Article Archives: Karen Dunn

Posted by: Karen Dunn

The 21% tax on compensation over $1 million could apply to more organizations than one would think. This tax applies not only to compensation over $1 million but also to excess parachute payments. And those parachute payments need not even be over a million dollars to be subject to the tax. It could also apply with respect to volunteers or low wage employees.

Clarification, provided in the recently published proposed regulations [Reg-122345-18], helps explain how this could be true and provides exceptions which give some relief in these situations.

About the Tax

First, the tax is imposed on remuneration over $1 million paid by an applicable tax-exempt organization (ATEO) or its related organizations to a covered employee.

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Posted by: Karen Dunn

After a long wait, the IRS finally issued proposed regulations on the unrelated business taxable income (UBTI) “siloing” rules on April 24, 2020.

These rules, under section 512(a)(6) of the Internal Revenue Code, require separately computing UBTI for multiple unrelated businesses. Thus, one cannot use a loss from one unrelated business to offset the taxable income of another unrelated business.

Here are the highlights:

Use of NAICS Codes

The proposed regulations allow the use of only the first two digits of the NAICS codes, along with considering all the facts and circumstances, to identify separate unrelated businesses. Currently,

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Posted by: Karen Dunn

At long last, the process for applying for exemption has entered the twenty-first century. Currently the Form 1023, the application for exemption under Internal Revenue Code Section 501(c)(3), may be submitted electronically. However, after April 30, 2020, the IRS will only accept electronic filing of the form and online payment of the user fee. Paper copies of Form 1023 will no longer be accepted.

The IRS expects the change to improve processing time, similar to how Form 1023-EZ electronic submissions did when that form first went on-line in 2014.

“Filing electronically reduces errors, and we believe this will help provide a smoother application process for those seeking tax exemption,”

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Posted by: Cheryl R. Olson · Karen Dunn

This article was originally published in NetRaising.

Your website may inadvertently cause tax risks to your organization. A website communicates an organization’s mission, programs, and events to donors, volunteers, and the community. That is a valuable service. However, it can also communicate taxable unrelated business activities, prohibited or limited activities, and noncompliance with tax rules. Knowing basic guidelines gives individuals responsible for the website the ability to recognize potential risks and bring them to the attention of management. Management can then take appropriate action. Even if management is very savvy, the webmaster may be the first to notice when something changes,

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Posted by: Karen Dunn

You’ve finally squared away your organization’s 2018 Form 990 (or 990-PF or 990-EZ) when your accountant informs you the organization still owes tax on qualified transportation benefits provided to your employees. What? It’s true.

Since this new expense came into effect with the 2017 Tax Cuts and Jobs Act (TCJA), we’ve dedicated several articles in our newsletter to covering its impact. Under section 512(a)(7), added by the TCJA, tax-exempt organizations must increase unrelated business taxable income (UBTI) by amounts paid or incurred for any qualified transportation fringe benefits and any parking facility used in connection with qualified parking.

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Posted by: Karen Dunn

This is updated from an article that was originally published on 8/1/2017.

It is time again to prepare to file the Form 990. Calendar year returns for 2018 are due May 15 and may be extended to November 15. Even fiscal year organizations can start thinking about it or they may be filing for 2017 now. What is your organization’s review process for the return? Does your board review it before it is filed, as the Form 990, Part VI asks?

If the Board of Directors does not require a board review of the Form 990 filed with the IRS each year,

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Posted by: Karen Dunn

The new “siloing” law requiring computing UBI separately for each unrelated business created significant challenges. Notice 2018-67, released last fall, addressed some of these questions. The Notice’s interim guidance can be relied on until formal regulations are adopted. The Notice requested comments, most notably whether NAICS codes should be used to determine the separate trades or businesses, how to treat activities that are not trades or businesses but statutorily included in unrelated business income (UBI), and how to treat partnership income where the partnership has multiple businesses.

Comments were submitted by various organizations such as the American Bar Association,

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Posted by: Karen Dunn

Two questions tax practitioners hear frequently — “What are the risks of an IRS audit?” and “What outcome can we expect if we are audited?” If you ask your tax advisor these or similar questions, it’s likely you will not get an answer. It is not ethical to give tax advice based upon probability of audit risk, and no one can predict the outcome of an IRS examination. However, the IRS recently published its annual examination statistics for exempt organizations, and the numbers can reveal useful information.

Below is a breakdown of the over 6,000 examinations displayed in this most recent IRS report,

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Posted by: Karen Dunn

Now is a good time to update employee expense reimbursement plans, given changes brought about by the Tax Cuts and Jobs Act (TCJA), effective beginning in 2018. The new law disallows tax deductions for some commonly reimbursed business expenses.

Why is this important if your organization does not pay taxes? It is important because now many of these reimbursements may be taxable to your employees. Even if your organization has no unrelated business income and is unconcerned about the disallowed income tax deductions, these items no longer meet the accountable plan requirements and, as such, they do not qualify as tax-free reimbursements to the employees.

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Posted by: Karen Dunn

Beginning in 2018, unrelated business taxable income (UBTI) must be computed separately for each unrelated trade or business. Net operating losses (NOL) from one unrelated trade or business may not be used to offset income from another unrelated trade or business. The unused NOL may be carried forward to future years but may only reduce income from the same trade or business that generated it.

This is a radical departure from previous law, where unrelated businesses, except for advertising or exploited exempt activities, were commingled in computing (UBIT). The new subsection was created in response to concerns that net operating losses from activities in which there is no profit motive were offsetting the income from other unrelated business activities.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

On February 22, 2017, the IRS released data regarding organizations that utilized the 1023-EZ from its inception in July of 2014, through December of 2016.

To conduct their research, the IRS employed a streamlined, online process, which allowed them to collect data from over 105,000 organizations. The 1023-EZ data the IRS collected, however, has raised some questions.

The simplified application process does not require organizations to file supporting documentation with the IRS, such as articles of incorporation or bylaws.

Further, the Form 1023-EZ does not require a narrative of the organization’s activities,

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

Typical year-end tax planning advice for individuals and corporations expounds on the virtues of accelerating deductions and deferring income. Charities and private foundations would be wise to consider the possible impact this advice may have on donations.

It appears likely that income tax rates will drop under a GOP-controlled executive and legislative federal government. There is no clear understanding of the details or what will actually come to pass. However, the consistency in proposed ideas suggests it may be a good time for charities to talk to their donors about the possible tax benefits of accelerating their donations.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

Your charity just received a donation of a painting valued at $6,000. You have diligently sent the donor a thank you note that includes all the information that an acknowledgment must have for the donor to take a charitable deduction. That is a very good habit, but is that all that is required?

Additional forms may have to be filed with the IRS or provided to the donor. Suppose your charity sold the painting during the year. Here, additional reporting is required to the donor as well as the IRS. Many charities are unaware of the additional reporting requirements the IRS imposes on certain types of transactions involving donated personal property.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

It is an election year and a CEO of a charitable, exempt organization personally endorses a presidential candidate at a forum sponsored by another public charity. The sponsoring organization of the event also invites one of the local gubernatorial candidates to speak to their members, but does not invite all of the candidates.

An employee of another public charity writes a letter to the editor of the local newspaper announcing her support for the incumbent mayoral candidate. Her organization also provides free advertisements supporting the incumbent mayor.

Meanwhile, the pastor down the street urges his congregants to get out and vote because no vote is a vote for the other presidential candidate.

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Posted by: Karen Dunn

By Karen L. Dunn, JD, LLM

September 6th is the due date for filing the notification of intent to operate as a 501(c)(4) organization, if the organization existed on July 8, 2016 and is otherwise not excepted from this requirement. Newly created organizations must file the notification and pay a small user fee, no later than 60 days after the organization is established. Failure to file this notice may result in penalties assessed.

A new law requiring organizations exempt under 501(c)(4) to notify the IRS that they are operating as such was enacted in December of 2015. However, it took time for the IRS to develop a process for this notification.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

The Protecting Americans from Tax Hikes Act of 2015 (PATH) was signed into law December 18th and includes many provisions affecting charities. Last month, we focused on the permanent extensions in the bill. This month, we focus on the new notice requirements for self-declared 501(c)(4) social welfare organizations in Code Section 506, added by PATH.

This legislation requires Section 501(c)(4) organizations, established after December 18, 2015, to notify the IRS of its formation and intent to operate as a 501(c)(4) social welfare organization. The notice and user fee must be submitted within 60 days of the organization’s formation and must include:

  1. Name,

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law December 18th, contains some very favorable provisions affecting charities. Some of these provisions provide permanent extensions and some are new administrative procedures. This article focuses on the permanent extensions affecting charities.  However, stay tuned, as next month we will cover some of the new administrative provisions.

Tax-free IRA Charitable Distributions (up to $100,000 per year)

The biggest win for charities in PATH is the provision that made permanent the tax-free IRA distribution to charities.  The provision allows taxpayers to exclude up to $100,000 per year from their taxable income when a charitable contribution is made from a traditional or Roth IRA. 

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

The IRS will be moving forward. Simota Lough, the Tax Exempt and Government Entities (TE/GE) commissioner, announced plans to build the IRS of the future with the Moving Forward Together – The Road Ahead initiative.

Each year, the IRS issues its priority work plan that outlines what the IRS accomplished in the past year as well as what its focus will be for the upcoming year for exempt organizations (EO). For the most part, the 2016 work plan continues efforts begun in 2015, to optimize resources and address significant non-compliance. These efforts will involve focus on five areas – continuous improvement,

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Posted by: Karen Dunn · Amber Busch

By Karen Dunn, JD, LLM and Amber Busch, CPA 

With all the hubbub among accountants about the new tangible personal property regulations, should exempt organizations be concerned, or is it, for them, much ado about nothing?

If you haven’t heard the scuttlebutt, these regulations provide long-awaited guidance on capitalization or expensing of improvements and purchases. The rules are complex, and their impact the business world is widespread. And yes, they do apply to exempt organizations. Specifically, the tangible personal property regulations (TPRs) can be advantageous to organizations that have unrelated business income (UBI) or a for-profit subsidiary.

Under the TPRs certain organizations may expense de minimis amounts paid for tangible personal property,

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

More due diligence and reporting is required than ever before for grant making and, in particular, foreign grants and programs. To maintain its exempt status, an organization must use its assets, including all domestic and foreign grants it may make, exclusively for qualified exempt purposes. Form 990 requires disclosure of whether an organization maintains records to substantiate both the amount of assistance and if eligibility for such grants or assistance is based on the organization’s policies and procedures.

Commonly recognized best practices recommend that charities develop policies, systems, and procedures for pre-grant inquiry, grant monitoring,

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

The Advisory Committee on Tax Exempt and Government Entities (ACT) released recommendations to the IRS last summer for specific changes to UBI reporting and additional guidance. In its report, the committee expounds on the lack of guidance from the IRS on the subject. The ACT points out that such lack of guidance contributes significantly to the reporting errors that the IRS found in their examinations of colleges and universities and proposes that the IRS publish a revenue ruling that provides comprehensive guidance on UBI issues.

Simply put, UBI is taxable income from trades or businesses that are unrelated to an organization’s exempt purpose.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

In an effort to address the frustration expressed by tax practitioners and the IRS regarding the inadequacies of the current Form 990-T, Exempt Organization Business Income Tax Return, The Advisory Committee on Tax Exempt and Government Entities (ACT) recommends a significant redesign of the form.

A line-by-line activities checklist spearheads the redesign. The answers would flow to the Form 990-T, but the checklist would not be open to public disclosure as is the rest of the form. It will include links to education and outreach materials as well as specific worksheets for calculating revenues and expenses for certain unrelated business income activities.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

The IRS has increased its focus on unrelated business income (UBI) reporting. Because of this, the Advisory Committee on Tax Exempt and Government Entities (ACT) released recommendations to the IRS for specific changes to UBI reporting and additional guidance. Although the IRS’s focus is in response to the findings of the IRS’ College and University Compliance Project issued in April 2013, this applies to all exempt organizations, not only colleges and universities.

Many organizations do not fully understand the UBI rules. They are likely to under-report UBI or fail to file a Form 990-T.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

Some small employers are finding themselves in a conundrum in 2014. This year, premiums eligible for the small business health care tax credit must be for qualified health plans (QHP) offered through a Small Business Health Options Program (SHOP) Exchange. However, some counties in some states do not yet offer such plans. What can these employers do?call out box March 2014

Beginning in 2010, the credit was designed to encourage small businesses to offer health insurance coverage to employees.   The credit could cover up to 25% of the cost of health insurance premiums paid by a tax exempt employer.

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Posted by: Megan Ryan · Karen Dunn

By Megan Ryan, CPA and Karen Dunn, JD, LLM

With the holiday season approaching, organizations may find that individuals or groups who benefit from the organization’s services, desire to make year-end gifts to the organization’s employees for their loyal service.

Examples include the parents of private school students providing year-end gifts to their children’s teachers or a hospital patient’s desire to financially thank the medical team that provided excellent care for the patient.

While we all would like the ability to just graciously give or accept gifts from the heart without worrying about tax consequences, many questions arise regarding the tax consequences of such gifts.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

Taking into consideration the government’s budgetary crisis, the Advisory Committee on Tax Exempt and Government Entities (also known as ACT) issued a report suggesting ways that the IRS can leverage its resources in regulating the more than 1.5 million tax exempt organizations, particularly smaller organizations (990-EZ or 990-N filers). The goal is to improve IRS oversight and tax administration with minimal budgetary impact.

The ACT report focuses on three areas:

  1. Form 990-EZ filing threshold;
  2. IRS customer education and outreach; and
  3. IRS information sharing with state charity regulators.

Form 990-EZ filing threshold.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

No prohibition exists against a 501(c)(3) organization using the internet for fundraising, the IRS said in a recently released information letter. Web or email fundraising should comply with the same rules* that apply to other solicitations. Since most organizations do some sort of internet solicitations, organizations must be cautious and aware of the requirements. IRS examination guidelines and the recent information letter highlight recommendations to follow.

IRS Recommendations for Online Fundraising
1. Comply with the Regular Donation Substantiation Requirements

This includes such requirements as the substantiation of quid pro quo contributions of more than $75.

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

On July 2, 2013, the Obama Administration announced the postponement to 2015 of the mandatory employer and insurer reporting requirements under the Patient Protection and Affordable Care Act. This gives employers more time to comply with the new rules. Without this relief, the requirements would apply beginning January 1, 2014.

According to a White House Blog, this will give employers more time to comply with the new rules and the government time to revamp and simplify the reporting requirements. “Since employer responsibility payments can only be assessed based on this new reporting, payments won’t be collected for 2014,” said Valerie Jarrett,

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Posted by: Karen Dunn

By Karen Dunn, JD, LLM

Although the IRS is currently under fire for its practices around screening applications for exemptions, we should assume they are still “open for business,” collecting taxes, and enforcing tax law. Each year the IRS issues its Annual Report and Priority Guidance Plan. This plan outlines what the IRS accomplished in the past year as well as what their focus will be for the upcoming year. For the most part, the 2013 work plan continues efforts begun in 2011 or earlier. The information gathered from these efforts will ultimately lead to more IRS audits.

The current year work plan targets many areas for audit.

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