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.
Changes to Standard Mileage Rates for 2021
Standard mileage rates used to calculate the deductible costs of operating an automobile are:
REMINDER: Next Major Nonprofit Tax Deadline: November 15, 2022.
Organizations using a December year-end: Return was 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 is due November 15, 2022, extended due date is May 15, 2023.
Organizations using a September year-end: Return was due February 15, 2022, extended due date is August 15, 2022.
Supreme Court Agrees to Hear Case on FBAR Penalties
On June 21, 2022, the U.S. Supreme Court decided to hear the United States. v. Bittner, No. 20-40597 (5th Cir. 2021) regarding the penalty for non-willful failure to report foreign bank accounts. The Fifth Circuit and Ninth Circuit Court of Appeals ruled differently on similar FBAR penalty dispute cases.
BACKGROUND: The Bank Secrecy Act requires any U.S. individual or business to file a FinCEN Form 114, also known as FBAR, to report certain foreign financial bank accounts. Specifically, the taxpayer must report “a financial interest in or signature or other authority over at least one financial account located outside the U.S. if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.” Failure to timely file a complete and correct FBAR may be subject to civil monetary penalties, criminal penalties, or both.
Ninth Circuit Rules That the Penalty is Imposed ONCE per year: In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the taxpayer Jane Boyd had a financial interest in multiple financial accounts in the United Kingdom. She received interest and dividends from these accounts but did not report the interest and dividends on her 2010 federal income tax return or disclose the account to the Internal Revenue Service (IRS). In 2012, the taxpayer participated in the Internal Revenue Service’s Offshore Voluntary Disclosure Program and submitted a FBAR listing her fourteen foreign accounts for 2010. She also amended that year’s tax return to include the interest and dividends from those accounts. The IRS concluded that the taxpayer had committed thirteen non-willful violations of the reporting requirements under 31 USC § 5314—one for each account she failed to timely report for 2010. As a result, Boyd was penalized $47,279 by the IRS, plus additional late-payment penalties and interest for non-willful violations. However, the Ninth Circuit Court of Appeals reasoned that Boyd was only required to file a single FBAR to report multiple foreign financial accounts; therefore, she only committed one violation, and the maximum penalty for that violation was $10,000. The court concluded that § 5321(a)(5)(A) authorizes the IRS to impose only one non-willful penalty when an untimely but accurate FBAR is filed, no matter the number of accounts.
Fifth Circuit Rules That the Penalty is Imposed FOR EVERY ACCOUNT HELD: In United States. v. Bittner, No. 20-40597 (5th Cir. 2021), Alexandru Bittner, with dual Romanian-United States citizenship, had multiple non-U.S. personal bank accounts (8 or fewer each year) and owned stock in a number of Romanian corporations that also owned foreign bank accounts. Bittner lived in Romania for several years and was unaware that he was required to file U.S. income tax returns reporting his foreign income as well as file FBAR to report foreign financial accounts. Shortly after returning to the United States in 2011, he discovered that he should have filed U.S. tax returns and FBAR while living abroad. The IRS determined that Bittner failed to timely file FBARs for five years (2007-2011), and during those years, Bittner had over 25 foreign accounts. As a result, the IRS asserted Bittner had violated the Act a full 272 times—once for each account that was not reported in each of those five years. Therefore, Bittner was penalized $2.72 million by the IRS, representing a $10,000 fine for each account he ultimately reported on his untimely FBARs. In this case, the Fifth Circuit Court of Appeals agreed with the IRS’s position and held that the Act imposes a standalone duty on taxpayers to report each account—and thus, “each failure to report a qualifying foreign account constitutes a separate reporting violation subject to a penalty.”
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:
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.
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.