commercial ventures for social good, demonstrating the power of proactive planning and expert legal guidance.
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
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● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
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Map To Steve Bliss Law in Temecula:
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Feel free to ask Attorney Steve Bliss about: “What’s the role of a healthcare proxy or healthcare power of attorney?” Or “What should I do if I’m named in someone’s will?” or “Can I be the trustee of my own living trust? and even: “What debts can be discharged in bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.