Tate & Tryon's Form 990 Forum

They're Here! They're Here!!

2008-08-19T11:43:53-07:00

The new Form 990 instructions were posted this afternoon - fresh from the PDF-maker. Follow this link:

http://www.irs.gov/charities/article/0,,id=185561,00.html

There are three important "background" documents you'll want to read, as well:

You can access the main page for these documents using this link:

http://www.irs.gov/charities/article/0,,id=181089,00.html

Happy reading! We'll be following right along with you, and will be available to answer the many questions we're sure you will have.

Debbie

Sales and Use Tax

2008-08-01T11:35:05-07:00

With many states feeling the economic crunch of the times, many of them will availing themselves of every possible opportunity to beef up their revenue streams. As a result, an area of taxation that might be of greater concern to exempt organizations other than public charities is the sales and use tax.

The sales and use tax is imposed by most states on both individuals and organizations. Most states offer an exemption to sales and use tax only to public charities exempt under Section 501(c)(3). Therefore, membership organizations holding conventions and trade shows in a state other than that of their normal operations will need to be careful to abide by the sales and use tax regulations imposed by those states.

Items purchased for resale are exempt from taxation if a resale exemption has been applied for. Resale exemptions are available in every state. Where it gets tricky is when tangible personal property is purchased in one state and brought into another state for use. The most common example is with give away items at conventions, but the rules apply to all tangible personal property that is used in the ordinary course of business.

The two general rules that apply in most states are that organizations:

1) Owe use tax to their "home" states on purchases made from out-of-state or Internet sellers where no "home" state sales tax was collected at the time of purchase, and

2) Use tax is due on an item of tangible personal property if it is purchased out-of-state (for example, by telephone, over the Internet, by mail, or in person) and is used, given away, stored, or consumed in another state other than that organization's "home" state.

The first general rule above is fairly straight forward, but it is the second that tends to cause some confusion. In the case of a convention or trade show where an organization brings tangible personal property from their home state into another, use tax will be due to the extent the use tax rate in the other state exceeds the sales tax rate of the organization's home state. In the event the use tax rate is lower, no use tax will be due.

As confusing as all of this sounds, it is important to be aware of and understand the use tax rules of the various states an organization operates in because the penalties for non-compliance can be substantial.

Fred

Charities - are you mailings "educational"?

2008-07-24T18:20:14-07:00

The last few years have been ones of significant change in the audit and accounting community. The 990 has been revamped, auditing standards have been revised, and the FASB continues to churn out new accounting standards. As a result, financial professionals in the non-profit world have been spending considerable amounts of time reviewing the operations of their organizations.

Since we're in the middle of a rather tumultuous time anyway, I'd like to suggest one more item to add to the list of things to review. What's the harm in adding one more thing to the already lengthy list?

This item will apply mainly to 501(c)(3) organizations that complete the "joint costs" section of the 990. On the revised Form 990, this section can be found on Part IX, Line 26 of the core form.

Many 501(c)(3)s have "education" as one of their core exempt purposes. As part of their activities, these organizations may distribute mailings that contain both an educational component (advocating the issues of concern to the entity) and a fund raising component. (Since the costs of the mailings serve the joint purpose of advancing program and fund raising functions, they are referred to as "joint" costs.) There is certainly nothing wrong with such conduct, but it does lead to some accounting and tax complications.

Typically, accountants are primarily concerned about the allocation of the joint activity costs between the programmatic and fund raising activities that benefited from the mailing. This is an important consideration that impacts how an entity presents its finances on the 990. Fortunately, the accounting for joint costs is covered quite comprehensively in the AICPA's SOP 98-2.

Setting aside the issue of accounting for the joint costs, there is another, deeper concern - one that accountants typically do not consider. That is to say, one must also weigh whether the IRS would consider the mailings to actually have an "educational" purpose. If the mailings are a significant part of an entity's activities, and the IRS does not consider them to have an educational component, the IRS may question whether the entity has been functioning in accordance with its exempt purpose.

IRS Revenue Procedure 86-43 outlines the criteria the IRS has said it will use when evaluating whether an educational component exists in advocacy-type communications. The Rev. Proc. indicates that the presence of any of the following factors indicates that a communication is NOT "educational":

1. The presentation of viewpoints or positions unsupported by facts is a significant portion of the organization's communications.

2. The facts that purport to support the viewpoints or positions are distorted.

3. The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of strong emotional feelings than of objective evaluations.

4. The approach used in the organization's presentations is not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training in the subject matter.

Thus, if you are involved with a 501(c)(3) that conducts significant issues advocacy communications, it wouldn't be a bad idea to review the organization's style of communication against the above criteria. Given all the internal financial and governance review that's going on anyway, now might be a good time to do a self-audit related to the guidance in Rev. Proc. 86-43.

Naturally, the area discussed in Rev. Proc. 86-43 quickly gets into the world of law and legal interpretations. (For example, how do you define "inflammatory"?) Thus, if you have any doubts at all as to whether your advocacy communications could withstand IRS scrutiny, a qualified exempt organization attorney should be consulted.

Doug Boedeker

The Restricted Net Asset Police Are Coming!

2008-07-10T04:59:03-07:00

Since the advent of Statement of Financial Accounting Standards No. 117 (SFAS 117) back in the mid-1990s, non-profit organizations have been required to segregate their net assets between "unrestricted", "temporarily restricted", and "permanently restricted" balances.

Although a theoretically simple concept, in practice there has often been confusion about when to classify net assets as permanently restricted.

For example, Organization A received a $1,000,000 contribution and initially classified the contribution as permanently restricted. Several years later, Organization A has a new Executive Director (ED) who reviews the entity's finances. She decides that a strong argument can be made that the donor did not intend for the $1,000,000 to be permanently restricted. Rather, the ED believes the contribution should be reclassified and presented as part of temporarily restricted net assets. The donor is now deceased, so short of holding a successful seance, further clarification of the donor's intent is not possible.

The question naturally arises, "So what happens if we make this reclassification? Do the permanently restricted police kick down our door?"

This has always been a tough question to answer. There are state laws governing the stewardship of charitable gifts, but from a pragmatic perspective, it can be difficult for non-accounting (aka "normal people") to see the real impact of making an ostensibly "paper entry" to the entity's financial records.

Schedule D of the revised Form 990 will serve to give more weight to SFAS 117's definition of unrestricted, temporarily restricted, and permanently restricted net assets. Part V of Schedule D now requires organizations to give an overview of its "endowment funds". In Part V, organizations will be required to report: (1) a five year history of revenues and expenses related to the endowment funds, (2) the allocation of the endowment funds by net asset class, and (3) the intended use of the endowment funds.

Thus, an entity will now be officially "on record" with the IRS as to what is being treated as permanently restricted, temporarily restricted, and board-designated (quasi-endowment).

As a result, it will be even more important for non-profits to carefully consider the classification of donations. It's not just a matter of making a "paper entry". Rather, it is part of the public record on file with the IRS. The IRS will likely take a dim view of entities that "shuffle" their net asset classifications from one year to the next.

Doug Boedeker

More on E-filing - Tales from the field

2008-06-26T16:58:20-07:00

One of the sessions during the 3-day AICPA Not-For-Profit Conference held here in Washington D.C. last week dealt with e-filing stories from the field. Of course, all of the stories were about filing the current 990 design, but these issues may continue when e-filing the new form. Here are several things mentioned during the session to make note of:

Elections - some returns were rejected because the 501(h) election on the 990 as filed did not agree with the election status in the IRS datebase. Determine if a Form 5768 was filed sometime in the past to make or revoke the 501(h) lobbying election for the filer. When the correct election status under 501(h) has been determined, document it for future filing years.

Print options - If your software allows your returns to print text in all capital letters regardless of how it was typed into the system, be sure to check the appearance of your returns on Guidestar. There were some instances of the IRS file version posting on-line with text printed exactly as it was typed. Review any previously e-filed returns on Guidestar. Then if necessary reset your print options either at the default level or the individual return level to avoid mixing upper and lower case printing.

Statements - Those helpful "See Statement #" references appear as just a character in the IRS file making it difficult to find the related white paper statement information for line items. This problem will hopeful be corrected for 2008. The new Form 990 design will have many more statement references than there are currently. One preparer worked around this by making one statement an index of all the statements.

Extensions - A few brave practitioners filed their extensions electronically with great success. ProSystem for example can e-file Form 8868 for Form 990, but not for Form 990-T, which also can not be e-filed. In addition, only the first extension can be e-filed. Despite these limitations e-filing of extension forms was worth the effort according to those who used it. Check with your software provider to see if e-filing of Form 8868 is possible.

In general, the session attendees were positive about e-filing, albeit reluctant to give the IRS any praise. With the success of 990-N filing there was general agreement that with the largest entities and now the smallest entities mandated to e-file, the entities in the middle better get ready. With the new 990 format and the success of the new 990-N, mandated e-filing for all 990 returns will be here sooner rather than later.

Subrina Wood

Changes to the Section 403(b) Regulations

2008-06-16T13:43:18-07:00

In July 2007, the Treasury released the final 403(b) Regulations providing updated and much needed guidance on annuity contracts offered under Section 403(b). The basic gist of the new regulations is to bring the rules governing the administration of 403(b) plans to be more in agreement with those governing the administration of Section 401(k) plans. The two most significant changes required under the regulations are the requirement of a written plan document and the curtailment of open-ended contract to contract transfers.

In order for 403(b) plans to be in compliance with the new regulations, plan sponsors will need to be sure that the plan is in writing. The IRS has announced that they will be providing a sample 403(b) plan document that may be useful to plan administrators in drafting written plan documents. Unfortunately, the sample plan document is not yet available, but plan sponsors will have until 2009 to have a written plan document in place. Specific items that need to be addressed in the written plan document include participant eligibility, plan contributions, applicable limitations, contracts available, and the time/form of plan distributions. Optional items that may be addressed, but are not required include the treatment of plan loans, hardship distributions, rollovers, and the delegation of responsibility for plan administration.

The curtailment of open-ended contract to contract transfers is the other significant change under the new regulations. Under the new regulations, transfers to other plan types, such as a 401(k) or a 457 are no longer permitted. Under the new regulations, transfers may only be made to and be received from other 403(b) plans.

There are no questions pertaining to the administration of a Section 403(b) annuity plan on the 2008 core Form 990, however, public charities filing Schedule A for tax years 2007 and before were asked if a 403 (b) annuity plan was in effect (Part III question 3b). Given the above changes, public charities with a 403(b) plan need to be aware of the new regulations and how they might affect the administration of their plans.

Start Info-Gathering Now

2008-06-03T11:44:00-07:00

Everybody knows that the new 990 is going to require more work -- especially more information-gathering. Much of the information you've been gathering (I hope!) all along. But there are some completely new, and some quasi-new, requests sprinkled throughout the form and schedules. What info do you need to get a handle on now? Here's a list. It's not comprehensive, but it's a good start.

For the new Form 990, you'll need to:

Estimate the total number of "volunteers," for Part I.
Identify "non-independent" voting members of the governing board, for Parts I and VI.
Set up policies and procedures, or create them, for chapters, branches and affiliates, for Part VI.
Develop process for sharing Form 990 with governing board, for Part VI. (final instructions not out on this yet)
Identify governance policies, or create new ones, for in Part VI.
Discuss whether to publicly disclose governing documents, policies, financial statements, in Part VI.
Put procedures in place to coordinate the reporting of political campaign and lobbying financial activity, for Schedule C.
Examine tax positions for possible FIN 48 issues, for Schedule D.
Gather info on foreign activities, for Schedule F.
Identify fundraising and gaming activities, for Schedule G.
Review executive compensation contracts, to ensure inurement provisions are not being violated, for Schedule J.
Track 'perks' provided to executives and board members, as well as policies covering such fringes, for Schedule J.
Gather information on reportable business relationships amongst officers, board members, etc. for Schedule L.
Gather information on related organizations, for Schedule R.

So, before your CPA even asks . . . get a jump on next year's info request. They'll love you for it -- and you may end up with more hair on your head than you otherwise would.

Debbie

More on the Draft Form 990 Instructions

2008-05-19T14:47:28-07:00

If you haven't sent in your comments on the draft Form 990 instructions, you still have some time left -- but not much. The IRS' deadline for comments is June 1; that's 13 days and counting.

IRS has posted comments received thus far on its web site. Most of the substantial comments received so far appear to involve compensation (no surprise there), independent contractors, key employees. Of greatest interest (and most controversial) to trade associations, hands-down, is the proposed expansion of the "key employee" definition. Per the new 990 draft Glossary, a key employee is "an employee of the organization (other than an officer, director, or trustee) who has responsibilities, powers or influence over the organization as a whole that is similar to those of officers, directors, or trustees; (2) manages a discrete segment or activity of the organization that represents 5% or more of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; or (3) has or shares authority to control or determine 5% or more of the organization’s capital expenditures, operating budget, or compensation for employees."

Clearly, defining a "key employee" as a person with at least 5% control will greatly expand the universe of "key employees" for most, if not all, organizations -- which is why it's controversial. Expect several heavy-hitting organizations to weigh in on this definition before the comment period ends.

On balance, I found the instructions to be sensible, logical, and (mostly) orderly. I noted some confusing sections: the "lobbying" definitions in the Schedule C instructions did not clearly distinguish between charitable and non-charitable organization lobbying rules; the standard for reporting compensation for "former" key employees in Part VII is inconsistent with the standard for "current" key employees; and some employee salary reduction amounts (401k/403b) are essentially being double-counted in the compensation sections of Part VII and Schedule J. Still, the draft gets an "A" in my book, at least for orderliness and clarity.

Draft Instructions

The Redesigned Form 990

Debbie

Schedule K and Tax-Exempt Bond Reporting

2008-04-29T09:19:53-07:00

Reporting tax-exempt bond liabilities, (bonds issued by the organization on behalf of a state or local government unit, or by the state or local government unit for the organization), are recorded on Line 64a of Part IV Balance Sheet of the current Form 990 and requires an additional attachment. The specific instructions for the attachment requires showing for each separate issue:

the purpose of the issue;
the amount outstanding;
the unexpended bond proceeds, and
whether any portion of any bond-financed facility was used by a third party (other than a governmental unit or section 501(c)(3) organization), and if so the percentage of space used by the third party.

Although this required attachment seems relatively straightforward, The IRS has found significant noncompliance in both the record keeping and retention of records relating to these bonds. This has made it difficult for the IRS to determine if the bonds remain qualified (a tax -exempt bond the proceeds of which are used by the 501(c)(3) organization in furtherance of its charitable purpose) throughout their term, from the information filed in the 990. The other IRS concern not addressed in the current Form 990, is arbitrage (profits earned from the investment of tax-exempt bond proceeds in higher yield taxable securities) and circumventing the arbitrage rebate (all net earnings above the bond yield must be remitted to the federal government. The rebate is a 100% tax on this profit). Schedule K was designed to address these issues.

If an organization checks Yes to any of questions 24a through 24d of Form 990, Part IV, Checklist of Required Schedules or enters an amount on either Form 990 Part VIII Statement of Revenue Line 4 or Form 990 Part X, Balance Sheet, Line 20 they are instructed to complete Schedule K. The new schedule consists of four parts, three of which are optional for 2008 to give entities time to put in place the necessary record keeping and record retention processes. The accompanying set of instruction contains a list of specific terms along with full definitions rather then just references to the Regulations or Code.

Part I, Bond Issues(required in 2008), requests information about all of an organization's outstanding bond issues with principal amounts greater than $100,000 and issued after December 31, 2002; CUSIP and issuer EIN are now specified columns,
Part II, Proceeds (optional in 2008), requests information about the use or investment of bond proceeds in far greater detail than previously requested. Questions include whether there are portions of the proceeds in Refunding or Defeasance Escrow, the amount of expenditures from proceeds in Working Capital or Capital Expenditures accounts as well as the amount of unspent proceeds;
Part III, Private Business Use(optional in 2008), requests specific information about management or service contracts, research agreements or lease agreements that may result in private business use. There are also questions pertaining to possible unrelated business income as well as the currently required reporting of the percentage of use by private entity;
Part IV, Arbitrage(optional in 2008) covers the hereto-for untouched area, requesting information about compliance with the arbitrage rebate filings Form 8038-T, variable rate issues, qualified hedges and investments in a GICs(guaranteed investment contracts).

In short, the new Schedule K will require much more time in record keeping, record retention and reporting for tax-exempt bond liabilities. But there is some transitional relief in the one year delay of completing parts pertaining to Proceeds, Private Use and Arbitrage reporting; the $100,000 outstanding principal threshold and limiting reporting to bonds issued after December 31, 2002. The clear and concise instructions along with the new IRS trend to include within the instructions specific definitions in easier to understand terms should all help mitigate the pain of compliance.

Subrina

Electronic Filing

2008-04-22T10:50:28-07:00

Beginning with tax year 2006, organizations that had $10 million or more in assets at the end of the tax year that also filed more than 250 forms with the IRS were required to file Form 990 electronically. Forms filed with the IRS include, but are not limited to, Forms W-2, W-3, 941, 940, 945, and any variation of Form 1099. Organizations that were required to file electronically but failed to do so would be deemed by the IRS to have not filed the return at all.

Considering the penalty for failure to file timely is $100 per day for organizations having gross receipts of $1 million or more (with a maximum penalty of $50,000) not filing electronically when required to do so could result in a significant penalty to the organization. Prior to the introduction of the 2008 Form 990 Draft, you would have had to read the instructions to the Form 990 to be aware of this electronic filing requirement. Thankfully, for those who chose to take on life's challenges without reading the directions, the 2008 Form 990 spells out the possible electronic filing requirement in the body of the return; specifically, in Part V question 2b on page 5.

Happy e-filing!

Fred