IRS guidance on qualified parking: Our take

Read this if you are at a nonprofit organization.

As technology continues to progress and our world becomes more automated, many states are now beginning to request (and in some cases mandate) that nonprofit annual filings be done electronically. While that may be welcome news, in some cases both nonprofit organizations and their tax preparers are looking for answers and synergies as to how to make this transition to online filing as seamless as possible. This article will discuss a few of the states that have recently enacted changes to their filing requirements. Like the technology itself, some of what is discussed below is likely subject to change.

Massachusetts

All public charities (including private foundations) doing business in Massachusetts must register with the Non-Profits/Public Charities Division of the Attorney General’s office, and thereafter file annual reports (Massachusetts Form PC). Recently, the division announced two major changes:

First, beginning September 1, 2023, the division requires all charitable registration and annual filings (including any applicable attachments) to be made through the state’s charity portal; paper submissions will no longer be accepted after that date. 

The MA charity portal does allow third-party practitioners to prepare the Form PC in the portal and share a draft with others prior to filing. However, practitioners cannot use their tax software to prepare the MA Form PC and can only use the state’s portal going forward.

Clients will be able to file the return and pay any applicable filing fees at the end of the process. The state will not accept/process any return until payment has been made. All users are required to set up accounts online to access the portal. Go to the  MA Attorney General’s website for details on how to sign up for the portal, including frequently asked questions.

Second, effective immediately, the gross receipts threshold for submitting an IRS Form 990 or 990-EZ to the division has increased from $5,000 to $25,000. While this change is warmly welcomed, it still creates a disconnect between the filing burdens at the federal and state levels for smaller organizations. Form 990-N, which is the federal filing of choice for organizations with normally less than $50,000 in gross receipts, is still not accepted by Massachusetts, requiring those smaller organizations to submit a Form 990 or Form 990-EZ to the state even if not required at the federal level.

New Hampshire

All charitable organizations and charitable trusts (including private foundations) organized in NH are required to file and submit Form NHCT-12: Annual Report to the Charitable Trusts Unit (a division of the NH Attorney General) annually. About a year ago, the state introduced the ability to file the annual report in addition to a variety of other filings online through the state’s website. In speaking with the Charitable Trusts Unit for this article, paper filings will continue to be accepted for the foreseeable future, but filing forms online continues to be strongly encouraged. Extensions of time to file as well as filing fees can also be processed through the state’s website.

Like Massachusetts, the preparation of the NH annual report is not supported by tax software vendors, so it must either be prepared online using the state’s site, or fillable paper forms can be found online and printed for a paper filing.

The Charitable Trust Unit website offers a wealth of information for both practitioners and nonprofit organizations alike, including free trainings for board members as well as other helpful resources.

Maine

The State of Maine has recently created a new Maine tax portal and has been rolling out its functionality in a series of phases. Two of the four phases are complete. Phase three is scheduled to be rolled out in October 2023, and phase four in October 2024.

The portal allows taxpayers to manage, access, and even file a variety of different tax returns. Like the other states mentioned above, each user is required to have their own login credential information in order to access the portal.

While third-party tax practitioners are still able to electronically file returns through their tax software vendors, taxpayers are able to remit any taxes owed through the portal. For more information, please visit the state’s website.

New York

Most organizations that hold property of any kind for charitable purposes, engage in charitable activities in New York, or solicit charitable contributions (including grants from foundations and government grants) in New York are required to register with the Office of the New York State Attorney General’s Charities Bureau. As of last year, the New York Office of Attorney General now requires charitable organizations to submit their annual Form CHAR500 via the state’s online portal.

Here again, tax practitioner software is of no use as the filing must be prepared and filed online. While third-party practitioner preparation of the form is possible, it can prove to be rather difficult. The signers of the form are required to log in within a certain period of time, and failure to do so results in the form “timing out,” requiring the process to start over. Because of these limitations, organizations with a NY filing obligation typically file the form themselves online (and have the signers on standby).

As we all know, technology waits for no one. Exempt organizations and their tax practitioners alike are used to this and continue to roll with the punches and adapt to the ever-changing landscape. We will continue to monitor and relay any future developments. As for those who may have printed this article off the internet to read it, we’re here for you too! Should you have any questions, our nonprofit tax team of dedicated professionals is standing by and is happy to help.

Read this if you are at a not-for-profit organization.

I’ve always wanted to learn how to be a carpenter. I’m secretly jealous of people who are able to create something from raw materials—oh how I wish I could do that! Some carpenters can tell a good board from a bad one just by looking at it or tapping it with a hammer, quickly evaluating it before accepting it as worthy of its intended purpose, or if it doesn’t pass muster.

So, what exactly does carpentry have to do with not-for-profits? Well, perhaps at first glance not much at all, except that they both rely in some part on solid boards! A very unique trait shared by all not-for-profit organizations is that they are not technically owned by anyone but are instead ultimately overseen and governed by a board of directors, who essentially are tasked with steering the organization and providing management oversight.

One question that is often asked (whether by board members themselves or various federal or state regulatory bodies tasked with overseeing not-for-profit organizations) is: “What makes for a good board?” This article will attempt to provide the tools you need to understand some of the basics and overall best practices related to not-for-profit board governance.

Board composition/structure

A not-for-profit organization’s board of directors should provide oversight of the management of the organization. To accomplish this, they should both meet regularly and be comprised of a reasonable number of members. Unfortunately, there’s no perfect answer to either of the above. A general guideline is that boards of directors should meet regularly, with board officers (i.e., chair, vice chair, treasurer, secretary) meeting more frequently than the entire board, if needed. Regarding board size, a board that is too big can lead to unproductive discussion, while being too small may not be representative of the community the organization serves. Based on the Form 990s we prepare, we see most organizations have a board consisting of somewhere between 10-20 members.

Additionally, the board should be comprised of individuals who are knowledgeable of or possess skills that benefit the organization. A board may want some members who have a background in accounting, legal, investing, or more industry-specific representation, like a healthcare worker sitting on the board of a hospital. Furthermore, organizations should consider the importance of diversity in board recruitment, striving to include members of different ethnicities, genders, and experiences whenever possible.

Policies:

A well-governed not-for-profit organization should have policies in place outlining certain key areas. The IRS considers a well-governed exempt organization to have the following written policies:

• Conflict of interest policy
• Document retention and destruction policy
• Whistleblower policy
• Executive compensation setting procedures

The IRS specifically asks about these four policies in the Form 990, so it should come as no surprise that these are considered best practices. Of these, the conflict of interest policy is by far the most critical to board governance and independence.

A board of directors should at all times remain independent, meaning those on the board should never materially benefit from their board service, particularly from a financial aspect. Should the board need to vote on a matter in which someone does have a board conflict, the written policy should be clear as to how those issues are handled—generally with the conflicting member recusing themselves from any vote or discussion on the conflicting matter at a minimum. Board members are required to disclose any potential conflicts of interest at least annually (also a question on the Form 990), but a better practice would be to regularly and consistently monitor and enforce compliance with the organization’s conflict of interest policy.

Note: By IRS definition, some fact patterns automatically cause a board member to not be independent. Examples include if the board member or a family member is employed by the organization. Those sorts of independence issues often require some level of disclosure on the Form 990. Organizations should limit the number of non-independent board members as much as possible.

Our BerryDunn team has created a tool that can be used to assist boards in collecting and identifying any potential conflicts. Please contact a member of the NFP Tax Team should you be interested in learning more.

Other considerations

Items to keep in mind as a demonstration of sound board governance are as follows:

1. Establish clear roles/responsibilities
   In addition to the fiduciary responsibilities all board members are bound by, reviewing the organization’s mission, budgets, compensation setting practices, and all other established policies should be required.
2. Create separate committees
   Establishing smaller committees to focus on particular areas is a great example of strong board governance. They also tend to make full board meetings more productive. Some examples include a compensation committee, a finance committee, a diversity committee, and an executive committee.
3. Document, document, document
   This too has its own line of questioning on Form 990. It should come as no surprise that documentation of meetings on a contemporaneous basis is a strong driver of board governance. Having discussions clearly documented in writing is an incredibly effective way to ensure something isn’t taken out of context. Contemporaneous is the key word here—meetings and minutes should be documented in writing as soon as possible. This applies to committees of the board as well (see #2 above).
4. Consider establishing term limits for board members
   There’s something to be said about bringing in some new blood or a fresh set of eyes, experiences, and expertise, and boards of directors are no exception. Boards should have policies around board terms, particularly around the number of consecutive terms allowed.
5. Continuing board education
   Sitting on a board of directors is no easy task and it’s essential that board members continue to be made aware of the legal and ethical responsibilities their positions carry not just within the organization, but also in the eyes of the general public. Establishing some education practices to help board members stay apprised of the rules is a best practice worthy of consideration.
6. Use of advisors
   No one is an expert in every aspect of everything. While having a board with people who are well rounded in the areas of healthcare, finance, and legal responsibilities is preferred, at some point every organization is going to need the help of outside consultants and practitioners. It’s important that roles of advisors be clearly defined, and ultimately have an obligation to report back to either the full board or committee. Having established guardrails between the organization and its many advisors is crucial. Arrangements between the organization and its advisors should also be vetted for potential conflicts of interest. 
7. Ask questions
   This goes hand in hand with the items above regarding advisors. If you’re joining a not-for-profit board of directors, it is to be assumed you did so because you had some sort of a particular interest in the organization’s well-being. That said, it should never be assumed that everyone knows all there is to know about the organization. We’ve seen cases where a board may just “go with the flow” or heed the advice of a single advisor or member of management who’s been working with the board for a long time. Having a board that is engaged and inquisitive is absolutely essential to the health and well-being of the organization. The old adage from high school still rings true: if you have a question about something, it’s a guarantee that at least one other person in the room has a similar question. Don’t be afraid to question something if it doesn’t seem right or doesn’t make sense to you.

While not exactly a hammer, we hope the above items assist your organization in establishing sound procedures in the areas of board governance. As always, we are here to help. Should you ever have any questions in the area of board governance, please do not hesitate to reach out to a member of the Not-for-profit Tax Team. We’re here to help.

Read this if you are at a not-for-profit organization.

With autumn now in full swing the NFP tax team finds itself in the calm before the storm with the 990 filing deadline on August 15 firmly in the rearview mirror and the November 15 deadline looming—much like winter. This brief lull between deadlines allows for a period of reflection. I myself have been reflecting on some of the issues I’ve seen over the past filing season on Form 990s, which I felt compelled to share. Here is my top five list of observations of this year's Form 990 filings.

Schedule B reporting

By now, most are familiar with Schedule B of Form 990. One of the lone holdouts from the pre-2008 “old” Form 990 (back when we only had Schedules A & B, now Schedules A all the way to R), Schedule B generally requires organizations to list out any donor who contributed $5,000 or more to the organization during the year.

While the disclosure appears straightforward, one of the variables that did change back in 2008 was that Schedule B is now required to be reported on the same accounting method as the organization’s books and records, and not exclusively on a cash basis, as was the requirement under the old rules.

Often-times we find that certain sections of the 990 information request are divvied up and completed by different organizational departments, with Schedule B often being tasked to the folks in the organization’s development/fundraising department. Because of this, we sometimes receive back information that is not reported correctly.

Unfortunately, the only way we know if there’s any issue is if total contribution income on the financial statements is less than is what is being reported to us on the Schedule B worksheet. Almost always, we find there’s a donor (or two) making payments on an amount previously pledged and the amount of cash received in the current year is being disclosed on Schedule B, which is incorrect. 

(Note: the example above implies the organization is on the accrual method of accounting, therefore the amount pledged was recorded as revenue when pledged. Subsequent payments on said pledge would not be recorded as revenue, causing the disconnect between contribution income for financial statement purposes and what is reported as contributions on Schedule B).

The rule of thumb is that organizations should follow what was recorded as contribution revenue during the year on the books (whether on a cash or accrual method of accounting) and then compile your list of donors from there. We could debate all day the somewhat intrusiveness of the Schedule B disclosure requirements, so we only want to disclose those that must be shown.

Conflicts of interest

It’s considered a best practice for all NFPs to check for any conflicts of interest (specifically with members of governance and management) at least annually. While most organizations do this diligently and far more often than once a year, I want to point out that the 990 has an entire schedule devoted to reporting of “interested persons”—that being Schedule L. Interested persons go beyond just corporate officers and members of the board; they also can be family members as well as business entities that are more than 35% owned or controlled by any of the above. Your organization may want to review your procedures as to how you identify potential conflicts to make sure you are also capturing these sorts of relationships.

Reporting thresholds for Schedule L disclosure can vary. If, for example, a board member’s child works for the organization and is paid more than $10,000, they are required to be disclosed and the board member is not considered to be independent by the IRS. Transactions with a business entity owned or controlled by an interested person has reporting thresholds of $10,000 for a single transaction, or $100,000 over the course of the year.

We offer a detailed conflict of interest survey that addresses these questions and more. If interested to learn more about this, please speak to your engagement principal.

Compensation to unrelated organizations

It seems more and more each year we hear some variation of the following: “X sits on our board and works here at the organization, but we don’t pay him/her directly—we pay their company.”

It’s important to know the IRS closed up this reporting loophole long ago and requires organizations to report the amounts paid to an unrelated organization for services they render as if you paid the individual directly. A narrative is also required on Schedule J explaining the arrangement. We find in most cases the organization may not be aware of what exactly X receives for compensation, which is perfectly fine. The narrative on Schedule J can explain this and that what’s being reported as compensation to X is the amount paid to the unrelated organization, and not necessarily what X’s compensation is. In any event, it is not appropriate to say that X receives nothing.

Fundraising events

COVID-19 certainly put a damper on most, if not all fundraising events over the past few years, but we’ve started to see some of events come back on the calendar recently, which is a great sign! Just a friendly reminder that if the price of admission to the event is $75 or more, it is necessary to note what items of value a participant is receiving in exchange for the amount of money they pay to attend so they can determine what amount, if any, of their entrance fee is tax deductible.

For example: An organization hosts a golf tournament and charges $100 per person to play. In exchange, the person gets use of a golf cart, a round of golf, and some food/drink on hole 19. The fair market value of everything per person totals $85. In this case, only $15 is tax deductible as a charitable contribution ($100 paid minus $85 value received) and the $85 of value received must be relayed to the attendee.

Should you have any questions as you begin to plan your next round of events, please do not hesitate to reach out to us.

Alternative Investments and Unrelated Business Income (UBI)

What top five list would be complete without at least a mention of UBI? During the pandemic, we saw many clients get more creative in terms of generating revenue sources, particularly in terms of alternative investments that typically come in the form of a partnership interest and can carry with them significant tax consequences, which are not always brought to the forefront at the time the investment is made. More than a few clients have been more than surprised (and less than impressed) to receive a Schedule K-1 at the end of year which not only contains UBI, but UBI that is spread over six different states, some, or all of which may require you to file tax returns. If the alternative investment happens to be domiciled overseas, that can bring with it its own set of obligations. You can read more about this here. 

It is vital for all organizations to be engaged in open and frequent communication with their investment managers and advisors (both within and outside the organization) to help ensure a full understanding of what sorts of obligations may stem from an investment. Organizations are strongly encouraged to review and share all relevant investment documentation and subsequent information (i.e., prospectus and any other offering materials) with its finance/accounting department, as well as its tax advisors prior to making the investment.

Just some things for you to think about as the next 990 filing deadline will be here before you know it. I hope you all enjoy the cooler temperatures and colorful foliage, and you all find some time to do whatever it is that brings you joy and peace. As for me, I think it’s time to get a hobby! 

If you have any questions about your specific situation, please feel free to contact our not-for-profit tax team.

Read this if you are at a not-for-profit hospital.

With the 990 filing deadline of August 15 firmly in the rearview mirror, and with our NFP tax team getting to take some well-deserved late summer paid time off, I have a small window of time for some reflection on the filing season. Some of us choose to wind down with a good book, maybe mull over what to do with the last remaining weeks of summer before the inevitability of Labor Day, or perhaps you’re deliberating what to get the kiddos as the new school year approaches (mine is still a wee pup so still rather light in that department). I myself have been reflecting on some of the issues I’ve seen on our last round of Form 990s, the vast majority of which are hospital clients with September 30 year ends, which I felt compelled to share. Here is my top five list of observations of this year's Form 990 filings.

1. 501(r) & hospital websites
   By now, most are familiar with the nuts and bolts of 501(r), but something to be mindful of is the interplay between 501(r) and requirements of what needs to be posted on your hospital’s website. Community health needs assessments and implementation strategies (both the most recent set and two subsequent sets) should be posted online at all times.
   
   Financial assistance policies (FAP), applications, and plain language summaries need to be online too. Those web addresses are provided on Schedule H for the IRS and general public alike.
   
   Further, items such as Amounts Generally Billed (AGB) calculations, and the list of providers not covered under your hospital’s FAP should be updated and reviewed at least annually. The IRS, despite their skeleton crew and shoestring budget, can and do vigilantly check and scour hospital websites and send out correspondence for any observed irregularities.
2. Conflicts of interest
   It’s considered a best practice for all NFPs to check for any conflicts of interest (specifically with members of governance and management) at least annually. While most organizations do this diligently and far more often than once a year, I want to point out that the 990 has an entire schedule devoted to reporting of “interested persons”—that being Schedule L. Interested persons go beyond just corporate officers and members of the board; they also can be family members as well as business entities that are more than 35% owned or controlled by any of the above. Your hospital may want to review your procedures as to how you identify potential conflicts to make sure you are also capturing these sorts of relationships.
   
   Reporting thresholds for Schedule L disclosure can vary. If, for example, a board member’s child works for the hospital and is paid more than $10,000, they are required to be disclosed and the board member is not considered to be independent by the IRS. Transactions with a business entity owned or controlled by an interested person has reporting thresholds of $10,000 for a single transaction, or $100,000 over the course of the year.
   
   We offer a detailed conflict of interest survey that addresses these questions and more. If interested to learn more about this, please speak to your engagement principal.
3. Compensation to unrelated organizations
   It seems more and more each year we hear some variation of the following: “Dr. X sits on our board and works here at the hospital, but we don’t pay him/her directly—we pay their company.”
   
   It’s important to know the IRS closed up this reporting loophole long ago and requires the hospital to report the amounts paid to an unrelated organization for services they render as if you paid the individual directly. A narrative is also required on Schedule J explaining the arrangement. We find in most cases the hospital may not be aware of what exactly Dr. X receives for compensation, which is perfectly fine. The narrative on Schedule J can explain this and that what’s being reported as compensation to Dr. X is the amount paid to the unrelated organization, and not necessarily what Dr. X’s compensation is. In any event, it is not appropriate to say that Dr. X receives nothing.
4. Fundraising events
   COVID-19 certainly put a damper on most, if not all fundraising events over the past few years, but we’ve started to see some of events come back on the calendar recently, which is a great sign! Just a friendly reminder that if the price of admission to the event is $75 or more, it is necessary to note what items of value a participant is receiving in exchange for the amount of money they pay to attend so they can determine what amount, if any, of their entrance fee is tax deductible.
   
   For example: A hospital hosts a golf tournament and charges $100 per person to play. In exchange, the person gets use of a golf cart, a round of golf, and some food/drink on hole 19. The fair market value of everything per person totals $85. In this case, only $15 is tax deductible as a charitable contribution ($100 paid minus $85 value received) and the $85 of value received must be relayed to the attendee.
   
   Should you have any questions as you begin to plan your next round of events, please do not hesitate to reach out to us.
5. Alternative Investments and Unrelated Business Income (UBI)
   What top five list would be complete without at least a mention of UBI? During the pandemic, we saw many clients get more creative in terms of generating revenue sources, particularly in terms of alternative investments that typically come in the form of a partnership interest and can carry with them significant tax consequences which are not always brought to the forefront at the time the investment is made. More than a few clients have been more than surprised (and less than impressed) to receive a Schedule K-1 at the end of year which not only contains UBI, but UBI that is spread over six different states, some or all of which may require you to file tax returns. If the alternative investment happens to be domiciled overseas, that can bring with it its own set of obligations. You can read more about this here. 
   
   It is vital for all organizations to be engaged in open and frequent communication with their investment managers and advisors (both within and outside the organization) to help ensure a full understanding of what sorts of obligations may stem from an investment. Organizations are strongly encouraged to review and share all relevant investment documentation and subsequent information (i.e., prospectus and any other offering materials) with its finance/accounting department, as well as its tax advisors prior to making the investment.

Just some things for you to think about as the next 990 filing deadline will be here before you know it, like the fall colors that will be joining us soon. I hope you all enjoy the last few gasps of what’s been a tremendous summer and you all find some time to do whatever it is that brings you joy and peace. As for me, I think it’s time to get a hobby! 

If you have any questions about your specific situation, please feel free to contact our not-for-profit tax team.

Read this if you are a not-for-profit organization.

With springtime upon us, it may be difficult to start thinking about this upcoming fall, but that is exactly what many folks in the nonprofit sector are starting to do. The reason for this? It’s because 2022 brings with it the mid-term election cycle. While technically an off-year election, many congressional and gubernatorial races are being contested, in addition to a myriad of questions that will appear on ballots across the country. It is around this time of year we start to see many questions from clients in the nonprofit sector in the area of political campaign activities, lobbying (both direct and grassroots), and education/advocacy.

This article will discuss the three major types of activities nonprofit organizations may or may not undertake in this arena and will offer guidance to give organizations the vote of confidence they need to not run afoul of the potential pitfalls when it comes to undertaking these activities.

Political campaign activity

Political campaign activities include participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office, be it at the federal, state, or local level. Examples of such activities include contributions to political campaigns as well as making public statements in favor of or in opposition to any candidate. The IRS explicitly prohibits section 501(c)(3) organizations from conducting political campaign activities, the consequence of doing so being loss of exempt status. However, other types of exempt organizations (such as 501(c)(4) organizations) are allowed to engage in such activities, so long as those activities are not the organization’s primary activity. Only Section 527 organizations may engage in political campaign activities as their primary purpose. 

Direct lobbying

Direct lobbing activities attempt to influence legislation by directly communicating with legislative members regarding specific legislation. Examples of direct lobbying include contacting members of Congress and asking them to vote for or against a specific piece of legislation.

Grassroots lobbying

Grassroots lobbying, on the other hand, attempts to influence legislation by affecting the opinions of the general public and include a call to action. Examples of grassroots lobbying include requesting members of the general public to contact their representatives to urge them to vote for or against specific legislation.  

A quick way to remember the difference:
Political = think “P” for People – advocating for or against a specific candidate 
Lobbying = think “L” for Legislation – advocating for or against a specific bill

Education/advocacy

Organizations may engage in activities designed to educate or advocate for a particular cause so long as it does not take a specific position. For example, telling members of Congress how grants helped constituents would be considered an educational activity. However, attempting to get a member of Congress to vote for or against specific piece of legislation that would affect grant funding would be considered lobbying. Another example would be educating or informing the general public about a specific piece of legislation. Organizations need to be mindful here as taking a specific position one way or the other would lend itself to the activity being deemed to be lobbying, and not merely education of the general public. There is no limit on how much education/advocacy activity a nonprofit organization may conduct.

Why does this matter?

As you can see, there is a very fine line between lobbying and education, so it is important to understand the differences so that an organization conducting educational activities does not inadvertently end up conducting lobbying activities.

Organizations exempt under Code Section 501(c)(3) can conduct only lobbying activities that are not substantial to its overall activities. A 501(c)(3) organization may risk losing its exempt status and may face excise taxes on the lobbying expenditures if it is deemed to be conducting excess lobbying, whereas section 501(c)(4), (c)(5), and (c)(6) organizations may engage in an unlimited amount of lobbying activity.

What is substantial?

Unfortunately, there is no bright line test for determining what is considered substantial versus insubstantial. As an industry standard, many practitioners have taken a position that insubstantial means five percent or less of total expenditures, but that position is not codified and could be challenged by the IRS. 

Section 501(c)(3) organizations that intend to conduct lobbying activities on a regular basis may want to consider making an election under Code Section 501(h). This election is only applicable to 501(c)(3) organizations and provides a defined amount of lobbying activity an organization may conduct without jeopardizing its exempt status or becoming subject to excise tax. The 501(h) election limit is based on total organization expenditures with a maximum allowance of $1 million for “large organizations” (defined as an organization with total expenditures over $17,000,000). 

While the 501(h) election provides some clarity as to how much lobbying activity can be conducted, it may be prohibitive for some organizations whose total expenditures greatly exceed the $17,000,000 threshold. Another item to be aware of is that the lobbying threshold applies to all members of an affiliated group combined, which means the entire group shares the maximum threshold allowed. 

Another option for those engaging in lobbying is to create a separate entity (such as a 501(c)(4) organization) which conducts all lobbying activities, insulating the 501(c)(3) organization from these activities. As previously mentioned, organizations exempt under Code Section 501(c)(4) can conduct an unlimited amount of lobbying activities but can only conduct limited political campaign activities.

What about political campaign activities?

Section 527 organizations, known as political action committees, are exempt organizations dedicated specifically to conducting political campaign activities. If a 501(c)(4), (c)(5), or (c)(6) organization makes a contribution to a 527 organization, it may be required to file a Form 1120-POL and be subject to tax at the corporate tax rate (currently a flat 21%) based on the lesser of the political campaign expenditures or the organization’s net investment income. State income taxes may also be applicable. Section 501(c)(3) organizations may not make contributions to 527 organizations. 

If your organization is considering participation in any of the above activities, we would recommend you reach out to your not-for-profit tax team for additional information. We’re here to help!

Read this if you are at a not-for-profit organization.

There is no question the investment landscape is forever changing. Even before COVID-19 placed a vice grip on all aspects of society, many not-for-profit organizations were looking for ways to maximize the value of their current investment holdings. One such way of accomplishing this is through the use of alternative investments, defined for our purposes as investments outside of standard assets such as traditional stocks and bonds. Alternative investments have become increasingly specialized and are often seen in the form of foreign corporations or partnerships (often times domiciled in locales such as the Cayman Islands where tax laws are more favorable to investors) and are much more commonplace than ever before.

While promises of higher rates of return are received warmly by not-for-profit organizations, alternative investments often carry with them the potential for additional compliance costs in the form of tax filing obligations and substantial penalties should those filings be overlooked.

This article will highlight some of those potential foreign filings, as well as highlight potential consequences they carry and what you need to know in order to avoid the pitfalls. 

Potential foreign filings related to investment activities

Not-for profit organizations should be aware of the potential filings/disclosures required in regards to their ownership of investments located outside of the United States. The federal government uses a variety of forms to track transfers of property, ownership, and account balances related to foreign activity/investments. A list of some of the potential foreign filings are detailed below (not an all-inclusive list):

Form 926 – Return by a US Transferor of Property to a Foreign Corporation

This form is generally required when a US investor transfers more than $100,000 in a 12-month period, or any other contribution when the investor owns 10% or more of a foreign corporation. The requirement to file this form can be via a direct investment in the foreign corporation, or indirectly through another entity (such as a partnership interest). The penalty for failure to file is equal to 10 percent of the transfer amount, up to $100,000 per missed filing.

Form 8865 – Return of US Persons with Respect to Certain Foreign Partnerships

Similar to Form 926, this filing arises when a US person (which includes not-for-profit organizations) transfers $100,000 or more in a given year, or if they own 10% or more of the foreign partnership. There are different levels of disclosure required for different categories of filers. Filings are also triggered by both direct and indirect investments. The penalty for failure to file varies by category type, ranging from $10,000 to up to $100,000 per missed filing.

FinCEN Form 114 – Report of Foreign Bank and Financial Accounts

Commonly referred to as the FBAR, this form tracks assets that US taxpayers hold in offshore accounts, whether they be foreign bank accounts, brokerage accounts, or mutual funds. This form is required when the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. Further, any individual or entity that owns more than 50 percent of the account directly or indirectly must file the form. Lastly, individuals who have signature authority over accounts held by the organization are also required to file the FinCEN Form 114 with their individual income tax return. The penalty for failure to file can vary, but can be as high as 50 percent of the account’s value.

Please note: there is a specific definition of the term “foreign financial account” which excludes certain items from the definition. Organizations are encouraged to consult their tax advisors for more information.

Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations

Form 5471 is required to be filed when ownership is at least 10% in a foreign corporation. There are different disclosures required for different categories of ownership. Organizations required to file Form 5471 are typically operating internationally and have ownership of a foreign corporation which triggers the filing, but this form would also apply to investments in foreign corporations if ownership is at least 10%. The penalty for failure to file is typically $10,000 per missed filing.

Recommendations to avoid the pitfalls of alternative investments

In order to avoid missed filing requirements, exempt organizations should ask their investment advisors if any investment will involve organizations outside of the United States. If the answer is “yes,” then your organization needs to understand any additional filing requirements up front in order to take into consideration any additional compliance costs related to foreign filings. You should review and share all relevant investment documentation and subsequent information (e.g., prospectus and any other offering materials) with your finance/accounting department, as well as your tax advisors—prior to investment.

We also recommend you engage in open and frequent communication with your investment managers and advisors (both within and outside the organization). Those who manage the entity’s investments should also stay in close contact with fund managers who can help communicate when assets are invested in a way that might trigger a foreign filing obligation.

As investment practices and strategies become increasingly complex, organizations need to stay vigilant and aware in this forever changing landscape. We’re here to help. If you have any questions or concerns about current investment holdings and potential foreign filings, please do not hesitate to reach out to a member of our not-for-profit tax team.

Read this if you are at a not-for-profit organization.

There is no question that cryptocurrency has been gaining in popularity over the past few years. It may be hard to believe, but Bitcoin, the first and most commonly known form of cryptocurrency, has been around since the good old days of 2009! What was once only seen as a quasi-asset traded solely on the dark web by a handful of private yet savvy investors has recently begun to step out into the light. With this newly found mainstream popularity come many questions from the not-for-profit (NFP) sector about how their organizations should proceed when it comes to donations of cryptocurrency, and how they might benefit (or not) from doing so. 

This article will answer some of the questions we’ve received from clients in this area and attempt to shed some light on the tax reporting and compliance requirements around cryptocurrency donations for not-for-profit organizations, as well as other topics not-for-profit organizations should consider before dipping their toes into the crypto current.

So, what exactly is cryptocurrency? 

Cryptocurrency is a digital asset. It generally has no physical form (no actual coins or paper money). Further, it is not issued by a central bank and is largely unregulated. Its value is dependent upon many factors, the largest being supply and demand.

Can a not-for-profit organization accept cryptocurrency as a donation?

Yes! For tax purposes, cryptocurrency is considered noncash property, and is perfectly acceptable for not-for-profit organizations to accept.

With that said, NFPs absolutely need to review and update their gift acceptance policies as necessary as to whether or not they are willing to accept cryptocurrency. Having a clear and established policy position in place one way or the other can mitigate any confusion or misunderstanding between the organization and a potential donor.

The organization may also want to consider adding language to the policy regarding its intent to either hold the asset or sell it as soon as administratively possible. A savvy donor may request that the organization hold the cryptocurrency donation for a period of time after the donation is made, so organizations will want to have clear policies in place.

What about acknowledging the donor’s gift?

Standard donor acknowledgement rules still apply. Any donation of $250 or more requires a standard “thank you” acknowledgement to the donor. Remember, the IRS has deemed cryptocurrency to be noncash property, which means a description of the donated property (but not its value) should be mentioned in the donor acknowledgement.

Are there any other forms I need to be aware of?

Yes. Forms 8283 & 8282 apply to donations of cryptocurrency. Where the donation is noncash, the donor should be providing the organization with Form 8283, Noncash Charitable Contributions, for a claimed value of more than $500. Further, if the claimed value is more than $5,000, the Form 8283 should be accompanied by a qualified appraisal report. Form 8283 should be signed by the donor, the qualified appraiser (if applicable), as well as the recipient organization upon acceptance.

NOTE: Form 8283, Part V, Donee Acknowledgement, contains a yes/no question asking if the organization intends to use the property for an unrelated use. Where the property in question is cryptocurrency, the answer to this question is likely always to be ‘yes’.

Should the organization sell the underlying cryptocurrency within three years of acceptance, the organization must complete Form 8282, Donee Information Return, and file a copy with the IRS as well as providing a copy to the original donor. Other rules apply if the organization transfers the property to a successor donee.

NOTE: Organizations may want to consider referencing the Forms 8283 & 8282 in their aforementioned gift acceptance policy.

How is a cryptocurrency donation reported on the financial statements and Form 990?

If donated and held by the organization as of the end of the year, it will be reported as an intangible asset on the balance sheet, and contribution revenue on the statement of activities. 

Similar reporting would follow for 990 purposes—the donation would be reported as part of noncash contribution revenue with additional reporting on 990, Schedule B, Schedule of Contributors, and Schedule M, Noncash Contributions, as necessary.

Why should I accept cryptocurrency?

This is by far the hardest question to answer, for a variety of reasons. There is no question that cryptocurrency has its risks. Cryptocurrency is known to be highly volatile. Bitcoin, which originally was valued at eight cents per coin in 2010 soared to an all-time high of over $63,000 back in April of 2021—and then two months later sold for around $34,000 per coin. And who could forget the recent Dogecoin (I’m still not sure how to pronounce that) phenomenon? It too in recent months became a sensation only to see its value plummet by almost 30% in a single day after an appearance by Elon Musk on Saturday Night Live (it did subsequently rebound after a Musk tweet).

The fact is no one really knows where the value of cryptocurrency is headed, so should a not-for-profit organization decide to proceed, you should be aware it may not be worth what it was when originally accepted, which could be either good or bad depending on the day. Ultimately, any value is still good for a not-for-profit organization, but the risks with cryptocurrency and its volatility are very real.

Other things to know about crypto

As of right now, cryptocurrency has its own trading platforms. Robinhood, a platform in the news recently when it halted trading of Gamestop’s stock when speculative traders got the price to soar to all new highs, being the most well known. Large investment firms are well on their way to creating their own platforms as cryptocurrency gains in popularity, so we certainly recommend speaking with your current investment advisors to find the platform that best suits your needs.

Cryptocurrency is held in a digital wallet, which can only be accessed by a password, or private keys. Digital wallets can be stored locally on a computer, but there are also web-based wallets.

There have been horror stories about people losing or forgetting passwords, ultimately rendering the cryptocurrency worthless because it cannot be accessed. Cryptocurrency, due to its private nature, is very desirable by hackers who could also potentially access the wallet and steal its contents. And if stored locally, the currency could be lost forever if the computer containing the wallet were to become corrupted or compromised.

Organizations holding cryptocurrency will need to ensure proper internal controls are in place to make sure the funds are secure and cannot be easily accessed or potentially stolen. Working with your internal IT department is a good strategy here. The questions above are not intended to be all inclusive. Cryptocurrency is still finding its way in the world and we’ll continue to keep an eye on any developments and keep clients up to date as cryptocurrency continues to expand its reach and as further guidance is issued.

If you have any questions, please contact me or another member of our not-for-profit tax services team. We're here to help.

Read this if you are a not-for-profit looking to learn more about tax filing deadlines.

State of New Hampshire: If your organization has a December 31 year-end, your annual report filing with the Charitable Trusts Unit and related payment are still due by May 15. If you are not ready to file, you may file Form NHCT-4 for an extension by May 15. If your organization has a June 30 year-end, you may email the State Attorney General to ask for additional time to July 15.

April 24, 2020, UPDATE: Commonwealth of Massachusetts: The Massachusetts Attorney General’s office has extended the Form PC filing requirement. All filing deadlines for annual charities filings for fiscal year 2019 have been extended by six months. This extension is in addition to the automatic six month extension that many not-for-profits receive. In addition, original signatures, photocopies of signatures, and e-signatures (e.g., DocuSign) will be accepted.

On April 9, 2020, the Internal Revenue Service (IRS) issued Notice 2020-23, its third round of tax filing relief guidance, which amplifies relief set forth in previously issued IRS notices providing relief to taxpayers affected by COVID-19. Notice 2020-23 also provides additional time to perform certain other actions. The Notice holds the special distinction of being the first to provide specific relief to not-for-profit organizations with return filing and tax payment obligations due between April 1 and July 15, 2020. The details are highlighted below:

Tax deadline extended to July 15, 2020
The Notice explicitly states that Form 990-T tax payment and filing obligations due during the period between April 1 and July 15 will be automatically extended to July 15, 2020. Additionally, Form 990-PF (and associated tax payments) as well as quarterly Federal estimated tax payments remitted via Form 990-W are also explicitly noted and are granted an extension to July 15.
    
While this is certainly good news, the more eagerly anticipated news is the Notice also includes “Affected Taxpayers” who are required to perform “Specified Time-Sensitive Actions” referenced in Revenue Procedure 2018-58. The Revenue Procedure specifically mentions exempt organizations as “Affected Taxpayers” required to perform “specified time-sensitive actions”—one such action being the filing of Form 990.

In summary (with the combined power of the Notice and Revenue Procedure), any entity with a Form 990, Form 990-EZ, Form 990-PF, Form 990-T, Form 990-W estimated tax filing requirement, Form 1120-POL or Form 4720 filing obligation due between April 1 and July 15, 2020 now have until July 15, 2020 to file. Needless to say this is very welcome news for an industry that like so many others, is being pushed to the brink during this turbulent and difficult time.

Additional extensions
Notice 2020-23 (with reference to Revenue Procedure 2018-58) also extends the due date of certain forms, notices, applications, and other exempt organization activities due between April 1 and July 15, 2020, until July 15, 2020 as noted below: 

• Community health needs assessments (CHNAs) and Implementation Strategies
• Application for Recognition of Exemption (Forms 1023 and 1024) 
• Section 501(h) Elections and Revocations (Form 5768)
• Information Return of US Persons with Respect to Certain Foreign Corporations (Form 5471)
• Political Organization Notices and Reports (Forms 8871 and 8872)
• Notification of Intent to Operate as a Section 501(c)(4) Organization (Form 8976) 

We are here to help
Please contact the BerryDunn not-for-profit tax team if you have any questions, or would like to discuss your specific situation.