The IRS cares about employment tax—why you should too.

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 a nonprofit organization.

Charitable organizations are as diverse as the causes they represent. Internal Revenue Code (IRC) Section 501(c)(3) defines these entities as “organizations operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes,” among other things. With the array of organizations covered, not all filings and not all tax treatments are the same. This article will go into detail on the types of charitable organizations out there and the differences between them. 

The two overarching categories in the charitable world are public charities and private foundations. Private foundations are then further classified as either operating or non-operating and include some beneficial provisions for organizations that hold the designation of an exempt operating foundation. 

Public charities

The first thing that comes to mind for most people when they think of charitable or nonprofit organizations is 501(c)(3) public charities. Public charities must annually file Form 990, 990-EZ, or 990-N with the IRS. Both Form 990 and 990-EZ include a public charity schedule where the filing organization must disclose the IRC from which it derives its public charity status. Furthermore, many public charities must also complete and pass one of two support tests on the schedule.

Most public charities that file Form 990 or 990-EZ receive their exemption under IRC Section 170(b)(1)(A)(vi) or 509(a)(2) and as such must complete either the Schedule A Part II or Part III support test to demonstrate they are publicly supported. 

Public charities that derive their public charity status from IRC Section 170(b)(1)(A)(vi) must complete and pass the Schedule A Part II public support test. This test must demonstrate the charity normally receives a substantial part of its support from a governmental unit or the general public.

Public charities that derive their public charity status from IRC Section 509(a)(2) must complete and pass the Schedule A, Part III public support test. This section describes an organization that normally receives (1) more than 33.3% of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions; and (2) no more than 33.3% of its support from gross investment income and unrelated business taxable income. 

Both public support tests look at the activities of the public charity in aggregate over the most recent five tax years. New organizations must complete the test but do not report a percentage in the first five years of existence and, as such, cannot fail a support test during this time. 

Alternatively, if a public charity fails the Schedule A Part II or III test, it is eligible to switch to the other test instead if it would pass that test.

Certain public charities such as churches, schools, hospitals, and supporting organizations are not required to complete either support test to demonstrate their public charity status but may have other requirements specific to their exemption. 

Private foundations

If a public charity fails its public support test for two consecutive years, it automatically becomes a private foundation. Additionally, organizations applying for exemption can request to be designated a private foundation from inception. Private foundations file Form 990-PF. Many private foundations are non-operating and primarily serve to hold investments and make grants or donations to public charities or other recipients as allowed by the IRS.

Private foundations must pay a flat 1.39% excise tax on their net investment income annually and are also required to meet minimum distribution requirements. Private foundations are also subject to stricter guidelines regarding their expenditures and other transactions with interested persons, as well as excess business holdings. Failure to comply with these rules can result in excise taxes being imposed both on the organization as well as its foundation managers.

Operating foundations

Some private foundations with substantial operations can be classified as operating foundations as described in IRC Section 4942(j)(3) and (j)(5). Operating foundations must complete a four-year test and pass either in aggregate or in three of the four most recent years individually. Operating foundations are not subject to the minimum distribution requirements of non-operating foundations. 
IRC Section 4942(j)(3) operating foundations must complete and pass both an income test as well as one of three supplemental tests, either the “Assets,” “Endowment,” or “Support” test. IRC Section 4942(j)(5) operating foundations must only complete and pass the “Endowment” test—they do not need to complete the income test or any other supplemental test.

If an organization does not pass the operating foundation test in a given year, it is classified as a non-operating foundation for that year and remains so until it passes the test again. While a foundation is designated as a non-operating foundation, it is subject to the minimum distribution requirements.

Exempt operating foundations

Finally, exempt operating foundations, as defined in section 4940(d)(2), are not only exempt from minimum distribution requirements as (j)(3) and (j)(5) operating foundations, but they are also exempt from the 1.39% net investment income tax. To receive the designation, an organization must be granted this status by the IRS and meet the following requirements each year it claims the exempt operating foundation status:

1. Qualify as an operating foundation
2. Qualify as a publicly supported organization for at least 10 years or have been an operating foundation as of January 1, 1983
3. Have no officers that are disqualified individuals
4. Have a governing body comprised of individuals that are broadly representative of the general public and at least 75% are not disqualified individuals

A private foundation can also transition into a public charity. To accomplish this, a private foundation must notify the IRS prior to beginning a 60-month termination period during which it must act as a public charity. At the end of the 60-month period, it must demonstrate that it now would pass a public support test. 

The rules and regulations surrounding exempt organizations are vast and complex. Should you have any questions regarding your organization or would like to discuss tax planning, our nonprofit tax team of dedicated tax professionals is happy to help.

Read this if you are a care provider that receives Medicaid Waiver Payments.

The IRS has recently issued guidance related to the taxability of certain payments to individual care providers of eligible individuals under a state Medicaid Home and Community-Based Services waiver program described in section 1915(c) of the Social Security Act (Medicaid Waiver Payments). Such payments, treated as difficulty of care payments, are excludable from gross income for federal income tax purposes under section 131 of the Internal Revenue Code.

Notice 2014-7, issued on January 3, 2014, provided guidance that deemed the difficulty of care payments as not subject to federal income tax. However, the notice was silent regarding implications related to employment taxes, specifically FICA and FUTA. Additional guidance issued in the fall of 2022 concludes that difficulty of care payments are subject to FICA and FUTA taxes unless an exemption applies.

Generally, if a service provider receiving difficulty of care payments is an employee of the organization providing the payments, then such payments will be considered wages subject only to FICA withholding (but not income tax), and FUTA will be assessed on those wages. If the service provider is an independent contractor, then the organization does not have any withholding obligations and does not need to prepare a Form 1099.

More information on Medicaid Waiver Payments can be found at Certain Medicaid Waiver Payments May Be Excludable From Income | Internal Revenue Service.

If you have any questions on these payments or your specific situation, please contact our Not-for-profit Tax team. We’re here to help.

Read this if you are a Maine business or pay taxes in Maine.

Maine Revenue Services has created the new Maine Tax Portal, which makes paying, filing, and managing your state taxes faster, more efficient, convenient, and accessible. The portal replaces a number of outdated services and can be used for a number of tax filings, including:

• Corporate income tax
• Estate tax
• Healthcare provider tax
• Insurance premium tax
• Withholding
• Sales and use tax
• Service provider tax
• Pass-through entity withholding
• BETR

The Maine Tax Portal is being rolled out in four phases, with two of the four phases already completed. Most tax filings for both businesses and individuals are now available. A complete listing can be found on maine.gov. Instructional videos and FAQs can also be found on this site.

In an effort to educate businesses and individuals on the use of the new portal, Maine Revenue Services has been hosting various training sessions. The upcoming schedule can be found on maine.gov. 

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

The New Hampshire Legislature has enacted a law that increases the revenue, gains, and support threshold to $2,000,000. This change applies to all charitable organizations with a fiscal year ending after August 6, 2022.

Under the old law, charitable organizations with revenue, gains, and other support totaling $1,000,000 or more were required to file audited financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) along with their Annual Reports and Forms 990.

Understand the requirements and revised audit threshold

Charitable organizations with revenue, gains, and other support of $2,000,000 or more will now be required to file with the Charitable Trusts Unit audited financial statements, along with their Form 990 and annual report. 

Charitable organizations with revenue, gains, and other support between $500,000 and $1,999,999 will be required to submit, with their Form 990 and annual report, a set of financial statements prepared in accordance with GAAP that may or may not be prepared by a certified public accountant.

Please note: the financial statement requirements outlined above do not pertain to private foundations.

Access the new forms

The New Hampshire Attorney General recently adopted new rules applicable to all charitable trusts, including charitable organizations and professional fundraisers. These changes include the adoption of new paper and online forms.

Effective October 7, 2022, the Charitable Trusts Unit of the New Hampshire Attorney General’s office can only accept forms submitted electronically through its website or paper forms with the date “September 2022.”

The acceptable forms are available here. Previous versions of these forms will no longer be accepted. Please contact our not-for-profit tax team if you have any questions about your specific situation. We’re here to help.

Read this if you file taxes with the IRS for yourself or other individuals.

To protect yourself from identity thieves filing fraudulent tax returns in your name, the IRS recommends using Identity Protection PINs. Available to anyone who can verify their identity online, by phone, or in person, these PINs provide extra security against tax fraud related to stolen social security numbers of Tax ID numbers.

According to the Security Summit—a group of experts from the IRS, state tax agencies, and the US tax industry—the IP PIN is the number one security tool currently available to taxpayers from the IRS.

The simplest way to obtain a PIN is on the IRS website’s Get an IP PIN page. There, you can create an account or log in to your existing IRS account and verify your identity by uploading an identity document such as a driver’s license, state ID, or passport. Then, you must take a “selfie” with your phone or your computer’s webcam as the final step in the verification process.

Important things to know about the IRS IP PIN:

• You must set up the IP PIN yourself; your tax professional cannot set one up on your behalf.
• Once set up, you should only share the PIN with your trusted tax prep provider.
• The IP PIN is valid for one calendar year; you must obtain a new IP PIN each year.
• The IRS will never call, email or text a request for the IP PIN.
• The 6-digit IP PIN should be entered onto your electronic tax return when prompted by the software product or onto a paper return next to the signature line.

If you cannot verify your identity online, you have options:

• Taxpayers with an income of $72,000 or less who are unable to verify their identity online can obtain an IP PIN for the next filing season by filing Form 15227. The IRS will validate the taxpayer’s identity through a phone call.
• Those with an income more than $72,000, or any taxpayer who cannot verify their identity online or by phone, can make an appointment at a Taxpayer Assistance Center and bring a photo ID and an additional identity document to validate their identity. They’ll then receive the IP PIN by US mail within three weeks.
• For more information about IRS Identity Protection PINs and to get your IP PIN online, visit the IRS website.

If you have questions about your specific situation, please contact our Tax Consulting and Compliance team. We’re here to help.

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 a tax-exempt organization.

The IRS recently issued proposed regulations (REG-106864-18) related to Internal Revenue Code Section 512(a)(6), which requires tax-exempt entities to calculate unrelated business taxable income (UBTI) separately for each unrelated trade or business carried on by the organization.

For years beginning after December 31, 2017, exempt organizations with more than one unrelated trade or business are no longer permitted to aggregate income and deductions from all unrelated trades or businesses when calculating UBTI. In August 2018, the IRS issued Notice 2018-67, which discussed and solicited comments regarding various issues arising under Code Section 512(a)(6) and set forth interim guidance and transition rules relating to that section. 

The good news
The new proposed regulations expand upon Notice 2018-67 and provide for the following:

• An exempt organization would identify each of its separate unrelated trades or businesses using the first two digits of the NAICS code that most accurately describes the trade or business. Activities in different geographic areas may be aggregated.
• The total UBTI of an organization with more than one unrelated trade or business would be the sum of the UBTI computed with respect to each separate unrelated trade or business (subject to the limitation that UBTI with respect to any separate unrelated trade or business cannot be less than zero). 
• An exempt organization with more than one unrelated trade or business would determine the NOL deduction allowed separately with respect to each of its unrelated trades or businesses.
• An organization with losses arising in a tax year beginning before January 1, 2018 (pre-2018 NOLs), and with losses arising in a tax year beginning after December 31, 2017 (post-2017 NOLs), would deduct its pre-2018 NOLs from total UBTI before deducting any post-2017 NOLs with regard to a separate unrelated trade or business against the UBTI from such trade or business. 
• An organization's investment activities would be treated collectively as a separate unrelated trade or business. In general, an organization's investment activities would be limited to its:
   
  1. Qualifying partnership interests
  2. Qualifying S corporation interests
  3. Debt-financed property or properties 

Organizations described in Code Sec. 501(c)(3) are classified as publicly supported charities if they meet certain support tests. The proposed regulations would permit an organization with more than one unrelated trade or business to aggregate its net income and net losses from all of its unrelated business activities for purposes of determining whether the organization is publicly supported. 

The missing news: Unaddressed items from the new guidance
With the changes provided by these proposed regulations we anticipate less complexity and lower compliance costs in applying Code Section 512(a)(6). While this new guidance is considered taxpayer friendly, the IRS still has more work to do. Items not yet addressed include:

• Allocation of expenses among unrelated trade or businesses and between exempt and non-exempt activities.
• The ordering rules for applying charitable deductions and NOLs.
• Net operating losses as changed under the CARES Act.

The IRS is requesting comments on numerous key situations. Until the regulations are finalized, organizations can rely on either these proposed regulations, Notice 2018-67, or a reasonable good-faith interpretation of Code Sections 511-514 considering all the facts and circumstances.
We will keep you informed with the latest developments.

If you have any questions, please contact the not-for-profit consulting team. 

Many of my hospital clients have an increased incidence of providing temporary housing for locums, temps and some employees and, as a result, have questions regarding the proper tax reporting to these individuals.   

First things first: the employment status of the individual needs to be determined before anything else.

If the person is an independent contractor (for example, a locum paid through an agency), a Form 1099-Misc usually needs to be filed for payments made to the individual (or agency) of $600 or more. A 1099-Misc is not required in the following circumstances:

• The payment is made to a corporation or a tax-exempt organization.
• Payments for travel reimbursement are excluded as long as they are paid under an accountable plan (which itself can be another topic for a blog). For example, an independent contractor submits a timely expense report to you with their lodging receipts for reimbursement. The amounts for the expense reimbursement do not have to be included on the 1099-Misc. If you pay the travel expenses directly or provide the housing, you also do not have to include these payments on the 1099-Misc.

If the individual is an employee, you should follow the guidance in IRS Publication 15-B, which can be found on www.irs.gov.

The basic rule of thumb is that every fringe benefit provided to an employee is a taxable benefit unless there is an exclusion listed in Publication 15-B.

The lodging exclusion begins on page 15 (of the 2016 publication), and there is an example regarding a hospital listed near the bottom of that page in the left column. For lodging to meet the exclusion, it must pass three tests:

1. The lodging must be furnished on your business premises. I’ve seen some guidance that allowed the exclusion when the lodging was in close proximity to the business premise (within a mile, etc.).
    
2. The lodging is furnished for the employer’s convenience. The employer furnishing the lodging to the employee must have a substantial business reason for doing so other than to provide the employee with additional pay. For example, the employee is on call for emergencies 4 or 5 days a week, so must live in close proximity to the hospital.
    
3. The employee must accept the lodging as a condition of employment. The employer must require the employee to accept the lodging because they need to live on your business premises to be able to properly perform their duties. We recommend including this condition of employment directly in the employee’s written employment contract.

If lodging does not meet all three of these tests, then it must be treated as a taxable fringe benefit with the appropriate payroll taxes withheld from the employee’s pay.

If you are also providing meals, the discussion on employer-provided meals also begins on page 15 of Publication 15-B, with the discussion for meals provided on your business premises starting on page 16.

A discussion related to transportation benefits begins on page 18. We have also had some questions from clients regarding transportation. For example, one client had an employee who dropped down to part-time status and moved from Maine to Florida. The employee agreed to continue working at the hospital one week a month, and the hospital agreed to pay for the flight back and forth. The individual continued to be treated as an employee. The flight is the employee’s commuting expense, and there is no exclusion for reimbursement of commuting expenses. Therefore, the flights had to be included in the employee’s compensation and reported on his W-2.

Many of these taxable benefits are being paid through an accounts payable system rather than payroll, and so can be easily missed. Withholding for these benefits at each pay period is much easier to accomplish rather than all at once at year end. It’s important for your HR department to communicate with the payroll office whenever unusual employment terms and benefits are being offered to employees to ensure proper tax treatment.