Page 191 - Washington Nonprofit Handbook 2018 Edition

than as agent when the original payment was made. Nonprofit
organizations should be aware, however, that this possible deduction
poses a significant audit trap, especially for affiliates or subsidiaries of
the organization and any cost sharing relationships. Reimbursement
arrangements must be carefully structured to avoid being treated as
taxable gross receipts.

• Income Exempt Under the U.S. Constitution. The federal
constitution prohibits Washington from taxing revenue derived from
interstate sales, imports and exports, Indians and Indian tribes, or
sales made by the federal government. Nonprofit organizations that
sell to the federal government are generally subject to the B&O tax.
See WAC 458-20-190.

• Investment Income. Investment income is deductible. Investment
income includes amounts derived from one of three sources:

(1) investments, (2) dividends or distributions from a capital account,
or (3) interest on loans between a subsidiary entity and its parent, but
only if the total investment and loan income of the parent is less than
5% of total annual gross receipts. See RCW 82.04.4281.

This deduction does not apply to amounts received by a banking,
lending, or security business. In addition, no deduction is allowed for
any organization for loans or the extension of credit to another,
revolving credit arrangements, installment sales, and the acceptance
of payment over time for goods or services.

• Bona Fide Dues. A nonprofit organization may deduct the bona fide
dues of its members. Bona fide dues are defined as those amounts
paid periodically by members solely for the purpose of entitling those
persons to continued membership in the club or similar organization.
See RCW 82.04.4282.

A nonprofit organization may not be eligible for this deduction,
however, if, in consideration of the dues, the members receive
significant goods or services, or if dues are graduated based on the
level of services provided.

The Department of Revenue has ruled that a nonprofit organization
may provide the following significant goods and services without

losing eligibility for bona fide due deduction: (1) the provision of

WASHINGTON NONPROFIT HANDBOOK -180- 2018