The New and Improved GuideStar Nonprofit Profiles: What’s Different and Why You Should Care

By: Deb Nelson1696

If you’ve been out to GuideStar recently, you probably noticed things look different. GuideStar debuted their new Nonprofit Profile on January 20th. Changes include grouping information into four categories – summary, programs and results, financials, and operations; getting away from financial metrics that don’t tell the whole story; and presenting interactive graphs showing trends over several years.

Mission statements are front and center when you click on an organization. You can find detailed information about their programs, access useful financial information without having to look at the normal financial reports, and easily see board of directors and officers along with compensation. The profiles also provide information on board leadership.

Why You Should Take A Look

I urge all nonprofit organizations to go and check out their profile. Organizations should be aware of how they will be perceived by donors and the general public. Lastly, consider claiming your profile to highlight other pertinent information that donors should know. Check out more information about the new look here.

A Nonprofit New Year’s Resolution

By: Ksenia Popke & Dave Studebaker75217522

With the New Year upon us and a fresh start for all, with the time of reflection on 2015 and setting 2016 goals, here is one that will help your organization ensure efficiency, sustainability and compliance. Resolve to improve your process documentation this year. Don’t put it on the back burner, take it one process at a time and before you know, you have created a lasting impression (OR masterpiece).

Nobody wants to spend time documenting what they do. It’s time consuming and you could actually be “doing” it rather than writing it. Employees and management of nonprofits are supremely focused on achieving their mission. It’s easy to organizationally procrastinate until a time when there is more free time or more room in the budget. Just as routine maintenance on your car is important to keeping it running smoothly when you need it, updating your organizations processes and controls is vital to keeping the organization humming.

Efficiency

Documentation of processes provides visibility across an organization likely identifying duplicated efforts and redundant processes. It allows a nonprofit to provide role definition and standardization. Nobody has to reinvent the wheel…and then unknowingly reinvent it again…and again. Efficiency allows a nonprofit to focus on mission.

Sustainability

Good process documentation forms the basis for “organizational knowledge” (as contrasted with individual knowledge). The U.S. Department of Labor reported in its biennial report in 2014 that average employee tenure in the United State is 4.6 years. Many nonprofits would likely report a period of far shorter tenure in their workforces. Good process documentation greatly reduces the training time every instance a position turns over (and thus greatly reduces the cost of turnover to the nonprofit). Sustainable processes allow a nonprofit to thrive and be prepared during periods of expected and, far less convenient, unexpected turnover, saving money to use for mission.

Compliance

Let’s be honest, we’re all human and we all make mistakes. Well documented processes lead to effective internal controls which will prevent or identify and correct errors before they become bigger problems. The only effective way for a nonprofit to ensure it is meeting all regulatory, debt, donor or other requirements is a systematic, documented process. Compliance means continuing to operate without the threat of revocation of tax exempt status, default or lawsuit.

Well documented processes allow a nonprofit to think forward to best accomplish their mission rather than employees spinning their wheels and responding to the “fire of the day.”

Contemporaneous Written Acknowledgements Remain the Requirement

1696By: Deb Nelson

The IRS recently withdrew the September 2015 proposed rules for an optional form that would allow charities to directly report donors’ charitable contributions for substantiation purposes. The IRS received tens of thousands of comments on the proposed rules, mostly opposing the optional reporting.

The top reasons cited for resistance to the proposed rules were:

  • Collection of social security numbers;
  • Fears of this optional reporting becoming mandatory; and
  • Questioning the need for such donee reporting

The proposed rules were aiming to address taxpayers under exam who could not substantiate charitable contributions claimed on income tax filings, and who were requesting charities to file amended tax returns to disclose the contribution. The IRS has stated filing an amended Form 990 for this purpose is not allowed.

Due to the required collection of personal information, such as social security numbers, identify theft and additional cyber security issues were a concern for charities.  Many charities do not have the resources to put additional safety precautions into place in order to maintain this type of data.

Today, donors remain responsible for substantiating charitable contributions. A donor must have a written acknowledgment from a charity for any single contribution of $250 or more in order to claim the charitable contribution deduction on an income tax filing. In addition, the charity is required to provide language on the written disclosure if the donor received goods or services in exchange for a single payment in excess of $75. There are different rules if the donor contributed a vehicle, boat or airplane with a value of more than $500.

For more information on charitable contribution substantiation and disclosure requirements, see IRS Publication 1771.

Form 1023-EZ in the Spotlight

By: Deb Nelson1696

The Taxpayer Advocate Service (TAS) recently released its Annual Report to Congress, calling out concern over the new form allowing small tax-exempt organizations to obtain tax-exempt status. The report claims Form 1023-EZ makes recognition of tax-exempt status virtually automatic for most applicants and identifies the form as the third most serious problem, out of a total of 24 most serious problems. Problems snagging first and second place was the way the IRS interacts with taxpayers and the use of user fees to fill funding gaps.

The short form was introduced to help the IRS address the serious backlog of exemption applications.  Certain organizations may qualify to submit the Form 1023-EZ if the organization expects gross receipts of less than $50,000 each year for the first three years and total assets of less than $250,000.

The three-page form requires organizations to “attest” versus “demonstrate” that they meet the requirements for tax-exempt status. TAS analyzed a sample of applications approved by the IRS and found 37% of organizations did not meet requirements for tax-exempt status.

TAS is recommending the IRS revise the form to require submission of organizing documents (articles, bylaws, trust agreements, etc.) and a description of activities, including related revenues and expenses. TAS estimates adding these steps to the process would require an additional one-hour of time to the IRS review process.

The IRS identified evaluation of the Form 1023-EZ in its Priorities for FY 2016. In addition, the IRS stated it will continue to review organizations that were granted tax-exempt status through the short-form and will begin post-determination compliance enforcement. The TAS says this approach invites noncompliance, diverts tax dollars and taxpayer donations, and harms taxpayers that could have adjusted their organizing documents or activities they pursued from the beginning. The TAS calls the IRS audit strategy of these small organizations a misallocation of IRS resources and an unnecessary burden on compliant organizations.

Does Your Organization Have the Right Year-End?

By: Deb Nelson1696

Have you found yourself asking why your organization operates on its current year-end? Whether it is a calendar year or fiscal year, organizations may benefit from examining whether the current year-end is still appropriate. Considerations may include:

Revenue Timing

If a large portion of your revenue is coming in right before year-end, it may make budgeting and year-end responsibilities more difficult. Changing the year-end to align with the organization’s operations may provide more flexibility and easier comparison to budget. For example, December 31 is right around the corner and many organizations receive substantial contributions in the last quarter of the year. It may make sense for those organizations to consider a June 30 or September 30 year-end.

Grant Cycles

If your organization is making or receiving grants on a specified schedule, this timing should be part of the conversation. If you receive significant grant revenue that has fiscal year-end timing and you operate on a calendar year-end, consider if there is benefit to align with the grant cycle to aid in the budget and reporting process.

Users of Your Financial Information

Do you have third parties requesting your audit and tax return by a specific date during the year? Consider whether a change in year-end would make it easier to meet those timing restrictions. Early communication with third party users is beneficial to gain a full understanding of potential implications that may arise with a change. Financial institutions, grantors, and regulators are some of the parties to reach out to. You should also contact your accounting firm to discuss timing and availability for fieldwork.

Audit Reports and Tax Filings

A change in year-end has an impact on the presentation of your financial information, from both an audit and tax standpoint. An organization needs to consider whether they would complete two separate audits to address the change: one for the 12-month period and one for the short-period, or whether they would have one audit spanning a 12+ month period, for example 18 months. In addition, you also must consider the impact on presenting comparative information.  Regardless of what the organization chooses to do from an audit standpoint, a tax return cannot be filed for a period longer than 12 months.  Therefore, a short period return will need to be filed and financial information will be needed even if a longer time frame is used for audit purposes.  State solicitation requirements may also impact the decision for the audit report.  State solicitation reports may require the attachment of audited financial statements which may require an organization to obtain two separate audits due to timing requirements. As discussed above, third party users may also require two separate audits because of timing.

Changing your year end is a relatively easy process.  The year end will need to be approved by your board and likely will require an amendment to your organization’s bylaws (or Articles of Incorporation).  If your organization has not changed its year-end in the last ten years, there is no special form to request the change from the IRS. Instead, organizations need to file a short period tax return and indicate “Change of Accounting Period” on the top of page one. If there has been a change in the last ten years, the organization must file Form 1128 – Application To Adopt, Change, or Retain a Tax Year, with the short period tax filing. If your organization files Form 990-N, you must report the change on Form 990, Form 990-EZ, Form 1128, or by sending a letter to the IRS.

New Federal Tax Act has Impacts for Exempt Organizations

1245By: Kim Hunwardsen

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. The PATH Act contains several provisions affecting tax exempt organizations.

Contribution Permanent Tax Extenders

The PATH Act permanently extends, for all taxable years beginning after December 31, 2014, a number of federal tax provisions intended to incentivize charitable giving, including:

  • Tax-free distributions from Individual Retirement Accounts (IRAs) for Charitable Purposes: This provision allows individuals age 70 ½ or older the ability to take tax-free distributions from individual retirement plans (IRAs) when donated to a tax-exempt charity. The maximum amount that can be donated per year is $100,000 and the recipient charity may not be a supporting organization or a donor-advised fund. Absent this provision, the distribution would first be treated as taxable income to the individual and then treated as a charitable contribution deduction.
  • Qualified Conservation Contributions: Individuals or corporations receive an increased charitable contribution deduction for contributions of real property interests for conservation purposes. The normal 30% of adjusted gross income limit for appreciated property gifts is increased to 50% and the carryforward limit is increased from five years to 15 years.
  • Contribution of Food Inventory: Taxpayers other than corporations are allowed enhanced deductions for donations of food inventory. The deduction is the lesser of basis plus one-half of fair market value in excess of basis or two times basis.
  • Adjustment of basis in S corporation stock: When a Subchapter S Corporation gives appreciated stock or land to charity, only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair-market value deduction is claimed by the shareholder.

Another Permanent Tax Extender 

Payments by Controlled Subsidiaries to Parent Tax Exempt Organizations: In general, certain passive income (such as rents, interest and royalty payments) is excluded from taxable unrelated business income (UBI) by statute. However, IRC 512(b)(13) provides that such payments received by a tax exempt organization from entities that it controls (more than 50 percent ownership of stock or beneficial interest) are generally taxed as UBI. An exception to the UBI treatment (subjecting only the amount in excess of FMV to tax) was made for payments made pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such contract under substantially similar terms). This exception had to be extended every year and now is made permanent for years beginning after December 31, 2014.

Other Provisions

Mandatory Application Process for Recognition of 501(c)(4) Exempt Status:  In the past, organizations intending to operate under 501(c)(4) were not required to file an exemption application with the IRS. Potential 501(c)(4) organizations could either self-certify their exemption or complete IRS Form 1024 in order to receive an IRS determination letter recognizing their exempt status.

Under the act, all 501(c)(4) organizations that are organized after December 18, 2015, must provide notice of formation and intent to operate as a 501(c)(4) organization no later than 60 days after formation. The notice must include name, address, taxpayer identification number, date on which (and the state under the laws of which) the organization was organized, and a statement of purpose of the organization. There will also be a user fee required with this notice. The IRS will then provide a letter acknowledging the registration within 60 days of receiving the one-page notice. This does not grant the organization a favorable determination. If the organization wants additional assurance of a favorable determination, they must still complete an exemption application on a newly created Form 1024.

501(c)(4) organizations already in existence as of December 18, 2015 that have never filed a Form 1024 or a Form 990 must file a one-page notice of registration with the IRS within 180 days of December 18, 2015. This means that all 501(c)(4) organizations must either have previously filed a Form 1024, Form 990 or the one-page notice of registration within the appropriate time frame. The IRS is expected to release the one-page notice of registration form early in 2016.

Declaratory Judgments Available to All Section 501(c) Organizations:  The PATH Act permits an exempt organization to seek a declaratory judgment from a federal court, when related to an IRS exemption ruling under Internal Revenue Section 501(c). This provision provides greater recourse for organizations whose exempt status has been revoked, denied, or where a determination letter was failed to be issued by the IRS.

IRS Required to Issue Procedures for Administrative Appeals to the IRS Appeals Office: The PATH Act requires the IRS to create procedures under which an-exempt organization facing an adverse determination may request an administrative appeal to the IRS Office of Appeals. The provision applies to determinations made after May 19, 2014.

Federal Gift Tax on Gifts to Certain Exempt Organizations:  Effective for gifts (contributions) made after December 18, 2015, Congress addresses the issue of whether contributions to 501(c)(4), (c)(5), and (c)(6) organizations are subject to federal gift tax. The IRS has not enforced the gift tax in this situation but has also not ruled that it is not applicable. This provision makes it clear that gifts to 501(c)(4), (5) or (6) organizations are exempt from the gift tax. Because of anticipated IRS administrative forbearance, gifts made on, or prior to, December 18, 2015 will not likely be subject to gift tax.

Charitable Contributions to Agricultural Research:  Effective on or after December 18, 2015, a higher individual charitable contribution level will be allowed on charitable contributions (up to 50 percent) made to an agricultural (ag) research organization. A qualifying ag organization will be directly engaged in the continuous active conduct of ag research (as in university programs), and during the year the contribution is made, the ag organization agrees to use the funds for research purposes before January 1 of the fifth calendar year that begins after the date of the contribution.

Church Plan Clarifications:  Effective on or after December 18, 2015, the IRS is prohibited from aggregating otherwise eligible organizations of a church plan to be treated as a single plan for non-discrimination purposes, thereby allowing for less restrictions on participants receiving disproportionate benefits under the plan and more flexibility for church plans to decide which other church plans they will associate. The provisions also allow church plans to offer auto-enroll accounts, similar to 401(k)s, relaxes maximum benefit accruals for grandfathered church defined-benefit plans and makes it easier for church plans to reorganize or invest in collective trust arrangements.