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What’s New at the IRS and Treasury for Nonprofits

Fall is here, and that means it is time for my annual tax update on recent guidance issued by the IRS and Treasury. By now, the old Parking Fringe tax is a distant, bad memory, but many new tax challenges are ahead for nonprofits this year.

The topics below are the highlights of a recent AICPA Exempt Org Technical Resource Panel (EOTRP) meeting with the IRS and Treasury. This year the meeting was held virtually for the first time because of the COVID-19 pandemic restrictions, but Margaret Von Lienen, IRS EO Director; Janine Cook, Dep. Assoc. Chief Council, Treasure EEE; and two former Treasury officials Ruth Madrigal and Elinor Ramey (who are now attorneys in private practice) were all in attendance.

The TRP meeting highlights include guidance for PPP Loan Forgiveness, Disaster Leave Sharing Plans, siloing operating losses using NAICS codes, and siloing qualifying investment activity.

Since it is almost election season, this is a good time for a refresher on political activity and how to stay out of electioneering trouble. As a bonus, we have included tips from the AICPA Nonprofit Conference on fundraising event rules, Form 990 storytelling, and the benefits of a gift acceptance policy.

We will give you a quick look at future guidance that will be coming soon in the IRS Priority Guidance Plan, which is a list of guidance projects that they want to complete each year. We will tell you what is on the top of this year’s list.

Finally, we have included a quick comment on the redesigned Form 990-T, and why we think the payroll tax deferral program is a dud.

Here are some highlights of recent AICPA meetings: 

CARE Act and Loan Forgiveness

Most nonprofits will qualify for loan forgiveness because the covered period has been increased and eligible cost is broadly defined. We recommend you record the loan as a refundable advance until all of the conditions for forgiveness are met. On your tax return, report the forgiven amount like you would for a government grant.

Disaster Leave Sharing Plan

Nonprofits must have a written plan. Leave is needed because kids are not in school, leave is taxable wages to the recipient not the donor, cash cannot be taken, and leave not used by the end of the disaster must be returned to the donors.

Siloing and NAICS Codes

If you have more than one unrelated activity, then Proposed Reg. 1.512(a)-6 requires you to separate activities into silos for calculating losses. Instead of hundreds of codes, you are allowed to use the first two digits so you have 20 codes to choose from, and it will be easier to utilize your loss. The AICPA Tax Resource Panel made some recommendations about siloing on September 9th in a comment letter to the IRS.

Siloing Tax Tip

Nonprofits that operate more than one taxable business and expect increased tax under IRC 512(a)(6) silo rules might consider dropping down those assets into a taxable corporate subsidiary. Transferring assets to a subsidiary is a nontaxable event and taxable corporations do not have siloing rules.

Qualifying Investment Activity

QIAs are treated as a single unrelated business so NAICS codes do not apply but determining investment activity for siloing is complicated. QIAs include partnerships, S-corporations, and debt-financed property. We can help you become familiar with the de minimis test and the control test.

Political Activities

Fall is election season and a good time to refresh your knowledge of how to stay out of trouble with electioneering issues.

Charities that want to avoid IRS advocacy issues should limit social media activity that might be considered electioneering as we near election time. Don’t post any partisan comments on social media while you are in your capacity as an employee or use nonprofit resources to help a candidate.

In June we attended the virtual AICPA Nonprofit conference. Here are some takeaways from some of the sessions:

Fundraising Events

Some gifts contributed to an event do not necessarily qualify for a charitable contribution deduction. For example, the contributed use of vacation home, media advertising, or skilled services are not included in nonprofit gift income, or as an expense on your tax return.

Form 990 Storytelling

Use your tax return to present your organization in the best light. Consider how the public will view your charity if an ineffective narrative is presented on your tax return. Spotlight your program accomplishments and be proactive about your effective governance practices. Use your development staff to craft the narrative of your accomplishments.

Gift Acceptance Policy

Not all gifts are good gifts, so a gift policy will minimize legal and tax liability. Some gifts are difficult to sell, have carrying costs, or result in taxes or increased administrative burden.

Here is a quick look at future guidance that will be coming soon in the IRS:

IRS Priority Guidance Plan

The IRS has a list of guidance projects that they want to complete each year. On the top of this year’s list is TCJA Regs for UBTI siloed for separate businesses under IRC 512(a)(6) and Donor Advised Funds (DAF). A DAF is a contribution which is owned or controlled by a sponsoring organization and to which the donor has some advisory privileges on how the funds will be distributed. Some people don’t like that there is no 5% distribution requirement (like a private foundation) and that DAF’s are being used incorrectly, they want the IRS and Treasury to provide guidance.

Here are some final thoughts about recent events:

New Form 990-T

On 9/1/2020, the IRS released a draft redesigned Form 990-T for 2020. The most noticeable change is the redesign of Schedule A which now looks more like the old first page of the 990-T than the old Schedule A. The changes are to facilitate multiple unrelated activities. Draft instructions have not been released yet for the redesigned forms.

Payroll Tax Deferral Is a Dud

On August 8th, President Trump signed a memorandum directing the Treasury to find a way for employees to defer the withholding, deposit, and payment of their share of payroll taxes for the balance of 2020. The deferral must be repaid in 2021 so many nonprofits see a lot of administrative problems and it is not worth the headache.