On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act. Major benefits include tax cuts, business credits and subsidies for state and local construction bonds. Two specific areas affect tax-exempt organizations:

1. Exemption  of payroll taxes for qualified employees. For qualified employees hired between February 3, 2010 and January 1, 2011, the employer’s share of Social Security taxes (6.2%) on salaries/wages earned after March 18 will be “credited” as reported under the quarterly payroll tax filings. Beginning with the second quarter (March – June) filing, Form 941 has been revised to include the exemption. In order to be considered a “qualified employee” the individual must have been unemployed during 60 days prior to starting work or have worked fewer than 40 hours during the 60 day period; didn’t replace another employee unless separation was voluntary or for cause; and no relationship to employer.
2. $1,000 annual business tax credit for each new employee retained for a least one year. This credit is 6.2% of the employee’s wages during the 52 consecutive week period, up to $1,000.

So what are the reporting requirements?

Beginning with the 2nd quarter reporting period, complete the additional items on Form 941, beginning with line 5a. The exemption can be applied to a future reporting period, are an overpayment may be requested.

For each “qualified employee”, retain a completed copy of W-11, “Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit”.

How does a tax-exempt organization claim the business tax credit? The IRS has not finalized how T-E organization will report the tax credits, but speculation has been Form 990-T. Stay posted for future clarification.

Even if your tax-exempt organization missed the May 17th Form 990 deadline, the IRS encourages organizations to go ahead and file the required form. Because these small tax-exempt organizations are vital to local communities, the IRS is encouraging compliance after the deadline. To help preserve the organization’s tax exemption, the IRS will be providing additional guidance soon. For more information, see the May 19, 2010 communication from Doug Shulman, IRS Commissioner.

When the Sarbanes-Oxley Act was signed into law on July 30, 2002, it overhauled corporate governance practices for publicly traded companies, with a significant emphasis on the role of the board of directors. In the years following, many of the governance policies and practices mandated for public companies were also adopted by nonprofit organizations as their board members began to question their own responsibility for the governance and oversight of their organizations. In 2005, according to a GuideStar survey of nonprofit organizations, 61 percent of of the participants said their organization had made changes in response to Sarbanes-Oxley.

Nonprofit boards had begun to change their focus, but not enough to stop the continued reports of fraud, misuse of assets, and excessive compensation for top executives.  The result was increased public scrutiny, new legislation, and the most significant changes to Form 990 in over 25 years. Those changes effectively required the board of directors to take responsibility for the oversight and governance of their organizations.

Although the fundamental principles of governance have not changed, governance practices have been completely redefined as boards have become more proactive in protecting the mission of their organizations by ensuring compliance with legal, financial, and ethical standards, and monitoring the progress and overall performance of their organizations. Time will tell if the “new” governance paradigm will protect nonprofit organizations from even more burdensome regulation that will divert already limited resources from the mission.

The IRS has projected that 300-400,000 exempt organizations will lose their tax-exemption for failure to file the required annual return. Most tax-exempt organizations are required to file an annual return with the IRS, depending on gross receipts/assets of the organization. Under the Pension Protection Act of 2006, the clock began ticking in 2007.  If your tax-exempt organization has not filed the required return (Form 990, 990-EZ, 990-N, 990-PF) for three consecutive years beginning in 2007, your federal tax-exemption will automatically be revoked by the IRS. Organiztations with a calendar year-end are required to file the annual return (or an extension) by Monday, May 17th.

What are the 2009 filing requirements? Most organizations (excluding churches) under Code Sec. 6033(a) must file one of the following applicable returns:

Form 990 - If gross receipts > $500,000 and total assets > $1,250,000

Form 990-EZ – If gross receipts < $500,000 and total assets < $1,250,000

Form 990-N – If gross receipts are “normally” $25,000 or less.

Form 990-PF – Exempt and taxable private foundations (no threshhold on revenue or assets).

Form 8868 – Application for extension to file the above returns.

These returns are due on the 15th day of the 5th month, following the organizations calendar/fiscal year-end.

For additional IRS information and frequently asked questions and answers, follow this link.

Are you in compliance? You have until midnight tonight, to file the required form.

In March 2010, Congress passed two broad pieces of legislation designed to reform the health care system in the U.S. The new legislation will have a significant impact on employers, including tax-exempt organizations. The following is a summary of several of the provisions that will impact nonprofit organizations, many of which will be effective in later years.

Employer Responsibility. An “applicable large employer,” defined as an organization that employs at least 50 full-time employees during the preceding calendar year, that does not offer coverage to all of its full-time employees, or offers coverage that does not meet certain criteria is subject to an excise tax penalty.

Maintaining Existing Coverage. Employers will be able to avoid certain of the law’s requirements by maintaining the same coverage for their employees after the effective date of the law (March 23, 2010). But keep in mind that at this point, it’s not clear whether minor changes in coverage, even those dictated by insurance companies, will affect the determination that the same coverage has been maintained. These issues will be clarified in future legislation.

Employer Tax Credits. The new law provides for certain tax credits designed to increase levels of health insurance coverage. Tax-exempt organizations would get a 35% credit against payroll taxes.

FSA/HSA/HRA Restrictions.Starting in 2011, employees can no longer receive pre-tax reimbursements from their FSA/HSA/HRA account for non-prescription over-the-counter medications.  In addition, the excise tax on non-qualified HSA withdrawals increases from 10 percent to 20 percent.  Starting in 2013, employee contributions to FSAs will be capped at $2,500 annually, adjusted each year based on the consumer price index.

Employee Reporting. The new law requires employers to disclose on each employee’s Form W-2 the value of the employer-sponsored coverage provided to that employee.

Information Reporting.The new law also changes several tax provisions completely unrelated to health care. One of the most significant changes requires organizations to file Form 1099 for all payments aggregating $600 or more in a calendar year to a single payee, including corporations.

At times the line between related exempt income and unrelated income can be narrow and gray. Because exempt organizations are not required to pay income taxes on “exempt earnings”, there are perceived advantages for developing diverse revenue streams that support the operations of the entity. However because these activities are competing with for-profit (tax paying) organizations, the IRS attempts to impose equality by assessing a tax on unrelated activities.

What is program related and what is unrelated? Here’s an example – A substance abuse center offers educational and counseling services to individuals based on need and income levels, helping them understand the signs of addiction. Because the center’s exempt purpose is rehabilitating individuals with addictions, this revenue stream is directly related to the exempt purpose. However, suppose the center operates a donut shop selling baked goods to the public. Is the donut shop related to the center’s exempt purpose? Probably not.

In order to qualify as unrelated income, the activity must meet all of the following characteristics:
1. Performance of a trade or business (profit motive in the selling of goods or services).
2. Regular activity (based on frequency and continuity, compared to commercial enterprises).
3. Not related to exempt purpose (does not significantly advance the exempt purpose of the organization).

If the activity meets all three requirements, there may be exceptions that eliminate the potential tax. Read the rest of this entry »

Under the Pension Protection Act of 2006, most non-profit organizations are required to file certain information with the IRS. Certain organizations (like churches) are exempt from filing informational returns with the IRS. However most organizations are required to file, and depending on the organization’s gross receipts and total assets, determines which form (Form 990, Form 990-EZ or Form 990-N) to file.

If an organization fails to file the required form for 3 consecutive years, the organization automatically loses their federal tax-exempt status. Revocation occurs on the filing due date of the 3rd year. Form 990s are due on the 15th day, following the fourth month after the organization’s calendar year-end. (Four 1/2 months after year end. If the organization’s year-end is December 31, then the return is due May 15th).

What does this mean to the organization?

1. Must reapply (Form 1023/1024) with the IRS to regain exempt status.

2. Must file income tax return.

3. Pay income tax.

4. Contributors cannot deduct donations to the organization.

How does an organization know if they are required to file a return with the IRS? Review the letter the IRS mailed to you, after they approved or denied Form 1023/1024. This letter, often referred as an IRS Determination Letter, documents whether the organization is exempt from federal income tax and what types of returns are required to be filed.

Questions about exempt status or which form to file? Contact me.

Starting in 2009, exempt organizations must adopt Fin 48 – Accounting for Uncertainty in Income Taxes. According to FASB, adopting FIN 48 is supposed to enhance the transparency of the exempt organization’s activities, much like the IRS’s intentions with the new Form 990. Implementing FIN 48 means exempt organizations are expected to analyze various areas of their operations and disclose any potential tax that may be assessed on uncertain tax positions. FIN 48 analyses may be necessary in many different areas such as state taxation and asset transactions, but a few target areas for all organizations are the purpose and activities, generation of unrelated business income, and excessive compensation arrangements.

FIN 48 will force a closer look at the source of the organization’s funds and the organization’s tax exempt purpose. Analysis in this area is necessary because if the organization strays from its exempt purpose, the income generated could become taxable. FIN 48 implementation requires that the risk of this happening be analyzed and any potential taxes be disclosed. 

This goes along with the second target area, classification of unrelated business income and management’s devotion of time to raising funds unrelated to the exempt purpose. Income unrelated to the exempt purpose of the organization should be taxable and whether or not income is classified as “unrelated” is a tax position. The potential tax liability arising from classifying income as unrelated business income requires a FIN 48 disclosure. 

The last generally applicable target area for exempt organizations is excessive compensation arrangements. If a compensation arrangement is found to be excessive it can result in excise taxes or jeopardize the tax exempt status of the organization. Compensation policies and practices will require analysis and possibly a FIN 48 disclosure of potential tax liability. 

Posted by Jamye Shaffer
RCO – Tax Senior

FIN 48 is an accounting standard that publicly traded companies have been complying with since 2007. Due to many comments and concerns about the standard, the implementation was delayed for nonpublic entities. FIN48 is an interpretation that clarifies accounting for uncertainties in income taxes, but more importantly, it changes the way that resulting liabilities are recognized, measured, presented and disclosed in the financial statements. When a tax return is completed, every answer or number is really a tax position. FIN48 asks the theoretical question, “would that tax position (either taken on a return or expected to be taken on a future return) stand up to examination by the IRS if they have full knowledge of the facts?”. 

Ok that is a bunch of tax talk. How can this standard affect tax-exempt organizations? The Financial Accounting Standards Board actually addressed that issue specifically, in a staff position paper issued last year. There are several FIN48 issues that can affect tax exempt agencies, but the most common are (1) performing services that are not consistent with the organization’s tax exempt purpose and (2) unrelated business income.

The first assessment of any tax position is whether or not the position is more likely than not to be upheld during an IRS examination. If the position would be upheld, then it is NOT an uncertain tax position and there is NO liability.  If the position cannot be upheld, then FIN48 requires a liability to be recorded and disclosed. The calculation of the liability is prescribed but allows some judgement. The recorded liability is the difference between the benefit recorded (full amount) and the amount that would be 50% or more likely to be allowed after the examination. The disclosure will identify this as an uncertain tax position, and will raise red flags for an IRS audit. As reported in the Journal of Accountancy, the IRS is currently proposing companies with more than $10 million of assets to disclose uncertain tax positions on their annual returns. 

Need help in determining what is considered an “uncertain tax position”? See our next post.

Organizations comprised of property owners can be classified into the following four groups:

1. Condominium Associations - comprised of unit owners owning their individual living quarters, having an undivided percentage interest in the common property.

2. Homeowners’ Associations - comprised of members who own their dwellings and the land on which the dwelling sits however the common area/property is owned by the Association.

3. Cooperative Housing Corporations - comprised of residents owning shares of stock or membership certificates, giving them the right to occupy a unit in the cooperative. The Corporation has title to the property (individual units and common area) within the development.

4. Timeshare Developments - comprised of users having access to certain accommodations annually or other repeating basis.  

These organizations are commonly referred to as Common Interest Realty Associations or “CIRAs”. The principle activities for these organizations include: Read the rest of this entry »