The IRS exempts qualified charities from income taxes, provided the income relates to their charitable activities. The provision exists because many charities conduct activities deemed unrelated to...

The IRS exempts qualified charities from income taxes, provided the income relates to their charitable activities. The provision exists because many charities conduct activities deemed unrelated to their core charitable mission. For example, a museum may earn income on its cafeteria sales or by renting out its lobby for a corporate reception. Such unrelated business income is taxable. Determining the portion of income that is taxable often involves extensive cost allocations. How might a charity be strategic in its choice of allocation methods? (Hint: An academic study found that nearly 30% of sampled charities reported
exactly
$0 as their unrelated business income.)