990 hot topics - snap · donor contributions •property contributions over $5,000 –recipient...

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Providing Tax, Auditing, Accounting & Controllership, Technology Solutions,

Consulting, and Wealth Management Services Since 1964.

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990 Hot Topics

Andrea Newman, CPA

April 20, 2016



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Discussion Topics

• Donor Contributions

• Unrelated Business Income

• Political Campaign and Lobbying Activities

• Board Review of Form 990

• Compensation – Reasonable or not?

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Donor Contributions

• Contributions – cash, property, or services – Amount reportable by the organization may not

equal the amount deductible by the donor • Ex. Contribution is required to be valued at fair market

value on the organization’s books, yet under current tax law, the donor’s deduction is limited to cost basis

– Donated Services or the use of facilities – No deduction is allowed • Includes discounts provided on sales of goods



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Donor Contributions

• Gift Acceptance Policy

– Decide before gifts are offered whether the organization is equipped to handle

– Procedures to follow

• Substantiation of Contributions

– Acknowledgement of Contributions

– IRS Publication 1771, “Charitable Contributions-Substantiation and Disclosure Requirements

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Donor Contributions

• Cash Gifts of Less than $250

– Not required to provide written contemporaneous acknowledgement (unless the contribution is a quid pro quo contribution of $75 or more)

– $250 threshold applied to each contribution separately (unless part of a series of related contributions)

– Donor’s written proof through bank records or credit card records



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Donor Contributions

• Cash Gifts of $250 or More

– Required to provide written contemporaneous acknowledgement

• Organization not required to report to IRS on behalf of donor

– Can be either paper copy or electronic (i.e. email)

– No prescribed format for acknowledgements

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Donor Contributions

• Acknowledgement must indicate –

– Name of the donee organization

– Date of contribution

– Amount of cash contributed

– Description (but not an estimate of value) of any property contributed

– Whether the organization provided any goods or services in exchange for the contribution** • A description of and good faith estimate of the value of goods or

services provided



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Donor Contributions

• Quid Pro Quo Contributions

– A payment made partly as a contribution and partly for goods or services provided to the donor by the charity

– Must provide written disclosure statement to donors who make a quid pro quo contribution in excess of $75 • Estimated FMV of the goods/services provided to the donor

• A donor may rely on the organization's good faith estimate

• Notify donor the charitable deduction is limited to the excess of the contribution over the value of the goods/services provided

• Potential penalty - $10 per contribution not to exceed $5,000 per fundraising event

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Donor Contributions

• Property Contributions under $250

– Same as cash gifts under $250

• Property Contributions of $250 or More

– Requires written acknowledgement

– Same information as provided for cash contribution

• Description of the donated property but not required to estimate its value



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Donor Contributions

• Property Contributions over $500 but less than $5,000

– Additional reporting requirements for donor

– Organization's responsibilities generally the same as cash or property contributions of $250 or more

• Exception: property contributed is a vehicle, boat, or airplane

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Donor Contributions

• Vehicles, Boats, and Airplanes – Donor’s deduction depends on how the donated

asset is used by the recipient organization • Results in additional reporting rules placed on the

organization

– Must provide contemporaneous written acknowledgement • Required to file Form 1098-C with the IRS

• To be considered contemporaneous – must be provided to donor with 30 days of sale or contribution



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Donor Contributions

• Property Contributions over $5,000 – Recipient organization must complete Form 8283

(Noncash Charitable Contributions), Section B, Part IV • Indicate whether intend to use the property for a use

unrelated to its charitable purpose

• Organization is not acknowledging agreement with the claimed FMV of the property when signing Form 8283

– Must file Form 8282 (Donee Information Return) if the donated property is sold, exchanged, or disposed • Certification of Use for Exempt Purpose or Function for

tangible personal property

• Provide copy of the completed Form 8282 to donor

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Unrelated Business Income

• Definition: Income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational or other purpose that is the basis of the organization’s exemption

• The following three criteria must be present: – A trade or business

– Regularly carried on

– Not substantially related



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Is Your Activity a Trade or Business?

• “Trade or business” – Any activity carried on for the production of income from selling goods or performing services – If the organization is selling goods or

services to generate income, even if it is conducting the activity within the larger group of activities related to its exempt purpose, the activity is a trade or business

– While the organization is carrying on its daily exempt function, it could also be carrying on activities that are taxable

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- IMPORTANT FACTOR TO CONSIDER - Whether A Profit Motive Exists



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Is Your Activity Carried On?

• Regularly carried on – If activities show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations – Key: The frequency in which for-profit operates

• If an activity is a type that a for-profit entity would conduct on a year-round basis, the same activity by an exempt entity will not be “regularly carried on” if it is for a few weeks

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Is Your Activity Not Substantially Related?

• Related to Exempt Purpose – There must a substantial causal relationship – The activity must contribute importantly to the accomplishment of

the exempt purpose (other than the organization’s need to produce income)

• Size & Extent – Particular emphasis is placed on the size and extent of the activity – If an activity is conducted on a scale larger than reasonable

necessary to carry out the exempt purpose, it is more likely to be treated as unrelated

• Dual Use of Assets & Facilities – Use for both exempt and commercial purposes will not necessarily

exempt the income derived from commercial use unless the business activity “contributes importantly” to the accomplishment of exempt purposes



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Substantially Related Income

• Factual Question: Is there a relationship between activity and accomplishment of organization’s exempt purpose? – Direct relation to the organization’s exempt

purpose.

• IRS compares incorporation documents and operations

• New activities should be reviewed to ensure consistency with exempt purpose

• Just because an activity raises needed funds for the organization does not mean that the activity is exempt

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Substantially Related Income

• Substantially Related: Depends on facts & circumstances of each case

– Factors that the IRS and courts have relied on in concluding that an activity is not substantially related: • Fees charged to the general public are comparable to commercial

facilities;

• Only those that purchase the goods or services are benefited and the benefits are in direct proportion to the fees charged;

• The organization furnishes and operates the facilities through its own employees who perform substantial services in providing the activity; and

• Maximization of profit is a predominant element in the exempt organization’s conduct of the activity.



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Exclusions from UBI

• Volunteer Labor – Activities in which substantially all (85% or

more) work is performed by volunteers

• Convenience of Members – Activities operated for the convenience of

members, students, patients, or employees

• Donated Merchandise – Sales of merchandise that is substantially all

(85% or more) donated to the organization

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Exclusions from Taxable Income

• Dividends

• Interest

• Annuities

• Royalties

• Rental income from real property

• Income from certain forms of research



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Royalties

Tax, duty or compensation paid to owners of a patent, copyright, mineral interest, or other property right for the use of it or the right to exploit it

• Royalty exclusion includes: – Overriding royalties

– Net profits royalties

– Royalty income received from licenses by the University as the legal and beneficial owner of patents assigned to it

• Exception: Royalty income derived in part from the performance of services – payment will not constitute royalty income

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Rents

• Rules vary depending on whether they are derived from real or personal property or from a mixed lease of both real and personal property

• Real Property – Generally, rents from real property are excluded:

– Property is not debt financed

– Additional services are not rendered

– Are not dependent on percentage of profits



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Rents

• Rental of real estate is generally not taxable

• The following may be taxable: – Rental based on income or profits of lessee is taxable

– Services other than customary rental may taint rental

– Portion for personal property rental is generally taxable

– Parking rental is generally taxable

– Hotel income is generally taxable

– Debt-financed rental is generally taxable • Special rules that apply to Universities, i.e. “qualified

organizations”

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Rents

• Personal Property – Generally, rents from personal property are excluded only if there is a mixed lease and the rents attributable to the personal property are an “incidental” part of the total rents received under the lease

• Rental of personal property is generally taxable – Ignored as incidental if value is 10% or less

– Separated, if between 10% and 49%

– If 50% or more – then it’s all taxable



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Rents

• Services provided with the rental – Other than customary landlord/tenant maintenance – For benefit of the tenant – May render entire rental as taxable

• Examples: – Supplying of maid or linen services services – Furnishing of heat and light not services – Cleaning of public entrances, exits, stairways, or lobbies not

services – Collection of trash not services – Renting of parking spaces where attendant is on duty services – Providing security services to a parking garage services

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Potential UBI-Generating Activities-

Advertising

• Any language which is an inducement to purchase a product or service

• Qualitative or comparative language

• Price information

• Indication of savings

• Endorsements

• Call to action



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Advertising

• Examples of Activities Which May Generate Advertising Income – Sports programs

– Scoreboards

– Sponsorships of a departmental newsletter

– Student newspaper

– Periodical advertising

– Web-site advertising

– TV & radio broadcasting rights

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Advertising

• Exclusivity Arrangements – Generally not UBI:

• Exclusive sponsorship as an arrangement that acknowledges the payor as the exclusive sponsor of an exempt organization’s activity, or the exclusive sponsor representing a particular trade, business or industry

– Generally is UBI: • Exclusive provider arrangement is defined as one that limits

the sale, distributions, availability, or use of competing products, services or facilities in connection with an exempt organization’s activity



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Investment Income: K-1’s from Partnerships, S-corps, LLC’s

• Included in UBTI: – Partnership, S-Corp, LLC Income

• Look for footnote or Code “V”

– Passive income generated through use of

borrowed funds (specifically debt-financed)

– Understand what is generating the partnership or S-Corp Income to determine if it is Unrelated Business Income

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- MISCONCEPTION- You do not need to be a general partner or

controlling member for UBI to be generated.



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Investment Income: K-1’s from Partnerships, S-corps, LLC’s

• Other Considerations:

– State Tax Filings

• Some states have no UBI threshold for filing

– International Filings

• $10,000 penalties for not filing

• Forms to look for – 926, 8858 and Reportable Transaction Filings 8886

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Political Campaign Activity

• Any activity that supports or opposes a candidate for elective federal, state, or local public office

• A political expenditure is any expenditure for a political campaign activity (payment, distribution, loan, gift of money)

• Must provide a detailed description on Schedule C of Form 990 of any direct and/or indirect political campaign activities



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Political Campaign Activity

• Prohibition against Section 501(c)(3) entities participating in political activities is absolute – possible loss of exemption

• Excise tax for political expenditures – Section 4955 tax – Organization initial tax = 10% of political expenditure – Organization Manager Initial tax = 2 ½% of political

expenditure

• Any activity that resulted in Section 4955 tax must be corrected

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Lobbying Activity

• Activities intended to influence foreign, national, state or local legislation

• Generally, an organization is engaged in lobbying

– Contacts, or urges the public to contact, members of a legislative body to propose, support, or oppose legislation or the government’s budget process; or

– Advocates the adoption or rejection of legislation



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Lobbying Activity

• Reportable activities include those conducted with volunteers as well as employees – Sending letters or publications to government officials or

legislators – Meeting with or calling government officials or legislators – Sending or distributing letters or publications, such as

newsletters and brochures, to members or to the general public – Using direct mail, placing advertisements, issuing press releases,

holding new conferences, or holding rallies or demonstrations

• An organization can lose its exemption if lobbying is a substantial part of its activities

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Lobbying Activity

• Lobbying Election – 501(h) – To minimize uncertainty and to allow an organization

the opportunity to do a limited amount of lobbying – Establishes more precise standards for determining

whether a Section 501(c)(3) organization’s legislative activities are substantial

– Eligible organizations that make the lobbying election can spend a specified amount to influence legislation without risking the organization’s tax exemption • Amount exceeding the prescribed limitation are subject to a

25% excise tax



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Lobbying Activity

• Advantages of Election – Organization engages in more than a

de minimis amount of lobbying each year

– Volunteers participate in the organization’s lobbying activities

– Organization’s lobbying expenditures fluctuate significantly from year to year

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Lobbying Activity

• Disadvantages of Election

– Organization’s lobbying activities focus on grassroots lobbying

– Organization is part of an affiliated group

– Lobbying expenditures likely to exceed $1 million



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Board Review of Form 990

• Public document and readily available at www.guidestar.org to the general public

• Form 990 not solely a reflection of financial activities

– Financial information

– Program information

– Information on organization’s governance practices

http://www.guidestar.org/

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• Form 990 indicates to the public how well the board is doing their job

• Focuses attention on whether organizations have policies and procedures in place that are considered to be best governance practices – Form 990 inquires about the existence of policies and

procedures throughout the return

– Responses to the various questions allow the public to assess the organization’s governance practices



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• IRS encourages more board involvement in the Form 990 review process (i.e. Form 990, Part VI)

• Encourage directors to become more aware of the importance of tax-exempt reporting compliance and related governance issues

• Review should include the appropriate financial and executive officer, as well as the board

• Demonstrate the organization’s care in engaging the appropriate review of the form may be of interest to potential donors

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• Specifically review for the following: – Does the return appear to be complete?

– Does the information contained in the return seem reasonable give the director’s knowledge of the organization?

– If the director is aware of any transactions conducted with an insider or an organization controlled by an insider, are these transactions disclosed?

– If the director is aware of organizations related to the filing organization, are the related organizations disclosed in the return?

• Form 990 is lengthy and intricate – important to accurately reflect the organization’s operations



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Compensation

• Compensation Policies and Procedures

– Not required by the IRS

– IRS perception of lack of policies and procedures

– Proper policies and procedures for determination and documentation

• Compensation Committee

– Careful documentation of duties and special skills

– Substantiation of governing board approval

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Compensation

• Excess Benefit Transactions (EBT)

– Definition: Any transaction in which an excess benefit is provided by the organization (either directly or indirectly) to a disqualified person

• Paying compensation that is not reasonable for the services provided

– Excess Benefit: Economic benefit provided > value of services provided



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Compensation

• Automatic Excess Benefit: Compensation paid but not reported (i.e. on a Form W-2 or Form 1099) – Common forms of unreported compensation

• Personal use of the organization’s equipment (e.g., laptop) or facilities

• Expense allowances not under an accountable plan (e.g., monthly care allowance)

• Foregone interest on loans from the organization to the disqualified person

• Liability insurance premiums paid by the organization

• Certain bonus payments (e.g., based on a percentage of income and/or with no topside limit)

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Compensation

• Reasonable Compensation – Amount of compensation a similar enterprise

(taxable or tax-exempt) would pay for similar services under similar circumstances

– Compensation includes anything a disqualified person receives from the organization in exchange for services rendered

– All items of a compensatory nature, whether or not included in the individual’s taxable income, are considered in determining if an individual’s total compensation is reasonable



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Compensation

• Defensive Guidance on Compensation Arrangements

– Regulations establish a rebuttable presumption

• Compensation arrangement approved in advance

• Governing body relies on appropriate comparable data

• Governing body adequately documents its actions

– IRS must develop its own evidence

– Well-documented and persuasive data will make it difficult for the IRS to rebut the decision

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Questions?



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Contact

Andrea Newman, CPA

Nonprofit Tax Director James Moore, CPAs www.jmco.com

[email protected]

352.378.1331 X2261

990 hot topics - snap · donor contributions •property contributions over $5,000 –recipient...

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