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.  

Does Your Organization Need to Pay the “Parking Lot" Tax?

Insights on new guidance from the IRS.

Concerns and questions arose last year regarding an obscure provision in the Tax Cuts and Jobs Act of 2017—a provision requiring nonprofit employers pay an unrelated business income tax for expenses associated with qualified transportation fringe benefit plans provided to employees.

Controversy arose surrounding the legislation in regard to its application to parking lots naturally associated with the nonprofit's facilities.  Legal and accounting experts differed on how the so-called “parking lot tax” would work, and how the Internal Revenue Service would interpret and implement the new provisions.  The uncertainty was eased—albeit temporarily—when interim guidance was issued in late December.

The IRS has provided its initial interpretation of the new law, which may foreshadow its ultimate position when it eventually provides permanent guidance. The good news: many nonprofits, including most churches, will not face this tax. The bad news: some nonprofits and churches will. The guidance provides a four-step process for determining whether your organization’s or church’s parking situation will still trigger this tax. 

The Four Steps

In IRS Notice 2018-99, the IRS provided the recommended analysis.  The recommended analysis encompasses 4 steps, but many organizations may stop the analysis after the second step. 

Step 1:

Determine the number of spaces specifically reserved for the organization's employees. The expenses related to these spaces create unrelated business income.

Example: An organization has 500 parking spaces and designates 50 parking spaces exclusively for employees, then 10 percent of the expenses associated with the parking lot will count as unrelated business income. (For organizations desiring to avoid this automatic potential for taxable income, the IRS is allowing employers to remove the reserved space designation as late as March 31, 2019, and the IRS will consider it retroactive to January 1, 2018.) 

Step 2: 

Determine the spaces not specifically reserved for any staff members. If at least 51 percent of the remaining spaces in the parking lot are available to the general public, then all the remaining spaces are considered as utilized for the general public.  Expenses related to those spaces do not create unrelated business income.  For churches, the spaces available to their attendees are classified as general public use, even if they are unoccupied most of the time.

Example:  A museum has 400 parking spaces available in its parking lot.  None of the spaces are specifically reserved for any employees, but employees may utilize any of the 400 spaces.  An analysis indicates the museum has 100 employees regularly using the parking spaces.  The remaining 300 spaces are available for the general public, including the organization’s visitors or members.  Since the 300 spaces for general use are at least 51 percent of the total spaces, none of the expenses associated the parking lot are included in unrelated business income.

Example:  A church’s denominational offices have a parking lot with 100 parking spaces.  Regularly, 75 of the spaces are utilized for the denomination’s employees.  The remaining 25 of the spaces are available for the few visitors that may come to the denomination’s offices.  Since more than 50% of the parking spaces are used by employees, a portion of the expenses associated with the parking lot are included in unrelated business income and the organization must proceed to Step 3 of the process. 

Step 3:

If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then determine the number of spaces specifically reserved for non-employee use. For example, reserved non-employee spaces include spaces reserved for visitors and customers. The expenses related to these spaces do not create unrelated business income.

Example:  The denominational offices have a parking lot with 100 parking spaces, and it has 10 spaces that are specifically reserved for visitors and are not available to employees.  When the expenses are analyzed, 10 percent (10/100) may be excluded from unrelated business income.  

Step 4:

If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then it must be determined what expenses will be allocated to the employee spaces. The organization may use an actual number of spaces and number of days the employees use the parking spaces, or it may adopt any reasonable method to determine this usage on a typical day. The employee usage is multiplied by the actual parking expenses to arrive at the unrelated business income amount.

Example: An organization has 500 parking spaces and regularly has 300 employees utilizing parking spaces. Since this is the typical use of the parking lot, then the organization may treat 60 percent of its total parking expenses as unrelated business income. 

Comprehensive Example:

A church’s denominational offices are in an office building owned by the organization.  The organization’s parking lot has 150 parking spaces.  Ten of the spaces are reserved for key staff members.  Ten of the spaces are specifically marked for visitors and the remaining spaces are available for employees or other general public use.  The denominational office employees 85 people that utilize the parking lot regularly during the normal work week.  In 2018, the organization spent $5,000 on general maintenance and upkeep of the parking area.

Step 1:  The 10 spaces specifically reserved for the key staff members represent 6.67% of the parking spaces, so $333.50 (6.67% of the $5,000) must be included in unrelated business income. 

Step 2:  The remaining 140 spaces are analyzed to see if more than 50% are utilized for the general public.  10 spaces are reserved for visitors, so these 10 are used by the “general public”.  Of the remaining 130 spaces, 85 spaces (65%) of the spaces are used by employees.  Since the employee-use is more than 50% of the spaces, a portion of the remaining parking lot expenses must be included in unrelated business income.

Step 3:  Before determining the remaining expenses included in unrelated business income, expenses may be allocated to the parking spots specifically reserved for visitors.  There were 10 visitor spaces, so 6.67% or $333.50 of the expenses are allocated to these spaces and are not included in unrelated business income.    

Step 4:  After allocating expenses to the internally reserved spaces (Step 1) and to the visitor spaces (Step 3), it is determined what expenses are allocated to the employee used spaces.  While there may be more difficult or extensive calculations, the easiest is to determine the percentage of the employee used spaces (85) to the total spaces available in the parking lot (150) and allocate 56.67% (85/150) of the expenses to the employee spaces or $2,833.50. 

The organization must report as unrelated business income the $2,833.50 (Step 4) plus the $333.50 (Step 1) for a total of $3,166.50 reported on Form 990-T as unrelated business income.

Reporting the Unrelated Business Income

Form 990-T is required if unrelated business income amount is $1,000 or more during the year. The return is due 4 ½ months after the end of the organization/church’s fiscal year.  For organizations with a calendar year end, a return is due May 15, 2019 to report taxable expenses incurred in 2018.  If a church has another source of unrelated business income, a loss from the other source may be netted against the income created through this provision and reduce the tax due.

Summary

Many organizations may discover they have an expected filing obligation.  The IRS’ interpretation took unexpected turns and created an analysis not anticipated by most tax professionals.  Even as this information is presented, there are actions underway to repeal the provision.  However, despite broad bi-partisan support, the repeal has not occurred.  Organizations should plan to perform the above analysis and timely file Form 990-T until a repeal of the law is finalized.

My thanks to Frank Sommerville, JD/CPA for his contribution to this blog post, as it represents our combined efforts to sort through and analyze the requirements of this new provision.  The above information is adapted from an article that first appeared on Christianity Today’s ChurchLawAndTax.com. Used with permission.  Frank and Elaine Sommerville both serve as editorial advisors for ChurchLawAndTax.com. Elaine is also the author of Church Compensation: From Strategic Plan to Compliance (2018, Christianity Today).

501(c)(4) Organizations Face New Reporting Requirements

Organizations claiming exemption under IRC Section 501(c)(4) have received greater attention over the past two years amidst allegations of IRS targeting based on an organization's political and/or philosophical views.  Due to what is perceived by many as widespread unacceptable activity by (c)(4) organizations, there are various attempts to increase the regulation and oversight of these organizations.  One of these attempts was recently codified into law as a part of the recently enacted Protecting Americans from Tax Hikes (PATH) legislation.  Organizations formed under 501(c)(4) are now required to file an additional notification with the IRS.

Background

Unlike organizations organized under IRC Section 501(c)(3), organizations exempt under 501(c)(4) have the ability to operate as exempt organizations without receiving official notification of exempt status from the IRS.  These organizations are categorized as "self declarers".  The organizations have to follow the rules and file the required annual Form 990, but they do not have to file an application with the IRS to have their exempt status recognized.  An organization may file a Form 1024, Application for Recognition of Exemption under Section 501(a), if it wishes to receive IRS approval and receive a determination letter from the IRS.  

New Law

PATH has enacted IRC Section 506 requiring organizations formed under 501(c)(4) to notify the IRS of the intent to operate as a 501(c)(4) organization.  Notification must be made to the IRS within 60 days of the formation of an organization created after December 18, 2015.  Additionally, notification is required by any organization in existence at December 18, 2015 that has never filed either an exemption application, Form 1024, or an annual information return, Form 990, 990-EZ or 990-N.   The due date for notification by existing organizations is June 15, 2016.   Failure to comply with the notification requirements carries of penalty of $20 per day up to a maximum of $5,000.  

The notification includes 1) the name, address and employer identification number of the organization; 2) the state laws under which the organization was formed; 3) the date of the organization's formation; and 4) a statement of the purposes of the organization. (This notification is not a request for recognition of an organization's exempt status.  A request for determination of the organization's exempt status is required to be made in addition to the notification required under IRC Section 506.)

Extended Due Date

Due to the need for the IRS to issue regulations regarding the operation of the notification requirement, the due date for the notifications has been extended to 60 days after the issuance of the temporary regulations.  (Notice 2016-9)  Therefore, organizations are not required to provide notification at this time.  

Once this notification is fully operational, there will be very little time between an organization's date of formation and when failure to comply penalties begin to accrue.  Therefore, it is critical that professional working with and organizers of these organizations understand the substantial change  required by IRC Section 506.  The new requirement transforms an organization being able to operate as a self declared organization with no specific notification to the IRS of its existence, other than filing its annual return, to being required to immediately inform the IRS of its existence and purposes. 

New IRS Form 8822-B Requires Action By Virtually All Organizations


In an effort to update its records, the IRS is requiring any organization or entity that obtains an employer identification number (EIN) to report to the IRS a change in the "responsible party" within 60 days of that change.  This change is reported using Form 8822-B, Change of Address or Responsible Party - Business.  This is a good thing as it helps to provide assurance that critical communications from the IRS will not be directed to a person who is no longer associated with an entity.  However, in its efforts to update contact information, the IRS is requiring virtually every entity to provide current information.


Who is a "Responsible Party"
Currently the application for an EIN requests the name and identifying number of the "responsible party".  This is defined to be as the person who has a level of control over, or entitlement to, the funds or assets in the entity and the disposition of its funds and assets.  This is a fairly general definition and may actually apply to multiple people within an entity.  However, when applying for the EIN, an entity is only required to list one responsible party.  In essence, this is listed as the primary contact for the entity and provides assurance that mail sent from the IRS will be directed to someone with enough authority to deal with the issue at hand. 


Why does this affect so many entities?
The complication enters the picture with the direction from the IRS that if the "responsible party" has changed prior to 2014, then the entity must file the Form 8822-B no later than March 1, 2014.  Prior to January 2010, the term "responsible party" did not exist.  Therefore, it can be presumed that if an entity obtained its EIN prior to January 2010, it should file the Form 8822-B by March 1, 2014 to declare its "responsible party".    If an entity gained its EIN after January 2010, then it should check its application to see who was listed as the "responsible party" to determine if the filing is required.  For the future, entities should understand that the "responsible party" must be updated in the event the listed party leaves the entity. 


Form 8822-B
The form is used for both updating the "responsible party" for an entity as well as updating the address for an entity.  It may be obtained at www.irs.gov for download.  Contact your CPA or attorney, if your entity needs assistance in determining its reporting requirements.

The List Is Out

Background
In 2006 Congress passed the law that automatically revoked the tax exempt status of any organization that failed to fulfill its Form 990 filing requirement for 3 years in a row. 2010 brought the first year this would be possible since the passing of the law with those who failed to file anything for the years 2007, 2008 & 2009. While the revocation date was effective for calendar year returns on May 17, 2010, the IRS continued to show some grace by allowing organizations to file through a special program conducted through October 15, 2010.

Results
With that program at its end and the final time passing to file most of the returns for the 2009 year, the IRS has finally issued the dreaded list of revocations. The list contains the names of approximately 275,000 organizations and can be found at www.irs.gov/autorevocationlist. It is organized by state. (Strangely enough the revocations for Texas is so large that it takes two files to cover it.)

What To Do
The law is clear - there is no disputing the revocation with the IRS or challenging it through the courts. IRS Notice 2011-44 details the process for reinstatement of tax exempt status. Organizations on the list are required to file new exemption applications, either Form 1023 or Form 1024, to request the exempt status be reinstated. Both the exemption application and the envelope should clearly indicate "Automatically Revoked" in order for the application to be directed to correct processing area.

Reinstatement will be effective the filing date of the exemption application unless the organization can provide reasonable cause for the failure to file Forms 990 all those years and provides the Forms 990 for 2007, 2008, 2009 and 2010. If the organization would have been eligible to file Form 990-N during all of the three missed year, then special procedures have been described to allow for a lower user fee to be paid with the application and they will gain retroactive exempt status. Procedures describing these special provisions can be found in IRS Notice 2011-43.

There will be many questions as organizations scramble to try to regain tax exempt status. The IRS has addressed many of those in its frequently asked questions found at http://www.irs.gov/charities/article/0,,id=221600,00.html. If an organization has received its notice of revocation or it is listed on the published list, it should seek the counsel of a CPA experienced in preparation of Forms 990 as well as experienced in the preparation of Forms 1023/1024.

IRS Releases Draft of 2009 Form 990

The IRS has released the draft of the 2009 Form 990. It can be located at http://www.irs.gov/ under their Draft Forms section. A quick review of the form does not reveal any major changes in the form. One notable change is the clarification that is now allowed when the organization is a part of a consolidated certified financial audit. Questions have been added that allow an organization to indicate whether it received an individual certified financial audit or was a part of a consolidated financial audit. I have not had the opportunity to review all of the schedules to determine any changes that may have been made.

In early November, the IRS issued sets of Frequently Asked Questions (FAQ) for Schedules A and L of the Form 990. These are just a part of the FAQs that have been released this year to assist in clarifying various filing issues for 2008 returns. It is hopeful that some of this information will make it into the 2009 instructions.

Form 990 Filing Requirements

Larger organizations required to file an annual information return are well into the preparation process of the new Form 990 for 2008. Many of these are due at November 15th. However, now is the time for smaller organizations to start preparing for conquering the new form for the 2009 tax year. For 2009, all organizations with gross receipts over $500,000 or assets greater than $1,250,000 will have to file the Form 990. Some of these organizations may not be ready to tackle the new form, so following are some helpful tips.

• Find a preparer who is preparing several of these forms. This isn't a form that is easy to complete and organizations need competent professionals to help them navigate the form.


• Have the board adopt a conflict of interest policy, a document retention policy and a whistleblower policy before the end of 2009.


• Review the composition of the board of directors - does the organization need to increase the number of independent directors?


• Review the revenue and expense reporting to determine if the necessary information can be easily obtained from the current accounting system.


• Consider taking a class on the Form 990. This is good even for the executives that are not the "numbers" people of the organization. A three hour course will be offered as a part of the 2009 Ultimate Financial & Legal Conference hosted by my firm October 26th & 27th. There is still time to register.


• Print the form from the IRS website at http://www.irs.gov/ and see all the information that will be required. Don't wait until it is time to file the form to figure out what it's all about!

With the returns for 2010, all organizations with gross receipts greater than $200,00 will be required to file the full Form 990. Organizations with gross receipts of $50,000 to $200,000 will be filing Form 990-EZ. Organizations with gross receipts of less than $50,000 will file the Form 990-N or the epostcard.

Mandatory Reporting of Foreign Bank Accounts

For tax exempt organizations, one of the little known IRS reporting requirements centers around foreign bank and investment accounts held by U.S. individuals or entities. The U.S. Treasury requires Form TD F 90-22.1 be filed to report holdings in foreign accounts by June 30th of each year. The reporting is required in the event that an individual or entity has accounts containing $10,000 or more in the aggregate. Penalties for not filing are staggering and can easily exceed the value of the accounts.

I find that many tax exempt organizations do not realize that they are subject to this filing. As the world shrinks, many organizations conduct operations in foreign countries. It is not unusual for an organization or a church to maintain foreign investment or bank accounts due to missions activities. Most organizations are not familiar with these filing requirements. Many times the professionals working with the organizations may not even realize that there are accounts in other countries.

If this blog is setting off alarms in your head, and you think your church or organization may have a reporting obligation in this area, then it is time to find out more information. For those who have not complied with this filing, the IRS does have a voluntary compliance program to help bring people and organizations into compliance without penalties.

If this update applies to you or your organization, more information on the subject may be located through the IRS website at www.irs.gov.