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Supreme Court Finds California Schedule B Requirement Unconstitutional

On July 1, 2021, the Supreme Court ruled 6-3 that California can not demand a copy of Form 990 Schedule B including the names and addresses of donors from charitable organizations.  For the sake of full disclosure, we have been arguing since 2010 that our nonprofit clients should not be forced to provide Schedule B to California in order to register with the Attorney General.  We are pleased with the Supreme Court’s ruling.  Nearly 300 organizations filed or signed on to “friend-of-the-court” briefs opposing California’s requirement, including the ACLU, the NAACP, PETA, and the Human Rights Campaign.

Since 2001, California regulations have required registering charities to provide a complete Form 990 Schedule B.  Similar requirements exist in New York and New Jersey.  Prior to 2018, we had been advising our clients to continue to provide redacted copies of Form 990 Schedule B, removing the names and addresses of donors.  In 2010, California threatened many charities with fines and suspension.  The Americans for Prosperity Foundation and the Thomas More Law Center (the petitioners) sued the state, alleging that the requirement violated their rights, the rights of their donors, and the rights of all other affected nonprofits.  In 2016, the District Court concluded that the requirement was not narrowly tailored to the state’s interest in investigating misconduct created an unconstitutional burden on the freedom of association rights of donors.  However, in 2018 the Ninth Circuit reversed the District Court and upheld California’s right to require the information as long as it was not publicly disclosed.

In arguments before the Supreme Court, the California Attorney General’s Office contended that the up-front collection of the names and addresses of major donors was useful for identifying potential fraud, self-dealing, and other misconduct.  Alternative means of obtaining Schedule B information, such as audits and subpoenas, are less efficient and effective than up-front collection, and a targeted request for donor information could cause a charity engaged in fraud to hide or tamper with evidence.  There is no basis on which to conclude that California’s requirement results in any broad-based chill since the information is kept confidential.  Most charities are noncontroversial, and publicity does not deter donations.  Donors often welcome the publicity that comes from being a major supporter of a cause they believe in.  In fact, some charities sell the names and addresses of donors to other organizations.  Since the information is already being gathered and sent to the IRS, California’s requirement created no additional burden.

The petitioners argued that Form 990 Schedule B disclosure makes donors less likely to contribute and subjects those donors to the risk of reprisals.  The Americans for Prosperity Foundation CEO testified that a technology contractor working at the organization’s headquarters posted online that he “could easily walk into [the CEO’s] office and slit his throat.” The Thomas More Law Center introduced evidence that it had received “threats, harassing calls, intimidating and obscene emails, and even pornographic letters.”  Both organizations and their supporters had been subjected to bomb threats, protests, stalking, and threats of physical violence.  California has a history of failing to ensure the confidentiality of donors’ information, posting the confidential information of nearly 2,000 nonprofit organizations to the Attorney General’s website.  California officials rarely used Schedule Bs to audit or investigate charities and such information was easily obtained by other means.

Six of the Justices agreed that it makes no difference if there is no disclosure to the public, if some donors do not mind having their identities revealed, or if the relevant donor information is already disclosed to the IRS.  California’s disclosure requirement imposes a widespread burden on donors’ associational rights, and this burden cannot be justified on the ground that the regime is narrowly tailored to investigating charitable wrongdoing, or that the State’s interest in administrative convenience is sufficiently important.  The Attorney General may well prefer to have every charity’s information close at hand, but the prime objective of the First Amendment is not efficiency.  Administrative convenience does not remotely reflect the seriousness of the actual burden that the demand for Schedule Bs imposes on donors’ association rights.  Disclosure requirements can chill association even if there is no disclosure to the general public.  While assurances of confidentiality may reduce the burden of disclosure to the State, they do not eliminate it.  It does not matter that the IRS already collects the information that California is seeking, because each governmental demand for disclosure brings with it an additional risk of chill.  The IRS has a nationwide role to determine exemption from federal income tax, which California does not.

However, there was disagreement among the majority regarding the basis on which requirements such as California’s should be scrutinized.  Justices Roberts, Kavanaugh, and Barrett write that the appropriate standard of review is “exacting scrutiny, which means that there must be a substantial relationship between the disclosure requirement and a sufficiently important governmental interest.  Exacting scrutiny does not require that disclosure regimes be the least restrictive means of achieving their ends, only that they be narrowly tailored to the government’s asserted interest. Justice Thomas disagreed, stating that the appropriate standard should be “strict scrutiny,” meaning that the government must adopt the least restrictive means of achieving its interest.  Justices Alito and Gorsuch did not see the need to decide which standard should be applied, nor do they believe that the same standard must apply in all cases.

In a dissent written by Justice Sotomayor and joined by Justices Breyer and Kagan, Justice Sotomayor expresses concern that the majority opinion could endanger other forms of reporting and disclosure, such as political campaign contributions.  It states, “All disclosure requires some loss of anonymity, and courts can always imagine that someone might, for some reason, prefer to keep their donations undisclosed. If such speculation is enough (and apparently it is), then all disclosure requirements ipso facto impose cognizable First Amendment burdens.”  The dissent notes that the ruling overturns California’s disclosure requirement “even if a plaintiff demonstrates no burden at all. The same scrutiny the Court applied when NAACP members in the Jim Crow South did not want to disclose their membership for fear of reprisals and violence now applies equally in the case of donors only too happy to publicize their names across the websites and walls of the organizations they support.”

The California Association of Nonprofits complained that the ruling will weaken public trust in the nonprofit sector.  California Attorney General Rob Bonta (D), stated, “Stripping our office of confidential access to donor information — the same information about major donors that charities already provide to the federal government — will make it harder for the state to fight fraud and prevent the misuse of charitable contributions.”  In contrast, over 120 organizations wrote that “With the political winds of state attorney general offices shifting from term to term, fears of threats, harassment, reprisals, and even political targeting by government for advocacy on issues of social, economic, religious, and political importance shift as well, and such risks are especially worrisome for controversial issues unpopular at the time.”

The consolidated cases are Americans for Prosperity Foundation v. Bonta and Thomas More Law Center v. Bonta, citation is 127 AFTR 2d 2021-XXXX.

REMINDER: Next Major Nonprofit Tax Deadline:  August 15, 2021.

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

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.

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.




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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