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TrimnerBeckham, based in the Washington DC metropolitan area, provides tax consulting and compliance solutions to nonprofit organizations. We help tax-exempt organizations file accurate and complete tax returns that enhance their public image.

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Changes to Standard Mileage Rates for 2021

Standard mileage rates used to calculate the deductible costs of operating an automobile are:

    1. 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020,
    2. 16 cents per mile driven for medical, or moving purposes for qualified active duty members of the Armed Forces, down 1 cent from the rate for 2020, and
    3. 14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020.

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REMINDER: Next Major Nonprofit Tax Deadline:  May 15, 2022.

Organizations using a December year-end:  Return is due May 15, 2022, extended due date is November 15, 2022.
Organizations using a March year-end:  Return is due August 15, 2022, extended due date is February 15, 2023.
Organizations using a June year-end:  Return was due November 15, 2021, extended due date is May 15, 2022.
Organizations using a September year-end:  Return was due February 15, 2022, extended due date is August 15, 2022.

New Provisions for PPP Loans and EIDL Advances That Affect Nonprofits.

Under the CARES Act passed in Spring 2020, an eligible organization could obtain a Paycheck Protection Program (PPP) loan for 2.5 times its average monthly payroll (“Draw I”).   As long as the organization spent at least 75% on payroll and employee benefits and the remaining 25% on eligible expenses such as mortgage interest, rent, and utilities during an 8-week period (“the 75/25 rule”), the loan could be forgiven. A subsequent law called the Paycheck Protection Flexibility Act of 2020 extended the period from 8 to 24 weeks and reduced the rule o expenses from 75/25 to 60/40.

Then on December 27, 2020, President Trump signed the $2.3 trillion Consolidated Appropriations Act, 2021 ( relevant portions referred to as “COVIDTRA”). It is one of the longest bills ever passed by Congress at 5,593 pages, and it includes roughly $900 billion in economic stimulus provisions. It did not address two of the most contentious issues during negotiations: funding for state and local governments, and liability protections for businesses.

In addition to direct payments for individuals and expanded unemployment benefits, COVIDTRA contains several provisions that affect nonprofit organizations:

  1. An organization that has an outstanding debt forgiven must report the forgiven amount as taxable income. COVIDTRA clarifies that the forgiveness of a PPP loan or an Economic Injury Disaster Loan Advance (EIDL Advance) is not taxable income.
  2. Under normal circumstances, an organization that pays expenses with nontaxable revenue generally can’t deduct those expenses from taxable revenue. However, organizations that spend forgiven PPP or EIDL Advance proceeds on otherwise deductible expenses may deduct those expenses from taxable income.
  3. PPP and EIDL loan forgiveness will not reduce the tax basis and other attributes of the borrower’s assets.
  4. The covered period can extend to March 31, 2021.
  5. The forgiveness application process is simplified for loans under $150,000, based on a one-page borrower certification that describes the total loan amount, the estimated amount of the loan that was spent on payroll, and the number of employees retained because of the loan.
  6. Allowable uses for forgivable PPP funds include expenditures for covered operations such as software, cloud computing, and other human resource and accounting needs; property damage costs related to 2020 riots and protests, such as vandalism and looting, that weren’t covered by insurance; essential supplies purchased prior to taking out the PPP loan; essential perishable supplies purchased before or after taking out the PPP loan; and worker protections such as personal protective equipment and COVID-19 related adaptations to comply with health and safety guidelines (e.g., a restaurant that converts its seating arrangements for outdoor dining).
  7. Employer-provided group life, disability, vision, and dental insurance are covered payroll costs for purposes of PPP forgiveness.
  8. A PPP borrower may be eligible for a “second draw” of up to $2 million if it is a small and hard-hit non-publicly traded business, it was in operation on February 15, 2020, it has fewer than 300 employees (500 for certain organizations with multiple locations), and it can demonstrate a 25% reduction in gross receipts in any quarter of 2020 compared to the same quarter in 2019.
  9. Borrowers who returned all or part of a PPP loan without receiving forgiveness but who are likely to qualify for forgiveness under the modified requirements can reapply for the maximum applicable amount.
  10. Churches and religious organizations principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs are eligible for a PPP loan.
  11. Section 511 public colleges and universities that have a public broadcasting station are eligible for a PPP loan if the organization certifies that the loan will support locally-focused or emergency information.
  12. 501(c)(6) organizations (other than professional sports leagues and those with the purpose of participating in political activities) with 300 or fewer employees that receive 15% or less of receipts from lobbying are eligible for a PPP loan, but only if lobbying activities comprise 15% or less of total activity and total lobbying costs did not exceed $1 million in the taxable year ending on or before February 15, 2020.
  13. Using proceeds of a covered loan for lobbying activities (as defined by the Lobbying Disclosure Act rather than the Internal Revenue Code), lobbying expenditures related to state or local campaigns, or expenditures to influence the enactment of the legislation, appropriations, or regulations is prohibited.
  14. Borrowers are no longer required to reduce their PPP loan forgiveness amount by the amount of their EIDL advance (as distinguished from an EIDL loan, which remains ineligible for forgiveness).
  15. Certain charitable donation incentives included in the CARES Act have been extended, such as raising the normal AGI limits for cash contributions made to qualified public charities in calendar year 2020, allowing non-itemizers to claim an “above-the-line” deduction for charitable contributions made in calendar year 2020, and raising the non-itemizer deduction to $600 for married-filing-jointly taxpayers, through calendar year 2021.
  16. Food and beverage expenditures that qualify as an ordinary and necessary business expense and that are incurred in 2021 and 2022 (not 2020) are 100% deductible if provided by a restaurant, whether eaten on the restaurant’s premises or ordered for takeout or delivery, although all other ordinary and necessary business food and beverage expenses remain 50% deductible and entertainment expenses remain nondeductible.
  17. Since September 1, 2020, the IRS has permitted an employer to defer withholding of the employees’ share of Social Security tax on certain wages through December 31, 2020, see IRS Notice 2020-65. The deferred amounts were required to be repaid through increased withholding between January 1, 2021, and April 30, 2021. COVIDTRA allows the deferred tax to be repaid through December 31, 2021.

Final Regs Provide Details on “Siloing” UBI

When reporting separate unrelated trades or businesses on Form 990-T, nonprofits should choose the 2-digit NAICS code that most accurately describes the unrelated activity, not the code that describes the exempt purpose. For example, a social club that earns unrelated business income (UBI) from operating a golf course and a restaurant should not use the codes for its exempt activity (operating a golf course or a country club), but instead should use codes that describe the sale of merchandise, food, and beverages.

An exempt organization that decides to use a different 2-digit NAICS code for an unrelated trade or business must provide:

  1. the identification of the separate unrelated trade or business in the previous taxable year,
  2. the identification of the separate unrelated trade or business in the current taxable year, and
  3. the reason for the change.

Changing the code used in a prior year would be unusual. Examples include partnership interests that no longer meet the requirements to be treated as a qualifying partnership interests (QPI), or activities that were improperly combined. However, simply switching from a 6-digit NAICS code to a 2-digit NAICS code is not considered a change if the first two digits of the old 6-digit code match the two digits of the new 2-digit code. For example, advertising in a periodical, on the website, in a convention program, and by direct mail all have different 6-digit NAICS codes and therefore may have been treated as separate trades or businesses in the previous year. However, they all use the same 2-digit NAICS code and therefore are a single trade or business.

Nonprofits may amend their prior year returns to combine trades or businesses and their associated net operating loss (NOL) carryforwards as long as they previously used 6-digit codes with the identical first two digits. However, an NOL from a trade or business that changes to a different 2-digit NAICS code will be suspended and can only be used if a future activity utilizes the original NAICS code unless the organization can establish that the previous code was used in error and that there has been no material change in the unrelated trade or business.

Certain separate unrelated trades or businesses do not have NAICS codes, such as income from a controlled subsidiary, income from investment activities, certain amounts derived from a controlled foreign corporation, and nonqualified interests in an S corporation. The IRS 2020 Instructions for Form 990-T provide a list of Non-NAICS Business Activity Codes.

Payments of interest, annuities, royalties, and rent from a controlled entity are reported as a separate unrelated trade or business to the extent that they reduce the net taxable income (or increases the net taxable loss) of the controlled entity. Such payments received from a single controlled entity are aggregated and reported as a single separate unrelated trade or business using the Non-NAICS Business Activity Code 903001. An organization that receives such payments from more than one controlled entity must report the payments from each additional controlled entity as a separate trade or business using the Non-NAICS Business Activity Code 903002, 903003, etc. The income is not combined with other investment or rental income.

Rent from debt-financed property is not combined with rental income from personal property or rental income from a controlled subsidiary. All unrelated business income from debt-financed property is grouped together as a single unrelated trade or business using the Non-NAICS Business Activity Code 901101.

Social clubs and VEBAs that are taxed on gross income other than exempt function income should use Non-NAICS Business Activity Code 901101. For these organizatios, taxable interest, annuities, royalties, and rent are combined and reported as a single separate trade or business. The taxable rent income of a social club is not combined with other taxable rent income it may have, such as rent income from debt-financed property or rent income from a controlled subsidiary.

Siloing is required for NOL Carrybacks

The CARES Act signed in March 2020 permits a five-year carryback for NOLs generated after 12/31/17 and before 1/1/21.

The IRS issued an FAQ that explains how the siloing rules (IRC Sec. 512(a)(6)) must be applied to such carrybacks.  The FAQ explains that an NOL carried back to a tax year that began before 12/31/17 can be applied against the aggregate UBI from that year, but an NOL carried back to a tax year that began after 12/31/17 can only be applied to net income from the same silo.

Employee Retention Tax Credit

The employee retention tax credit has been extended through June 30, 2021. The credit rate for the first two quarters of 2021 increases from 50% to 70%, and the wage limit is raised from $10,000/year to $10,000/quarter. The maximum credit is $5,000/employee in 2020 and $14,000/employee in 2021. The refundable credit is available to an employer when its gross receipts fall by 20% rather than the previous 50%. Employers that receive PPP loans may claim the credit only for wages not paid with forgiven PPP loan proceeds.

Increase in Corporate Charitable Contribution Limit Does NOT Apply to Form 990-T

For cash contributions made to qualifying organizations during calendar year 2020, the CARES Act increased the charitable contribution deduction limit for corporations from 10% to 25% of taxable income. Subsequent legislation extends this provision through calendar year 2021. However, IRC Sec. 512(b)(10) has not been amended, so exempt organizations must continue to use the 10% limit, not the 25% limit, when deducting charitable donations from unrelated business taxable income on Form 990-T.

 

 

 

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Many nonprofits prefer that the audit firm also prepare the tax return.  Because the audit represents ten times the hours of the tax work (and ten times the fe
David Trimner has provided tax consulting services to nonprofit organizations for over 20 years.  While he is not an auditor, he has worked for several aud

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