Schedule B Relief for Some Tax-Exempt Organizations
On February 7, 2020, the IRS held a public hearing in Washington, DC to discuss whether to relax the requirements for completing Schedule B for certain nonprofit organizations. The Regulations were finalized on May 27, 2020, see Reg. 1.6033-2, and are applicable to returns filed after September 6, 2019.
Back in July of 2018, the IRS announced that, going forward, only 501(c)(3) charities and 527 political organizations would be required to provide the names and addresses of donors who gave $5,000 or more during the year. All other tax-exempt organizations would continue to complete Schedule B, but would leave the name and address fields blank for each donor.
Several states objected, and on July 30, 2019, the U.S. District Court for the District of Montana determined that the IRS had failed to follow the required procedures for notice and comment. The hearing on February 7, 2020, was part of the more formal rulemaking procedures. The final regs. made no substantive changes.
The final regulations indicate the Treasury Department’s desire to protect donor privacy and reduce the burden of filing organizations. While the Internal Revenue Code requires 501(c)(3) organizations and 527 organizations to provide the names and addresses of large donors, there is no law requiring that any other tax-exempt organization must do so. However, all tax-exempt organizations must maintain detailed records of donations of $5,000 or more, and must be prepared to provide the names and addresses of those donors if requested during an IRS examination (“audit”).
Effective January 31, 2020, nonprofit organizations applying for federal tax-exempt status using Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, must file the form electronically. There is a 90-day transition period during which the IRS will continue to accept paper filings of Form 1023, but paper submissions will no longer be accepted after April 30, 2020.
Applicants will need to register for an account on pay.gov, and then enter “1023” in the Search box. The user fee remains at $600.
The IRS believes that the new system will make the Form 1023 application process smoother and the approval process faster.
PARKING TAX REPEALED!
On Friday, December 20, 2019, the President signed the ‘Further Consolidated Appropriations Act of 2020,” retroactively repealing the tax on transportation fringe benefits.
For the last two years, many nonprofits have been paying taxes on the commuter benefits provided to employees. Organizations may file an Amended Form 990-T and state returns to claim a refund for taxes paid on transportation fringe benefits provided after Dec. 31, 2017.
The IRS issued guidance on how to get a refund for organizations that paid UBIT on transportation fringe benefits (“parking tax”), which was recently repealed (see https://www.irs.gov/forms-pubs/how-to-claim-a-refund-or-credit-of-unrelated-business-income-tax-ubit-or-adjust-form-990-t-for-qualified-transportation-fringe-amounts).
Unfortunately, the guidance does not expedite the refund procedures, but instead it requires organizations to file a complete and accurate amended 990-T. We are still hoping that some sort of expedited refund will be offered, including a way to adjust NOL carryforwards, obtain refunds of 2019 estimated taxes without having to file a 990-T, and some assurance that amending the 990-T won’t increase an organization’s chances getting an IRS audit. We will post on our website and on LinkedIn if such procedures are announced.
For a discussion of the history of the tax, please see Transportation Fringe Benefits.
Private Foundation Flat Tax
On Friday, December 20, the President signed the ‘Further Consolidated Appropriations Act of 2020,” eliminating the 1% and 2% tax brackets for investment income of a private foundation and replacing them with a flat 1.39% tax rate.
Private foundations will no longer need to ensure that current year qualifying distributions exceed the average of the prior five years in order to benefit from a lower tax rate since all private foundations will be subject to the same rate. One benefit of the change is that private foundations will be able to make increased distributions during times of disaster without being concerned that it will cause them to fall into the higher tax bracket in subsequent years.
The 1.39% tax rate is effective in the private foundation’s tax year that begins after December 20, 2019.
Form 1099 – Make Your List, Check it Twice
During an IRS examination of a nonprofit organization, the IRS will invariably ask for all of the Forms 1099 that were issued for the year. It will compare those forms to the General Ledger, looking for journal entries that appear to be payments to independent contractors for which there is no corresponding Form 1099.
If they find any, it can become expensive. In addition to a penalty for failure to file the 1099 with the IRS and another penalty for failure to furnish a copy to the vendor, the nonprofit organization may also be subject to 24% (formerly 28%) backup withholding.
Translation: If a nonprofit organization paid a vendor $10,000 and forgot to send a 1099, it could face a tax of $2,400 plus several hundred dollars in penalties.
- Maintain an updated annual list of all payments to nonemployees
- Obtain a contemporaneous Form W-9, Request for Taxpayer Identification Number and Certification, from every recipient BEFORE making payment, and keep the W-9 on file
- Prepare Forms 1099 in mid-January
- Have CFO or equivalent double-check the prepared forms against the general ledger for completeness and accuracy
- Document the justification for any vendor or nonemployee who received a payment but is not getting a 1099
- Common exceptions include: the vendor is a C-Corp or is a foreign payee, or the payment amount is below $600
- There are other exceptions, consult your tax advisor
- File with IRS and furnish a copy to recipients by January 31 (other due dates apply under various circumstances, but for simplicity, we recommend a January 31 deadline)
Mileage Rates Going DOWN in 2020
The IRS announced the standard mileage rates used for computing deductible costs:
Business Miles: 57.5 cents/mile, down from 58 cents in 2019
Medical and Moving Miles: 17 cents/mile, down from 20 cents in 2019
Charitable Miles: 14 cents/mile, unchanged
“What’s Our Policy?”
If you don’t have a whistleblower policy, a document retention and destruction policy, and a conflict of interest policy, adopt one now!
If your nonprofit organization’s governing body adopts these policies before the end of your current tax year, you can say “Yes” to those questions on Form 990 Part VI. The IRS considers the adoption of such policies to be part of good governance and generally considers organizations without those policies to be a higher examination risk.
Taxable Tokens of Appreciation – From Gift Cards to $25 Holiday Hams
So you are feeling festive, and you want all your employees to know you appreciate their hard work in 2019. But before you dash to the Mall (or your favorite website), here are a few reminders:
Cash Equivalents are Taxable to the Employee
Sad but true. Any gift card or certificate, whether redeemable at a restaurant, movie theater, store, or website, must be included in the employee’s taxable compensation. Cash equivalents are not considered “de minimis” in any amount and cannot be excluded. The only exception is small amounts of cash provided for an occasional meal or transportation to enable an employee to work unexpected overtime. Such cash is not excludable for expected overtime hours (although reimbursements under an accountable plan may be excludable from taxable compensation under the right circumstances).
De minimis Noncash Gifts are Not Taxable to the Employee
Small items such as flowers, candy, books, a fruit basket, occasional tickets for entertainment events, or similar items given as holiday gifts may be excludable if the following is true:
- It is done infrequently,
- The nominal value is so small as to make accounting for it unreasonable or impractical,
- It helps promote health and productivity of employee, and
- It is not a form of disguised compensation.
Many nonprofit organizations believe that as long as the value of the item is less than $25, then it is de minimis. However, there is no primary authority that sets $25 as the limit. Employers should determine what constitutes “nominal value” based on the facts and circumstances. In one instance, the IRS took the position that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
Final Pre-Filing Review
The last three items for tax-exempt organizations to check before sending Form 990 to the IRS:
● Confirm you are using the nonprofit organization’s current mailing address (which may not be the street address) and current phone number on Page 1.
● Double-check the “NO” answers on pages 3-6. “YES” answers probably required some discussion and explanation, but the “NO” answers sometimes get overlooked.
● Review pages 9 and 10 to ensure everything is in the right column. The rows are the natural classification of revenue and expenses, and the columns are the functional classification. Putting the right number on the right row but the wrong column can affect the organization’s unrelated business income and its public support calculation.
Who Are They Going to Call?
Chances are, they won’t call; they will write.
Every nonprofit organization should designate an individual responsible for receiving communications from the IRS and put that person’s name on Form 990 Part VI line 20, “state the name…of the person who possesses the organization’s books and records.”
Many 990 filers simply put “The Organization” rather than the name of an individual. Generally, the IRS will contact a nonprofit organization by written correspondence addressed to the person listed on Part VI line 20. If the addressee is “the organization,” then correspondence will often be delayed in the mailroom or with the receptionist. It is possible that the person who opens the correspondence will not know how to respond, and the letter may be set aside and forgotten.
The issue does not go away when the first IRS notice is ignored. The second notice is always worse than the first, and the third notice can be downright intimidating!
The designated person should be listed by name on Form 990 line 20 so that correspondence will be addressed to him or her. The person should be someone who can be relied upon to share the communication and respond appropriately, especially regarding confidential information.
Did you know? Nonprofits with diversified revenue portfolios experience lower risks of dissolution.
Revenue diversification has a positive effect on the long-term financial health of a nonprofit organization, according to a recent study focused on 501(c)(3) public charities from 2005 to 2015 (Lu, Shon, & Zhang, 2019).
Furthermore, nonprofit organizations that engage in commercial activities, such as program services and the sale of goods, have higher survival prospects in turbulent economic environments than nonprofits that receive income primarily from grants and donations. The adoption of business management practices helps nonprofits improve efficiency and capacity, and revenue from program services gives nonprofits more flexibility and stability. As a result, commercial nonprofit tends to experience improved financial self-sufficiency and organizational longevity.
Donor Acknowledgements: When and How to Write Them
If you are a tax-exempt 501(c)(3) organization:
For your donors to receive a tax deduction for making a charitable donation, they must have a receipt. For donations less than $250, a credit card slip or a canceled check is generally sufficient. However, for donations of $250 or more, donors will need a “contemporaneous written acknowledgment” from you prior to filing their own tax returns. The receipt should include the name of your organization, the amount of the gift, and a description of the goods and services received or an explicit statement that says, “No goods or services were provided in return for this contribution.” Failure to provide the proper receipt can result in the donor’s charitable deduction being disallowed.
If the donor receives a substantial benefit in return for the donation, then the threshold drops from $250 to $75. Failure to provide the proper receipt can result in a penalty on the charity of up to $5,000 per event.
If you are a tax-exempt organization other than a 501(c)(3) organization:
Every solicitation must contain an express statement that the gift/donation/contribution is not tax-deductible as a charitable contribution. Failure to make the proper disclosure can result in a penalty of $1,000 for each day the failure occurs.
The easiest way to reduce your nonprofit organization’s chances of an IRS examination? Distribute a complete copy of your 990 to the entire Board before filing it.
The IRS is moving away from “random sampling” when selecting which nonprofit organizations to audit. Instead, it analyzes the data from your Form 990 and Form 990-T, looking at specific “trigger questions.” One of the important trigger questions is Form 990 Part VI, line 11. Answer “yes” by providing a copy of the complete Form 990 to the entire governing body prior to filing. Don’t redact anything. Don’t just send it to the Finance Committee or the Audit Committee. And share it before you file, not after.
Note that the governing body need not vote to approve the Form 990; technically they don’t even have to look at it (although we recommend that they do!). All that is required is that you provide them a copy, which can be as simple as emailing them a pdf.