Lose the Paper - E-Filing Requirements Increase

Elaine Sommerville, CPA

Sandra Fowler, CPA, CPP

The IRS, helped by Congress, has been on a continual path of increasing mandated electronic filing of various returns.  Despite their best efforts, in 2019, the IRS still received nearly 40 million paper information returns, even though approximately 99% of all information returns for that year were e-filed.   In 2019 the IRS received another boost to their goal of reducing paper with the Taxpayer First Act (the Act).  The Act changed the electronic filing requirements for an array of information returns filed by businesses by lowering the threshold for required electronic filing of certain forms. Before the Act, electronic filing was required for a return, if the taxpayer filed as least 250 returns in that series. The Act reduces this requirement to 10 returns. Immediate implementation of the law was suspended awaiting the issuance of final regulations by the IRS.

The final regulations issued on February 21, 2023 are effective for tax years ending on or after December 31, 2023.  All taxpayers filing 10 returns or more in a tax year are now required to file those returns electronically. Returns include information returns (including Forms 1099-NEC, 1099-Misc and W-2), corporate income tax returns, withholding tax returns, and excise tax returns and others. The 10-return filing threshold is an aggregate calculation across all returns covered by the regulations. For example, a small nonprofit files eight Forms W-2 for its employees and 2 Forms 1099-NEC for its independent contractors.  Under the new law, all 10 forms must be filed electronically.  The regulation generally applies to returns required to be filed for taxable years ending on or after December 31, 2023. Therefore, for 2023 forms filed in 2024, electronic filing will be required for all taxpayers filing 10 or more returns. For many nonprofit organizations, the most affected filings will be filing Forms W-2 and Forms 1099-NEC/MISC. The Form 990 series of returns filed by nonprofit organizations is already under mandated e-filing although the new regulations clearly state that a Form 990 filed via a paper form when e-filing is required is considered to have not been filed.

While many organizations already utilize software facilitating e-filing of returns, smaller organizations may still file paper returns. Looking forward to facilitating this new requirement, Congress mandated the IRS create an e-filing system.  Meeting this mandate, the IRS rolled out the Information Return Intake System (IRIS) in January of 2023.  Through IRIS, taxpayers can electronically file any of the Forms 1099 series for tax year 2022 and future years. Taxpayers will need to apply for a Transmitter Control Code to use this system to electronically file forms. All this information is available on the IRS website at https://www.irs.gov/filing/e-file-forms-1099-with-iris. The Social Security Administration already maintains a method of e-filing Forms W-2 and information is available at https://www.ssa.gov/employer/.

If the taxpayer believes filing returns electronically creates an undue hardship to the taxpayer, a waiver can be requested by filing Form 8508, Request for Waiver from Electronical Filing of Information Returns at least 45 days before the due date of the return(s) for which you are requesting a waiver. The instructions require substantiation be provided for a taxpayer’s justification for the waiver request and acceptance is not automatic. A waiver should only be requested when necessary.

Practically, it is best to avoid filing any return or report with the IRS or the Social security Administration using paper.  Both entities are struggling to timely process paper filings, so practitioners encourage clients to utilize electronic filing and payment avenues. The shutdowns experienced during the pandemic created a severe backlog for the IRS, and it is just now catching up on processing manually filed returns. By filing electronically, the taxpayer can ensure filings are received and processed by the IRS timely and avoid errors made during the manual input of information received by the IRS. Electronic filing platforms provide confirmation information allowing for a tracking of the filing if technical issues occur. Not to mention the time saved in preparing the mailing of paper returns requiring certified return receipt cards and trips to the post office.  The new IRIS system is not the only e-filing option available to taxpayers for the Form 1099 series of information returns. And the Social Security Administration is not the only avenue for e-filing Forms W2. Many accounting software platforms include e-filing options, all tax practitioners maintain e-filing options and there are independent companies easily available to taxpayers offering these services through browser-based platforms. The key to meeting this new mandate is preparing for the January 2024 filing season by selecting the e-file options best available to the taxpayer before the filing season begins. 

COVID-19 Update #11 - The PPP Loan Game Changer

The past two months have seen a flurry of activity as professionals and regulatory agencies interpreted all the aspects of the legislation passed to address various issues associated with the corona virus.  The blog has not attempted to address all the changes as we have waited to find some final settling of the ever-moving target of final implementation of the new rules.  One of the difficult areas has been the administration of the loans issued through the Paycheck Protection Program.  Much has been written and many webinars have been conducted to take apart and put back together all the nuances with this program.  This program has been the most public of the assistance programs.  From obtaining the loans, to keeping the loans (or maybe returning them), and now to the forgiveness aspects of the loan, administering these loans has been challenging.  With confusion shrouding the program, Congress enacted changes to assist in making the program more beneficial to recipients.  The Paycheck Protection Program Flexibility Act of 2020 was signed by President Trump on June 5th bringing some much-needed flexibility to the PPP.

Background

The PPP was originally authorized by the CARES, Act.  With initial funding quickly disbursed, additional funding was provided by Congress.  (Funding is still available, if your organization needs assistance.)  Most organizations have moved past obtaining the loans, and justifying the loans, and are now addressing the next step; applying for the loan forgiveness.  While there are various requirements, for most recipients, the funds available for forgiveness were originally required to be spent in the eight weeks following the funding of the loan.  Consternation set in as recipients realized they could not spend the funds in the requisite eight weeks due to a multitude of factors.  Significantly, the ongoing restrictions on business’s operations revealed problems with the PPP as originally implemented. 

Paycheck Protection Program Flexibility Act of 2020

Enacted to address several growing concerns with implementing the original legislation, the extension act provides for greater flexibility in gaining forgiveness of the loan funds.  The PPP Flexibility Act makes these changes:

•          Extension of time to use the funds – Originally, set at eight weeks, the time to use the funds has now been extended by changing the definition of the term “covered period” to the earlier of twenty-four weeks from the loan funding or December 31, 2020.  This provision triples the period to assist organizations that may have been closed or restricted in operations during the first weeks after receiving the funds.  Recipients may still elect the eight-week period, if this time-period better suits operations.
•          Establishes a set allocation usage of funds – Forgiveness may occur when the funds are used in the “covered period” for payroll costs and certain overhead costs.  While original legislation did not determine a percentage between the two areas, the SBA had announced that at least 75% of the funds had to be used on payroll costs.  The legislation establishes an allowable 60/40 split on the fund’s usage.  This provision accomplishes the goal of clearly stating that no more than 40% of the funds can be used on the overhead items, i.e., rent, utilities, transportation, mortgage interest.  (The legislation also indicates that 60% of the funds must be spent on payroll costs or none of the funds are forgiven.  However, some commentators believe this is a drafting error and will be corrected to allow for partial forgiveness.)
•          Workforce reestablishment – The original program required a return to “normal” of the number of full-time equivalent employees employed at February 15^th by June 30th.  With extended closures and other operational limitations, the June 30^th deadline has now been moved to December 31, 2020.   And some considerations are provided for this requirement if reemployment is restricted or limited due to ongoing government guidance and restrictions. 
•          Extension of repayment period – While the loans were originally granted with a two-year repayment arrangement, the period has been legislatively established at five years for any portion of the loan that cannot be forgiven.
•          Delay in employer tax deposits – A provision of the CARES, Act allows employers to delay depositing or paying the employer portion of the Social Security and Medicare taxes.  Originally prohibited from taking advantage of this relief provision, PPP recipients may now delay depositing the employer-portion of these taxes.  See this blog’s post for COVID-19 Update #9 published in April.  

Time to Apply

As many approached the conclusion of the initial eight-week "covered period", plans commenced to complete the application requesting loan forgiveness.  The SBA's original loan forgiveness application was not for the faint of heart.  With the legislative changes, the SBA should issue a new loan forgiveness application.  Professional assistance may be required to complete the application.  Forgiveness must be requested within ten months of the end of the recipient's "covered period".  For most recipients, this will be ten month following the twenty-four-week period after the loan's funding.  However, some organization may elect the eight-week covered period after reviewing various business considerations. 

Summary

Navigating the PPP process has been challenging since its inception, but the funds have provided significant financial resources to many nonprofit organizations and churches. To successfully navigate this final phase of the program, recipients will want to monitor upcoming guidance from the SBA and may need to consult with their outside professionals to gain maximum benefit from the program.  For those organization determining they could not spend all of the money prior to the end of eight weeks, the new legislation provides a sigh of relief during these turbulent times.

Proposed New Guidance for Group Rulings Indicates Future Changes for All Groups

Proposing sweeping reform and updating archaic guidance for organization's holding group rulings, the IRS issued Notice 2020-36 proposing changes in the rules applicable to group rulings.  The guidance is issued in advance of a final revenue procedure that may be issued on the topic later this year. 

Not updated since 1980, guidance for organizations hosting a group ruling has been outdated for many years.  The new proposed guidance promises to be an all inclusive "how to" as it applies to central organizations hosting group rulings.  Group rulings are common in every area of exempt organizations but have not received great attention over the years.  Several years ago, the IRS performed a compliance initiative directed at group rulings.  While no formal report was issued, the proposed guidance more than like addresses concerns raised through the initiative.  Virtually all groups will be affected by the proposed guidance including church denominational group rulings.

Group rulings consist of a central organization (Central) that obtain its own exemption and then obtain special permission from the IRS to share its exemption with subordinate organizations (Subordinate).  Many well known organizations operate with group rulings including professional membership organizations, parent-teacher organizations, student/alumni groups and youth organizations.

Changing the Qualifications

A central organization has been able to obtain a group ruling determination as long as it has at least 1 subordinate organization.  The proposed guidance requires a new group have 5 members for the central organization to qualify for the group ruling.  Additionally, a group must always have at least one subordinate member to maintain the group.

A central organization will only be allowed to have one group exemption ruling. 

Preexisting groups will be required to comply with the above two provisions within one year after the final revenue procedure is published in the Internal Revenue Bulletin.

Strengthening Oversight

The IRS has long been frustrated by the lack of oversight provided by central organizations to subordinates.  Addressing this lack of oversight, the new guidance defines required oversight functions. Central must either exercise "general supervision" or "control" over its subordinates. 

• The Central must exercise general supervision by:
• Annually, obtaining, reviewing and retaining information on Subordinates' finances, activities and compliance with annual filing requirements. In other words, Central is obtaining proof that each subordinate required to file Form 990 is filing the appropriate return as well as obtaining other operational information.  
• Central will actively educate Subordinates on the Form 990 filing requirements in writing. This requirement addresses the consistent issue with Subordinates losing tax exempt status due to the auto revocation requirements. 
• Control - Control is accomplished when Central appoints the majority of Subordinate's officers, directors or trustees; or a majority of Subordinate's officers, directors or trustees are officers, directors or trustees of Central. 

New Inclusion Requirements

Tightening the requirements for who may be included in the group ruling, the new guidance restricts inclusion to: 

• Central and all subordinates must be exempt under the same 501(c) section.  For example, if Central is a 501(c)(4), then all the subordinates must be classified under 501(c)(4).  
• Further restrictions for 501(c)(3) organizations require all subordinates to be classified  as public charities under the same 509(a) classification, but it is not necessary that they all be classified under the same 170(b)(1)(A) classification.  For example, a church's denominational ruling may cover schools, churches and hospitals.  All of these are classified under 170(b)(1)(A) under different subsections. Subordinates may be publicly supported under 509(a)(1) and 170(b)(1)(A)(vi) interchangeably with a public charity classification under 509(a)(2) and still maintain membership in the group.  However, it does not appear that organizations classified under 509(a)(3), supporting organizations, could be included in a ruling unless it solely consists of 509(a)(3) supporting organizations.  Additionally, Type III supporting organization are banned from inclusion in any group rulings. 
• For groups outside the 501(c)(3) arena, all subordinates must also share a the same primary purpose and the same NTEE classification code. 
• All subordinates must adopt a uniform governing document.  Providing a "suggested" document is not sufficient.  If a 501(c)(3) group contains differing organizations; i.e., churches, schools, hospitals, a uniform document must be adopted for each group. Subordinates do not have to be corporations, but they must have a governing document.  (Note:  Due to varying state requirements, it will be interesting to see the final format of this particular requirement.)

Effective Dates 

Except for the items discussed under "Changing the Qualifications" above, the new rules are generally effective when the final revenue procedure is published.  For new subordinates, the effective date is immediate upon the publication of the revenue procedure.  While other transition relief is granted for preexisting subordinates for some of the rules allowing them to continue in the group, the application of the new rules to all new subordinates may restrict who may join the group.  Additionally, there does not appear to be a proposed transition for applying the new oversight rules.  

Summary

Long over due, it is time for all groups to reexamine the way they operate.  Some groups will have to restructure due to the matching requirements.  While the old rules still apply, groups are best served by transitioning to the proposed new rules.  Starting June 17, 2020, the IRS will no longer accept any requests for group rulings until after the publication of the final revenue procedure. Comments on the proposed new rules may be submitted to the IRS until August 16, 2020.  Due to the potential restructuring involved to institute some of the new guidance, the IRS should expect a lot of comments between now and August 16th. 

COVID-19 Update #10 - The Housing Allowance and the PPP

Over the past two weeks many churches have applied for the a loan through the Paycheck Protection Program (PPP).  In determining average monthly wages, the banks consistently excluded compensation designated as housing allowance paid to ministers.  The housing allowance is not a taxable part of compensation, so it is not reported on a church's payroll reports or on a minister's Form W-2.  Since the banks were using these documents to support the payroll amounts, many refused to include the housing allowance.  Since the housing allowance may be a significant portion of a minister's cash compensation, omitting it from the calculation of average monthly compensation significantly reduced a church's qualifying amount for the PPP. 

SBA Clarifies the Issue of Housing Allowance

The SBA has been updating its frequently asked questions (FAQs) on a regular basis.  Today's addition to the FAQs specifically addresses the question of housing allowance.  Question 32 now specifically states that payroll costs include all cash compensation.  Therefore, the cash housing allowance paid to a minister may be included in a church's payroll costs for the PPP. 

What Does This Mean

This clarification has two applications:

Churches Already With A PPP:  Churches who have already received or been approved to receive a PPP loan cannot go back and request more funds.  However, the inclusion of the housing allowance as a payroll cost will make it easier to meet the expenditure tests that must be met to justify the use of the funds for the upcoming "forgiveness" phase of the program.   Compliance with this phase of the PPP is intricate, so professional assistance may be required.  Additionally, we are still waiting on further guidance regarding various aspects of the "forgiveness" phase.

Churches Applying For A PPP:  Starting Monday April 27, 2020, the PPP will be accepting more applications (new funding was approved on Friday April 24, 2020).  For churches and religious nonprofits applying in the new phase of funding, the average monthly payroll costs may be calculated including the housing allowance.  Lenders may not be fully aware of the intricacies of housing allowance and how it operates.  Therefore, churches should be ready to assist in educating lenders in these unique payroll aspects of ministers' compensation.

COVID-19 Update #9 - Deferral of Tax Deposits

The CARES Act provides for employers and self-employed individuals to shift the timing of certain tax payments over the next few months in the hopes of alleviating some of the financial burden felt at this time.  Of the CARES Act's programs, this one should be approached with the greatest amount of care, concern and planning.

What is Available for  Deferral

The Act allows employers to defer the deposit of the employer's share of Social Security taxes owed on employees' wages as determined by IRC Section 3111(a).  This is the OASDI portion of the taxes and is 6.2% of the first $137,700 of taxable wages.  The Act does not provide for the deferral of the employer's share of the Medicare taxes associated with employees' wages.

For the self-employed individual, a deferral of 50% of the tax determined under IRC Section 1402(a) is available.  This is the portion of the self-employment tax associated with the Social Security tax as calculated on Schedule SE.  Of the 15.3% of self-employment tax calculated, 12.4% is assessed as the Social Security tax.

The deferral of the applicable taxes is for taxes required to be paid or deposited during the period March 27, 2020 to December 31, 2020.   The deferral is not associated with the date the wages were paid, but rather when the taxes are required to be deposited or paid.

Provision for the Deferral

The tax available for the deferral will be due as follows: 

• 50% due by December 31, 2021 and 
• 50% due by December 31, 2022.

Late payment penalties or interest will not be charged on the taxes deferred through the program because the payments are considered as timely made as long as the above schedule is followed.  Of course, the deferred taxes may be paid at any time within this time schedule.  

Example for the Employer  

First Church pays wages to employees other than their ministers totaling $4,000 in April.  Normally First Church is a monthly payroll tax depositor, so its April tax deposit is due by May 15th.  When reviewing the tax deposit for April, First Church determines it consists of the following: 

Federal Income Tax Withholding       $  750

Social Security Tax Withholding        $  248

Medicare Tax Withholding                 $    58

Total Employee Withholding             $1,056

Social Security Tax - Employer          $248

Medicare Tax  - Employer                  $  58

Total Potential Tax Deposit              $1,362

First Church may defer the $248 of employer Social Security taxes.  The tax deposit required at May 15th is $1,114 ($1,362 - $248).  The $248 is now due as follows:  $124 by December 31, 2021 and the remaining $124 by December 31, 2022.  

Warning:  It is important to note there is no deferral of any of the taxes withheld from the employee.  This money doesn't belong to the employer.  There is never any reason to not timely remit employee withholdings.  These funds are called "trust funds".  If not remitted timely, penalties may be assessed against individuals with financial authority within an organization. 

Example for the Self-Employed Individual

Pastor Joe is the senior pastor of First Church.  As a minister, he reports his wages on Schedule SE.  His estimated self-employment taxable income for 2020 is $50,000.  His estimated self-employment tax is $7,650 consisting of $6,200 Social Security tax and $1,450 of Medicare tax.  Pastor Joe decides to make use of the deferral program for 2020.  He may defer 50% of the $6,200, or $3,100, to be paid at a later date.  This deferral amount can be immediately used to reduce his 2020 estimated tax payments.  The deferral is due in two payments:  $1,550 must be paid by 12/31/2021 and the other $1,550 must be paid by 12/31/2022.  

The Deferral and the Paycheck Protection Program

All employers may use the deferral program, including those claiming credits for the paid sick or family leave programs provided for in the Families First Coronavirus Relief Act and the employee retention credits provided by the CARES Act.  However, employers participating in the Paycheck Protection Program (PPP) are limited in their use of the deferral program.  The employer receiving a PPP loan may participate in the deferral program until it has its PPP loan forgiven.  At the date the PPP loan is forgiven, the employer may no longer defer any taxes using the deferral program.  For the time period the PPP loan is outstanding, the deferral is available.  

Caution

As mentioned in the beginning, this is the program that requires care, caution and planning before implementing.  As a tax professional, it is the program that causes me the greatest consternation.  Taxes deferred can easily become a liability that cannot be paid.  While in the short term, the program provides a tremendous relief to the employer and the self employed person, in the long run it may also create a burdensome liability that cannot be easily met.  Any taxpayer using the program must be aware of the amount of the associated liability.  Organizations should record the unpaid tax in a special liability account to provide for clear tracking of amount.  Self-employed individuals may want to specifically set up a monthly savings plan to provide for funds at the applicable due dates.  In essence, the money is borrowed from the government and, as with any other debt, plans are needed to provide for its repayment. 

COVID-19 Update #8 - Update on the Paycheck Protection Program

The Paycheck Protection Program has created a whirlwind of activity over the past 10 days.  While it was the goal of everyone to provide needed funds quickly, rolling out a $349 billion dollar program is no small feat.  Over the past 10 days, the SBA has issued guidance three separate times.  Each set of frequently asked questions (FAQs) has answered another debate in the professional and banking communities.  There have been winners and losers on both sides of these debates and there have been some surprising resolutions by the SBA.  Rather than providing separate blog posts, I have opted to update the original post each time.  Therefore, despite the posting date on the blog on this topic of March 30th, please check the date at the top of the blog for the most recent update.  The blog has been updated as of April 7, 2020.

COVID-19 Update #6 - Individual Economic Impact Payments

To further assist in stabilizing the economy the CARES Act provides for economic impact payments to be automatically distributed to taxpayers.  According to IRS Information Release 2020-61, the payments will begin to be distributed within the next three weeks.  While the provision does not directly affect nonprofit organizations and churches, this information does affect your staff, members and those you serve.   The following information discusses the various aspects of the this new benefit.

Who may receive the payment & how much will it be?

The Act provides for a credit on a taxpayer's 2020 Form 1040 of $1,200 to individuals and $500 for each dependent child.  (The child must be a dependent under the age of 17.  This leaves a large number of young adults who will not be eligible for any payments because they are 17 or older and still dependents of their parents.)  The full credit is provided to tax filers whose adjusted gross income does not exceed $75,000 for single taxpayers and $150,000 for married couples filing a joint return.  For those with adjusted gross income in excess of these amounts, the credit phases out until it is totally unavailable when the taxpayer's adjusted gross income is $99,000 for single taxpayers and $198,000 for married couples filing jointly. 

While the Act provides for a credit (an item that would be applied directly to a person's federal tax liability)  calculated on a person's 2020 Form 1040, the Act also allows for an advance payment of the credit.  This is the payment qualifying taxpayers will soon receive from the IRS.  When a taxpayer files their 2020 Form 1040, the advance credit will be reconciled to the actual amount allowed.  If a greater credit is due, the taxpayer will get the additional amount.  This could occur, if the taxpayers income in 2019 (or 2018, see below) is in the range where the credit was either reduced or disallowed when calculating the amount of the advance payment. 

Obviously, the credit and advance system is confusing to taxpayers, so an example might best clarify the situation.

Example 1:  Sue is a single taxpayer making $65,000 a year as reported on her 2019 Form 1040 (Sue is a very with it taxpayer having already filed her return!)  The IRS sees that Sue's AGI (adjusted gross income) is less than $75,000, so they send her the full $1,200.  Sue enjoys her $1,200 of additional money during our time of economic disruption.  In 2021, Sue files her 2020 Form 1040.  Sue's return shows the following:

Economic Impact Credit Allowed:               $1,200
Economic Impact Advance Received:          $1,200

Credit to claim against 2020 tax liability:        -0-

The credit/advance arrangement has no affect on Sue's 2020 tax liability.  She will have the same tax liability she would have had without the passage of the credit.  Therefore, the $1,200 is additional money to Sue.

Example 2:  Sue is a single taxpayer making $105,000  a year as reported on her 2019 Form 1040.   The IRS sees that Sue's AGI is more than $99,000, so they do not send her any payment.  However, Sue is unable to work all of 2020, so her AGI in 2020 is $50,000.   In 2021, Sue files her 2020 Form 1040.  Sue's return calculates the economic impact credit as follows:

Economic Impact Credit Allowed:               $1,200
Economic Impact Advance Received:          $   -0-

Credit to claim against 2020 tax liability:     $1,200

Because Sue did not qualify for the advance payment but did qualify for the final credit, she may take the credit against her 2020 income tax liability.   The result being that if a taxpayer qualifies for the $1,200 (or any part of it) he/she will get that money either as an advance paid by the IRS in the upcoming weeks or as a credit against income taxes on the 2020 Form 1040. The credit is a gift from Congress that is either received in advance from the IRS or received by reducing the 2020 tax liability.  This is simply a timing issue of when you receive the "free" money.

Initial information indicates that if the reconciliation on the 2020 return determines the advance credit paid was larger than it should have been, the excess received does not have to be paid back. Therefore,  the 2020 federal tax liability will either be exactly the same as it would have been without the credit (Example 1) or it will be a little less, creating a refund, with the credit/advance adjustments (Example 2).

How will the IRS determine the advance credit payment? 

The IRS will use a taxpayer's 2019 Form 1040 to determine qualification for the payment and the amount of the payment.  If the 2019 return has not been filed, then the IRS will base the payment on the 2018 return. If a taxpayer has not filed a Form 1040 for either 2018 or 2019, they should file a return immediately.  

Many older taxpayers do not file returns since their income is below the filing thresholds.  The Act does provide for the IRS to based the payment qualification on the SSA-1099 issued to recipients of Social Security if the tax returns are not available.  Therefore, if older taxpayers have not filed due to the filing thresholds, they may still receive their payment.  The IRS originally advised these taxpayers to file a return for 2019, so their information is in the system and their payment is not delayed.  However, in a recent press release, the IRS has announced they will use the SSA-1099 to determine payment recipients and these taxpayers do not need to file a return to receive a payment. 

How will the payments be delivered?

It is the desire of the IRS to direct deposit the payments into a taxpayer's bank account based on the information provided on the tax return utilized to determine the payment.  However, many taxpayers do not include this information on their tax returns unless they are receiving a refund.  

For taxpayers who have not provided banking information on a prior return, the IRS is establishing a web-based portal for taxpayers to use in providing the information to the IRS.  If the IRS does  not receive any banking information for direct deposit, it will mail checks to the taxpayers.  However, this significantly delays a taxpayer receiving the payment.  

The IRS is required to send a notice, by mail, to the taxpayer within 15 days of issuing the payment.  The notice will provide IRS contact information for a taxpayer to use, if the payment is not received. 

Note:  If a taxpayer's information, either mailing or direct deposit information, on the 2018 Form 1040 has changed and the 2019 Form 1040 has not been filed, then a taxpayer may desire to quickly file the 2019 return with updated information to avoid delays in receiving the advance credit payments. 

With all the isolation orders, how can a tax return be completed? 

This is a great question considering many people are currently under an isolation order and most tax preparers have closed their doors to any outside clientele.  However, CPA firms and tax preparers are resilient people and most have established mechanisms for continuing to serve their clients.  At Sommerville & Associates, P.C. we are utilizing our client portals and electronic communications to continue to prepare returns.  Clients are encouraged to submit tax documents electronically through their client portals and completed returns are electronically submitted to the client alleviating any exchange of physical packages.  While our staff is working remotely, we continue to work on client returns.  Most tax preparers have similar structures in place, so taxpayers should continue to seek a preparer that can move forward in preparing the 2019 Form 1040.  The due date for the 2019 Form 1040 has been extended to July 15, 2020 as well as the payment of related taxes.  If a taxpayer owes with their 2019 Form 1040, they should still proceed with filing the return.  The taxes due with the return would still be due at July 15, 2020.  

As with all of our COVID-19 posts, the information contained in the post is based on guidance issued at the time of the post.  Continual guidance is being issued by the IRS and the DOL, so above information may be updated in the future as guidance is published. This blog was updated on 4/3/2020. 

COVID-19 Update #5 - The Paycheck Protection Program - SBA Loans Available to Nonprofit Organizations

Special Note:  Guidance and information has been issued from several sources over the past week.  In an attempt to provide accurate information, this blog post is updated as guidance is issued.  This blog was last updated on 4/7/2020 and includes information contained in the SBA Frequently Asked Questions (FAQs) issued on April 6, 2020 . 

On March 27, 2020, President Trump signed a second piece of legislation, the Corona Aid, Relief, and Economic Security Act (the  CARES Act) geared to keep the economy running during the COVID-19 pandemic.  One of the most popular provisions in the legislation is the provision to provide businesses and nonprofits operational loans to assist during this time in keeping employees gainfully employed until the crisis has passed. This provision is known as the paycheck protection program.

Source of the Loan

The loans are financed through the U.S. Small Business Administration (SBA).  While typically nonprofit organizations and churches are not eligible for SBA loans, the CARES Act allows 501(c)(3) organizations, including churches, to apply for this program.  Congress has allocated $349,000,000,000 for the program.

Eligible Organizations

Virtually any small business and/or nonprofit organization with less than 500 employees will qualify or that meet one of the other definitions of a "small business enterprise" as defined by the SBA.  However, for nonprofit organizations this appears to be a straight up count of employees, both full-time or part-time.  Also, business operations that are independent contractors or sole proprietors may qualify for the loan. Nonprofit organizations may require an organization's determination letter as proof of exemption under 501(c)(3).  A determination letter is issued to each nonprofit entity when the IRS approves its exempt status.

The organization must have been in operation on February 15, 2020 and had employees at that date. Additionally, the organization must be prepared to state the loan request is due to economic uncertainty due to the current COVID-19 pandemic.

Special Note for Churches:  Churches exempt under a group ruling issued to a denomination should obtain a letter verifying they are a part of the group ruling and the determination letter issued to the group verifying its exempt status.  Churches that have never officially requested IRS recognition of their exempt status and do not belong to a group, may encounter hurdles in verifying their status as a 501(c)(3) organization.  However in a set of "frequently asked questions" issued on April 3, 2020, the SBA clarified that churches do not have to formally apply for exempt status.  Additionally, after much confusion occurred in the lending community, the SBA clarified that churches do qualify for the PPP assistance and the SBA's nondiscrimination requirements cannot be applied to a church's religious activities.  

Loan Availability

Loans will be available through this program until the earlier of June 30, 2020 or the funds allocated by Congress are utilized.  Therefore, early application will assist an organization in securing the loan.  The loans may bear an interest rate not to exceed 4%.  The SBA has announced that the loan's rate of interest will be 1%.  Additionally, lenders are instructed to defer any required loan payments for six months to one year with a potential for all or most of the loan to be forgiven.   

Potential Funds Available

The maximum loan available through this program is 2.5 times the amount of the organization's average monthly payroll costs for the one-year period preceding the date of the loan not to exceed $10 million.  (Special rules may apply for organizations in existence for less than 1 year or with seasonal employees.)  The SBA has clarified that an employer may use the past 12 months or the calendar year 2019 for determining the potential loan amount.  If the 2019 calendar year is used to determine the amount, the employer must also confirm that it had employees at 2/15/20. Therefore, a payroll run covering that time period may also be requested. 

Payroll costs include:

• Salaries and other wages

• Employer-paid health care benefits

• Employer-paid retirement benefits

• Employer-paid state and local payroll taxes

Payroll costs do not include: 

• The amount of cash compensation exceeding $100,000 per any employee (clarified by the SBA FAQs issued 4/6/20.)
• Compensation paid to an employee residing outside the U.S.

• Federal payroll taxes - While the law indicates this includes any taxes withheld from the employee for FICA/Medicare and Federal Income Tax as well as the employer portion of the FICA/Medicare taxes assessed and withheld for the period 2/15/20 to 6/30/20, the SBA states in its FAQs that there would not be a reduction in payroll costs for any taxes withheld from the employee, but the employer share of FICA/Medicare should never be included in the calculation.  

• Any compensation paid under the Families First Coronavirus Response Act for sick leave or family leave (see other related blog posts.)
• For an employer, payroll costs do not include amounts paid to independent contractors reported on Forms 1099-Misc.  This is excluded because these individuals/businesses may apply for the loan on their own. (Clarified by the SBA in FAQs issued on 4/2/20.)

Potential Use of Funds

Funds from the loan may be used for: 

• Payroll Costs as previously defined

• Mortgage interest

• Interest on other debt obligations incurred before February 15, 2020

• Rent

• Utilities

Potential Loan Forgiveness

Entities receiving these loans may qualify for all or a portion of the loan to be forgiven.  The amount to be forgiven is based on the amount spent on the following expenses for the period of eight weeks beginning with the date of the loan. 

• Payroll costs

• Mortgage interest payments for loans incurred before February 15, 2020

• Rent for lease agreements in force at February 15, 2020

• Utilities that were obligations as of February 15, 2020

Since the purpose of the provision is to keep people working, the amount of the loan forgiven is directly tied to the accomplishment of this purpose.  Therefore, the amount of the loan forgiveness is reduced if the recipient reduces its workforce either in numbers of employees or in the amount of salaries paid is significantly reduced.  

The amount forgiven is limited to the principal of the loan and accrued interest.  Additionally, only 25% of the amount of the loan can be justified with non-payroll costs; i.e., rent, utilities, etc.  The forgiven portion of the loan is not  taxable.  

Any portion of the loan that is not forgiven must be repaid within 2 years (the Act states up to 10, but the guidance indicates the loans are 2 year loans.)

SBA Guidance

Guidance from the SBA was issued on 4/2/2020 and can be located at https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf.

Application can be located at https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf

Frequently Asked Questions (FAQs) related to faith-based organizations applying for the PPP and the EIDL can be located at https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl

Alternate Loan Program

Secular nonprofit organizations may also explore the Economic Injury Disaster Loan (EIDL) provided for in earlier legislation.  This program may also provide funding for operations but it does not include any loan forgiveness provisions.  However, once an organization has applied for this program, it may be eligible for an immediate grant of up to $10,000 in addition to its loan.  Organizations who have previously received an EIDL may be eligible to roll it into the Paycheck Protection Loan. 

COVID-19 Update #4 - Emergency Family Leave Provisions and Related Tax Credits

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes several tax credits as well as mandated leave requirements.  To assist with application of the provisions, the various provisions are discussed in separate blog posts.  

Required Paid Family Leave for Employees

In addition to the required sick leave employers must offer, the Act also added some emergency provisions to the Family Medical Leave Act of 1993 (FMLA).  The effective date of these provisions is April 1, 2020.

Applicable Employers:  While the FMLA does not generally apply to employers with less than 50 employees, the emergency provisions have changed the applicable definitions of "employer" to address the current circumstances.  The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). 

Required Leave Circumstances:  The leave generally is available when an employee must take off to care for the employee's child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place or (2) makes a childcare provider unavailable.   Note:  the act specifically indicates an employee's son and/or daughter.  This does not extend to care of others at this time.  Therefore, it would not extend to employees who need to care for their grandchildren.  

Amount of Required Leave:  This amount of paid leave is more extensive than the other required sick leave provisions.  (Generally, the first 10 days of leave can be unpaid.  If qualifying, these leave days may have to be considered under the required sick leave provisions of this legislation.  For more information on the required sick leave, see Update #2.)  After 10 days, then paid leave is required, pegged to the employee's pay rate and pay hours. The paid leave rate must be at least 2/3 of the employees regular pay, but it may be capped at  $200 per day and $10,000 in the aggregate per employee.  

For part-time or irregular work schedules, the amount of paid leave is calculated based on the average number of hours the employee was scheduled to work per day for the last six months prior to the date the leave starts. 

Eligible Employee:  An eligible employee is an employee who has been employed for 30 days.  If an employee was laid off after March 1, 2020 and has been rehired, he/she must have been employed for 30 out of the last 60 days prior to the lay off.  

Taxation of Wages:  The required leave payments are taxable, but the compensation is not subject to the employer's portion of OASDI (Social Security tax of 6.2%)

Corresponding Tax Credits for Paid Family Leave

Tax Credits for Employers

Calculating the Credit:  The credit consists of the amount of:

1. The wages paid for the family leave (see note below) subject to the above discussed limits; and 
2. The amount of the cost of maintaining a health plan that is allocable to the paid leave time.

In addition to the base calculation for the credit, an employer is also eligible for a credit on the employer's portion of the Medicare taxes paid on the family leave wages paid. 

Nuance for churches and ministers:  The definition of wages eligible for the credit is defined by IRC Section 3121(a).  Wages paid to ministers performing ministerial duties and to employees of churches that have elected out of the FICA/Medicare system are not wages for purposes of IRC Section 3121(a).  Therefore, the wages paid to ministers and to employees of "electing" churches are not eligible for the credit.  Unless guidance is issued to the contrary, these individuals will need to look to the provisions for self-employed taxpayers to claim the credits.  See the discussion below on self-employed taxpayers claiming a family leave credit. 

Claiming the Credit:  The tax credit corresponding with the EFMLEA mandate is a credit against the employer's 6.2% portion of the Social Security (OASDI) payroll tax.  In the event the credit is more than an employer's OASDI, then the amount is refundable.  

Note:  While guidance as to how to claim the credit is still forth coming, right now we are anticipating the credit being claimed on an employer's Form 941.  

Family Leave Credit for Self-Employed Taxpayers

The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed in a separate blog post.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  As noted above, this should also apply to ministers and to employees of churches electing out of the FICA/Medicare program.  

Limit on the Credit:  The allowable credit is limited to the lesser of either 67% of the average daily self-employment income for the days attributable to family leave or $200 per day.   Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  

Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Technical guidance from the IRS and the DOL is forthcoming and the above interpretation of the law is subject to change based on newly issued guidance. FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.

COVID-19 Update #3 - Families First Coronavirus Response Act - Sick Leave Tax Credits for the Self-Employed

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. While the Act requires mandated paid sick leave in certain instances (covered in a separate blog post), the Act also provides limited relief for taxpayers who are self-employed.  

Tax Credit for Sick Leave 

The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  

Warning:  An unusual nuance is the law's application to ministers and employees who work for churches making the election under IRC Section 3121(w).  Income earned by ministers is taxed under IRC Section 1402 as self-employment income as is income paid to all employees that work for a church electing out of the FICA/Medicare system.  Therefore, these employees, even if provided with required sick leave by an employer, must claim the credit on their personal tax returns.  The employers will not be eligible to claim the credit.  At this time, guidance has not been issued by the IRS to confirm this interpretation.

Qualifying Time:  The taxpayer must have incurred days that he/she could not have performed their regular work duties for one of the following stated reasons: 

1. the taxpayer is subject to a Federal, State or local quarantine or isolation order related to COVID-19;
2. the taxpayer has been advised to self-quarantine due to COVID-19;
3. the taxpayer is experience symptom of COVID-19;
4. the taxpayer must care for an individual who is subject to a quarantine order; 
5. the taxpayer is caring for a son or daughter, if the child's school has been closed; or 
6. the taxpayer qualifies due to a subsequent factor defined by the Secretary of Health & Human Services.

Amount of the Credit:  The amount of the credit is either $511 per day, not to exceed 10 days, for the days qualifying under #1, #2 or #3 or $200 per day, not to exceed 10 days, for the days qualifying under #4, #5 or #6 above.  Accordingly, the self-employed person may receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. 

Limit on the Credit:  The allowable credit is limited to either 100% for days qualifying under #1, #2 or #3 or 67% for days qualifying under #4, #5 or #6, of the average daily self-employment income.  Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Please note that guidance on the legislation is being issued and may provide further clarification on the application and operation of the new law. 

Further analysis of COVID-19 relief legislation is discussed in separate blog posts.  

COVID-19 Update #2 - Families First Coronavirus Response Act - Mandated Paid Sick Leave

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses desiring to maintain employees in the wake of an inability to continue normal operations.  The Act includes several tax credits and a tax exemption that may be applicable to nonprofit organizations as well as for-profit organizations.   Since tax credits and employment obligations are combined into the legislation, it is difficult to determine how they stand alone and how they interplay with each other.  The goal of this post, and future posts, is to start sorting through the legislation creating understandable guidance specific to nonprofit organizations and churches. 

Note:  The following provisions are effective for wages paid starting April 1, 2020

Required Sick Leave 

Applicable Employers:  The Act act applies to private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons.  (An administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy may be claimed.  However, at this time there is no guidance on how this administrative exemption may be claimed or determined.) Applicable employers include nonprofits and churches.  Therefore, if your nonprofit organization or church employees more than 50 people, full-time or part-time, this law applies to you.  If you have less than 50 full-time and part-time employees, the law may apply to you unless you claim that adhering to the law will place your church or ministry in jeopardy.  Failure to comply with the required paid sick leave provisions is a violation of the Fair Labor Standards Act (FLSA) and subjects the offending employer to the penalties.

To assist in the analysis, the sick leave provisions have been split into two categories.

Required Sick Leave Category 1:  Employers are required to provide up to 80 hours of paid sick time to qualifying employees (see below for nuances applicable to churches) their regular rate of pay, not to exceed $511 per day ($5,110 overall limit).  The provision applies to employees are unable to work, or telework for the following reasons.  

1. the employee is subject to a Federal, State or local quarantine or isolation order related to COVID-19;
2. the employee's health care provided has advised them to self-quarantine; or 
3. the employee is experiencing symptoms of COVID-19 and seeking medical assistance. 

Required Sick Leave Category 2:  Employers are required to provide up to 80 hours of paid sick time to qualifying employees (see below for nuances applicable to churches) their regular rate of pay, not to exceed $200 per day ($2,000 overall limit).  The provision applies to employees who  are unable to work, or telework for the following reasons.  

1. the employee is caring for an individual who is subject to a Federal, State or local quarantine or isolation order or has been advised to self-quarantine; 
2. the employee is caring for a son or a daughter, if the school or the child-care provider has been closed or become unavailable due to COVID-19 (this is a fairly restrictive category and does not include grandchildren); or
3. the employee is affected by COVID-19 in some way specified by the Secretary of Health & Human Services in consultation with the Department of Labor (best interpretation: if the federal government comes up with another reason to let this provision apply, it may do so).

Nuances Applicable to Churches:  The definition of an employee for the above provisions is based on the definition of an employee for FLSA.  The courts have ruled that the FLSA does not apply to employees qualifying for the ministerial exception.  Therefore, a case may be made that the above mandated leave requirements do no apply to any church employees meeting the ministerial exception.  

Notice Requirements:  The law requires each employer to post a notice in a conspicuous place available to employees.  The DOL has issued a model notice that applies to both the sick leave discussed above and the additions to the Family Medical Leave Act to be discussed in a separate blog.  The model notice may be located at https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf

Benefits to the Employer

Available Credit Against Payroll Taxes:  Coupled with the above mandated sick leave requirements, Congress has granted a corresponding tax credit based on the above wages payments. The credit is based on:

1. Wages paid due to the required sick leave provisions.  Wages taken into account cannot exceed the above described wage limits of $511/$5,110 and $200/$2,000 per-employee.  (In the event an employer continues an employee's regular pay rate in excess of these limits, the excess is not eligible for the credit.) Warning for churches and religious organizations:  The definition of wages, for purposes of this credit, is defined by IRC Section 3121(a).  Wages paid to ministers and wages paid to employees of a church electing out of the FICA/Medicare program are not eligible wages; 
2. The amount of certain expenses incurred in connection with a qualified health plan if the expenses are excluded from employee income and are allocated to the employees' required sick leave wages; and 
3. The employer's portion of the Medicare tax paid on the applicable wages.

The credit is applied to the employer's share of OASDI taxes (Social Security tax of 6.2%) with any excess credit being refundable.  At this time, it is anticipated that the credit will be allowed on the Form 941.  However, in order to allow immediate access to the funds, the IRS has indicated that an employer may determine the amount of the credit and apply it against the employer's required payroll tax deposit for all taxes. 

Additionally, any wages paid as a result of required paid sick leave are not wages for purposes of the calculation of the OASDI taxes (Social Security tax of 6.2%).  

Practical Application:  Employers must determine the employees that may qualify for the required leave and discuss the arrangements with them.  Remember, the provisions don't apply if the employee is still performing services for the employer.  When the applicable wages are paid, the employer will need to be able to delineate these wages from any other wages paid.  As the wages are paid, a tentative calculation of the credit should be determined to allow for a proper reduction in payroll tax deposits.  

As originally stated, the required paid sick leave becomes available for applicable wages paid between April 1, 2020 and December 31, 2020. 

Please be aware that guidance is being issued on a regular basis and may provide further clarification on the above information.  FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions. 
Other provisions of the legislation will be covered in other blog posts. 

COVID-19 Update #1 - IRS Return Filing & Payment Obligations

At the writing of this post, life has taken a sharp turn from "normal" for everyone across the world.  Adjusting to COVID-19 requires most of us to adjust every facet of life from the way we work, to the way we shop, to the way we worship and the way we socialize.  This post is the first in a series that is geared to keep the nonprofit community up to date in the tax and accounting changes that may be affecting or will affect your organizations and employees in the coming days. 

Return Due Dates

All federal income tax returns due on April 15, 2020 have been automatically extended to July 15, 2020.  There is no need to file Form 4868 or Form 7004 to extend these returns.  This extension covers all individuals and corporations.  However, nonprofit organizations should note that it does not cover information returns.  Therefore, nonprofit organizations filing Form 990 must adhere to the original filing deadlines.  However, Form 990-T is an income tax return and it has been extended.  Additionally, for income tax returns applicable to fiscal years ending in 2019, if a return's original due date or extended due date is April 15, 2020, the due date is extended to July 15, 2020. 

Income Tax Payments

2019 payments of income taxes as well as first quarter federal estimated income tax payments have been extended to July 15, 2020. Please note:  the quarterly estimated tax payment due June 15, 2020 has not been extended.  (Although, one of my creative practitioner friends pointed out that you can make your first quarter estimated tax payment at July 15th large enough to cover the second quarter payment and technically, alleviate the need for a second quarter payment at June 15th.) 

Please see upcoming updates in this series regarding the various benefits provided through recent legislation.  

The Repeal of the Taxation of Qualified Transportation Fringe Benefits

Enacting Internal Revenue Code Section 512(a)(7) through the Tax Cuts and Jobs Act 2017, Congress moved into the uncharted territory of taxing nonprofit organizations through the taxation of expenses associated with providing qualified transportation fringe benefits to employees.  Seeing this as an equalizer to removing the deduction for the same benefits from for-profit employers, law makers determined having all employers pay the tax on the fringe benefits would be preferential to taxing the employees on the benefits. 

The resulting outcry was enormous especially when both the IRS and the Joint Committee on Taxation made it clear that the "taxable" expenses would include expenses associated with an employer provided parking lot even when the parking represented little or no real value to the employee.  Creating a tremendous record keeping burden as well as a tax burden, the outcry from the nonprofit community was swift and loud. 

As early as the summer of 2018, there were bills prepared and presented in both houses of Congress repealing the offensive provision.  In the fall of 2018, President Trump announced he would sign legislation repealing the provision, but with the election looming, no action could be achieved from Congress.  As 2019 progressed, it became clear sufficient support to remove the offensive provision existed, if it could just be included in legislation that Congress could agree to pass.  The mission was accomplished on December 20th when President Trump signed the appropriations bill including the provision to remove Code Section 512(a)(7).  The tax provision is not only ended, it is as if it never was.  Nonprofit organizations who complied with the tax reporting should look for IRS guidance on how to obtain refunds of previously paid taxes associated with qualified transportation fringe benefits.

Maximizing and Working with Qualified Charitable Distributions from an IRA

Enacted in 2006 and made permanent as of 2014, Congress provided a vehicle for owners of individual retirement accounts (IRAs) to make charitable contributions without creating adverse tax consequences through a qualified charitable distribution (QCD).  With the increase in the standard deduction in 2018 and fewer individuals claiming itemized deductions, more charities are receiving contributions from IRAs. 

Qualified Charitable Distribution (QCD)

A QCD is a distribution(s):

• coming from any type of IRA, including a Roth IRA, but does not include an IRA utilized in a SEP IRA or a SIMPLE IRA while the participant is still an active participant in the plan;
• made directly by the IRA trustee to a Code Section 170(b)(1)(A) charitable organization.  This would include most organizations exempt under IRC Section 501(c)(3) organizations with the exception of an organization classified as a supporting organization under 509(a)(3).  There is also a prohibition against contributing the funds to a donor advised fund;
• that is entirely deductible as a charitable contribution under Code Sec. 170 other than any potential percentage limit imposed by Code Sec. 170(b).  There cannot be a benefit given in exchange for the contribution creating a quid pro quo contribution;
• documented with a contribution receipt meeting the substantiation requirements of Code Sec. 170(f)(8) (among other requirements, this means the contribution receipt contains the required "no goods or services" statement);
• made after the IRA owner turns 70 1/2; and 
• not exceeding $100,000 per year for the IRA owner. 

Benefits to the IRA owner:

• The amount of the QCD is not included in the taxable income of the IRA owner and the owner is not entitled to a charitable contribution for the QCD.  Since not all taxpayers benefit from charitable contributions, an adverse tax consequence may be created if the owner of an IRA receives an IRA distribution and subsequently makes a contribution of an equal amount to a qualifying charity.  The QCD avoids this consequence since it moves the funds directly to the charity without moving through the separate accounts of the IRA owner.  
• IRA owners are required to receive minimum distributions (RMD) from their IRAs after they are 70 1/2.  Many taxpayers may not desire to receive the minimum distribution and may not have need of the funds.  The amount of a QCD may be applied to the RMD and assist in avoiding taxes on the RMD.  Therefore, older taxpayers may be able to meet their own personal giving goals and minimize unwanted tax consequences of a RMD. 
• A QCD may also be made from an inherited IRA as long as the beneficiary has attained age 70 1/2.

Responsibilities of the Recipient Charity

While most of the rules associated with these distribution/contributions fall to the IRA owner, recipient charities must assist the donor/IRA owner in complying with two important aspects of the QCD.  

The recipient charity should confirm it is a qualifying charity and it must issue a qualifying charitable receipt according to the requirements of Code Sec. 170(f).  Due to the unique tax  structure surrounding these transactions, charities should not add these donations to donor records and allow the gifts to be reported on a donor's regular contribution receipt issued at the end of the year.  These contributions must be receipted separately from a donor's other contributions to a charity.  

The following is a sample of the donor letter that may be used to receipt a QCD: 

Dear  [Name of Donor], 

Thank you for your charitable gift of $_____________  to [name of church or charity] from your individual retirement account (IRA).  We  received your gift on ________________ directly from  [Name of IRA Administrator/Trustee]  This acknowledges that we have received your gift from your IRA and that it is your intention for all or a portion of the gift to qualify as a qualified charitable distribution (QCD) from your IRA under Internal Revenue Code (IRC) Section 408(d)(8).

This letter confirms the receipt of the donation and that [name of church or charity] is a qualified public charity under IRC Section 170(b)(1)(A) and that your donation has not been transferred to either a donor advised fund or a supporting organization defined in IRC Section 509(a)(3).  We further confirm that no goods or services have been provided in exchange for the donation. (Churches should also include "other than intangible religious benefits" in the statement). 

While your gift may be applied to any pledge or commitment you have made to [Name of church or charity], the QCD is not a tax deductible charitable gift.  The gift will not be included on any other charitable contribution receipt issued (or if included on any receipt, it will be listed as a nondeductible donation.)  A QCD may count towards your annual IRA required minimum distribution (RMD) and not deemed taxable income.  Please consult with your tax adviser regarding these unique rules. 

Thank you for your generous support of [name of church or charity].

There is not a penalty to a recipient charity for failing to assist the donor/IRA owner with an appropriate receipt.  However,  failure to issue the receipt results in the distribution failing to qualify as a QCD and creates a taxable distribution to the donor/IRA owner.  

Qualified charitable distributions create a wonderful avenue for donors to support their favorite charities, manage their required minimum distributions from their IRAs and minimize the tax consequences associated with these funds. 

Benevolence

Meeting the Ever Increasing Need

What Is Benevolence

Benevolence is the desire to do good to others, an act of kindness; or a charitable gift.  In churches and other nonprofits, a benevolence program is a program established to identify and meet the needs of individuals that they cannot meet themselves.  While it is most commonly considered in light of finances, any program that meets this definition is a benevolence program.  For example, even a organization providing meals is operating a benevolence program.   However, no matter the method of meeting a “need”, there are financial considerations involved.

 The Concept of a Charitable Class

There is a tax concept in the world of nonprofits known as “charitable class”.  If a program serves no  charitable class, then it more than likely does not meet the test for being a proper exempt purpose program.  Those who are “poor and distressed or underprivileged” constitute a charitable class.  Therefore charitable purposes or exempt purposes include the relief of the poor and distressed.  However, the charitable class defined must be of either an indefinite or sufficient size to avoid benefiting private interests.   For example in PLR 201205011 a nonprofit was denied exemption because it was formed to aid children with special needs, but they were all of the same family.  

Qualifying for Benevolence

There are two facets requiring scrutiny in operating a benevolence program.  The IRS generally states that an acceptable benevolence can be granted to 1) meet a need and 2) that need cannot be met by the recipient from resources currently available to them.

Determining need requires determining a necessity missing in a person's life.  Necessities normally include items such as food, clothing, shelter, transportation and health care.  Determining available resources requires inquiries into why a person can't meed the "need" or provide the "necessity" out of resources already available to them.  For example, after 9/11 many people had resources that were not available for use to meet basic needs.  Therefore, even though someone has financial resources, if they are not available for use, they may still qualify for assistance.

Structure of a Benevolence Program

The key to operating a successful benevolence program is in constructing the program.  The more structure provided to the program, the more successful it will be and the easier it is to operate the program.  For a program to not threaten the exempt status of the organization/church, it must operate according to a formal structure. (Church in Boston, 71 T.C. 102 & PLR 201235022)

 

Successful programs contain these aspects:

• A method of verifying the person is a member of a valid charitable class, i.e., that they have a need and it cannot be met out of their currently available resources.  This generally requires an application besides a potential interview with the applicant.  The documentation will:
• support the church’s decision to make the payment;
• prove that the payment is within the guidelines established by the church; and 
• prove that the payment fulfills the church’s exempt purposes.
• .A set of guidelines provides staff with the tools to operate the plan.  Common items addressed in the guidelines or the policy include:
• Who has the authority to approve a request at various dollar thresholds;
• What types of needs will be considered;
• What type of third party confirmation is needed to confirm the existence of the need;
• What proof of other resources is required;
• Who is the targeted group to be considered; i.e., is it just church members; is it active church members or just members?  CAUTION:  Do not link approval of a benevolence request to a person’s tithing records; 
• Determination of situations that disqualify an applicant;
• The actions an applicant must take to secure the assistance;
• How will the need be met, i.e. payments to requester or payments be made directly to a third party benefiting the requester;
• How will requests for multiple requests be handled; 
• How will requests from employees and their family members be handled; and
• The process for making the requests.
• A manner of reviewing the above information by persons independent or disinterested from the person making the request.

Repeat Requests

While most benevolence plans deal primarily with short term needs, plans must exist to deal with circumstances presenting long term needs.  People encounter extended illnesses prohibiting them from working and providing for their families or a single parent struggles to support their family even though she/he is gainfully employed.  Long term situations should be cautiously supported by an organization taking these steps:

• Have the appropriate committee approve the situation;
• Perform regular reevaluations of the situation to document that the need continues to exist; and
• Assist the recipient in exploring other sources to meet a continued need.

Designated Gifts

It is not acceptable for an organization to accept contributions earmarked for an individual, even when a need is justifiable.  An organization, including a church, may not solicit funds for a specific person.  An organization may solicit for additional funds to increase its overall benevolence funds and provide funds in response to an unusual need.  However, it must be clearly conveyed to donors that the organization is the one making the final determination as to the amount of assistance that any recipient will receive. 

An organization should have a practice that consistently states that any designation by a donor is a “suggestion” and the final use of all funds is at the discretion of the governing body; i.,e., the finance committee, board of directors, elders, etc.

Employee Benevolence

Internal Revenue Code Section 102 specifically states that gifts are not taxable.  The exclusion provided in Section 102 allows benevolence to not be taxable to recipients.  However, the exclusion is not available to amounts provided to employees.  There are several considerations when working with benevolence related to employees. 

• Regular Employees - Benevolence assistance provided to an employee should be approved as additional income.  Consideration must be given to confirm that the total compensation paid to an employee is always reasonable.  
• Employees Considered as Disqualified Persons under IRC Section 4958 –  These are employees who are in positions of control and authority.  All of their income must be reasonable” and “approved in writing”, so it is imperative that any additional payments to this group of employees be carefully documented.  Failure to follow the correct procedures could cause the assessment of intermediate section ranging from 25% to 200% of the assistance to the disqualified person. Benevolence payments to this group should be made only after great care, consideration and approvals.
• Family Members of Employees – In general benevolence to family members of employees is considered income to the employee, if the employee is responsible for the care of the family member.  Sometimes the relationship may not trigger income to the employee as long as the employee is not a disqualified person.  
• Family Members of Disqualified Persons – Family members of disqualified persons should never be provided assistance unless the same procedures are followed as in the case of the payment of compensation or benevolence to the disqualified person.  member, then he/she may not use the church to fulfill their moral and/or legal obligation. Failure to follow the correct procedures could cause the assessment of intermediate section ranging from 25% to 200% of the assistance to the disqualified person.

Exceptions under IRC Section 139 – IRC Section 139 allows for tax-free assistance/benevolence type payments to be made to employees affected by a qualifying disaster.  This would also apply to family members of the employees affected by a qualifying disaster.  Organizations should establish disaster assistance programs separate  benevolence assistance programs.  Requirements for these programs were discussed in my blog of  September 2, 2017.

Summary

While operating benevolence or assistance programs is a natural activity of many types of nonprofit organizations and most churches, it is necessary the programs operate in compliance with all the rules applicable to nonprofit organizations.  Operating a program that cannot justify its assistance fulfills its charitable purposes creates a threat to the organization's tax exempt status.