Form 941 Schedule B 2009 - PowerPoint by fjq18774

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									  The New IRS Form 990 and
Unrelated Business Income Tax

                    Presented by:
               Robert F. Watson, CPA &
               Andrea L. Newman, CPA
                    June 2, 2010
Welcome to Florida
                 Objectives
• Understanding the challenges with the redesigned
  Form 990
• Implementation dates
• Can you use Form 990EZ or 990-N?
• Provide an overview and identify key areas in the
  new Form 990
• What is Unrelated Business Income Tax and how
  does it effect public broadcasting
     IRS Principles Behind the Revised
      Form 990 – 3 Guiding Principles
• Enhance transparency for IRS and the Public
  – Realistic picture of exempt organization
  – Basis for comparing the organization to similar
    organizations
• Promote tax compliance
   – Staying within exempt purpose
   – Appropriate use of assets
• Minimize burden on filing (??) Material change only for
  organizations with complex compensation arrangements,
  related entity structures, and “activities that raise compliance
  concerns”
      Why a Redesigned Form?
• Scandals in the tax-exempt community
• Changes in the activities of exempt
  organizations
• Congressional inquiry on governance
• Justification for tax-exempt status
Implementation and Effective Dates

• Revised Form 990 began for the 2008 tax year
                           (2009 filing season)
• Forms 990EZ and Form 990-N provide relief for
  smaller organizations
  – Phase-in of organizations required to file the full Form
    990
  – During 2008-2010 more organizations will be allowed to
    file Form 990-EZ instead of Form 990
3 Year-Transition Schedule for Smaller Exempt
     Organizations that use Form 990-EZ

 2009 tax year:
   - Gross receipts > $25,000 <$500,000 and
   - Total assets <$1.5M
 2010 and later:
   - Gross receipts >$50,000 < $200,000 and
   - Total assets < $500,000
          E-Postcard: Form 990-N
• Gross receipts < $25,000
           – (2010 : threshold increases to < $50,000)
• Simply identifies organization
• Indicates justification for not filing a return
• Electronic filing
• Applies to tax years after 12/31/06
• Available to the public
• Failure to file for 3 consecutive years will result in an
  automatic revocation of the organization’s tax-exempt status
                Mandatory E-file
• If an organization files at least 250 returns of any
  type during the calendar year and has total assets of
  $10 million or more at the end of the tax year, it
  must file Form 990 electronically.
   – “Returns” for this purpose include information returns (for
     example, Forms W-2 and Forms 1099), income tax returns,
     employment tax returns (including quarterly Forms 941),
     and excise tax returns.
Overview of Redesigned Form 990
• “Core Form” is 11 pages
• 16 Schedules for specific activities
• Expanded opportunity to provide descriptions
  and explanations
• Much of the new information is nonfinancial
• Provides opportunity for organizations to tell
  their story, emphasize service to community
                   Core Form:
• Part I, Summary- summary of mission or activities;
  snapshot of key financial, governance and operation
  information
• Part II, Signature Block (previously on page 9)
• Part III, Statement of Program Service
  Accomplishments- includes new, discontinued or
  altered program services (describe and explain)
• Part IV, Checklist of Required Schedules-answer
  questions, required Schedule will be indicated
                 Core Form:
• Part V, Statements Regarding Other IRS Filings
  and Tax Compliance
• Part VI, Government, Management and
  Disclosure
• Part VII, Compensation of Officers, Directors,
  Trustees, Key Employees, Highest Compensated
  Employees and Independent Contractors
• Part VIII, Statement of Revenues
                Core Form:
• Part IX, Statement of Functional Expenses
• Part X, Balance Sheet
• Part XI, Financial Statements and Reporting-
     Mission and Achievements
• Mission Statement (Core Parts I & III)
   First thing reviewers will see on summary page
   Provides opportunity to “tell your story” and provide
    context for all other information in form
• Changes in Activities (Core Part III)
    Describe new activities, changes in activities
• Exempt Purpose Achievements (Core Part III)
    Describe achievements for 3 largest programs by
     expenses
                    Quote

“I have no use for bodyguards, but I have a very
   specific use for two highly trained certified
   public accountants.”

                           ~   Elvis Presley
Part VI: Governance, Management & Disclosure

 • Requests information regarding an organization’s governing
   body and management, governance policies, and disclosure
   practices
 • Although federal tax law generally does not mandate
   particular management structures, operational policies, or
   administrative practices, every organization is required to
   answer each question in Part VI
    – The IRS considers such policies and procedures to generally improve
      tax compliance
    – Whether a particular policy, procedure or practice should be adopted
      by an organization may depend upon its size, type, and culture
Part VI: Governance, Management & Disclosure

 • Independent voting members of governing body
    – All of the following must apply at all times during the tax year:
         Not compensated as an officer or other employee of the organization or a
          related organization.
         Did not receive compensation or other payments exceeding $10,000
          during the tax year from the organization or related organization as an
          independent contractor
         Neither the member, nor any family member of the member, was involved
          in a transaction with the organization that is required to be reported in
          Schedule L for the organization’s tax year
    – A member is not considered to lack independence merely
      because they are a major donor
Part VI: Governance, Management & Disclosure

 • Independent board members are not required by the Internal
   Revenue Code. However, organizations with insufficient or no
   independent board members face challenges:
    – Poor Public Relations
    – Presumed Poor Governance
 • Organization’s should consider whether increasing the
   number of independent governing board members would
   improve the oversight abilities of their boards
    – Organizations that prefer not to have a majority of independent board
      members should strongly consider having an independent audit
      committee
Part VI: Governance, Management & Disclosure

 • Review of Form 990
     Provided to governing body before filing? Question 10 –
      Describe on Schedule “O”
       Note: Question asks if copy of the Form was provided
         to the governing body before it was filed.
     Describe review process.
       To whom is the form provided?
       When it is provided?
       What is the level of review?
Part VI: Governance, Management & Disclosure

 • Policies: Section B specifically asks if the
   organization has adopted certain policies (i.e.
   Conflict of Interest, Whistleblower, and Document
   Retention) and, in some cases, what procedures exist
   for monitoring compliance with these policies
    – Organization’s that answer “No” to the policy questions may be
      perceived negatively by the public because of an expectation that a
      prudently managed organization would have specified policies
    – Not complying with a policy could be more harmful than not having
      the policy
Part VI: Governance, Management & Disclosure

 • Internet resources for Sample Governance
   Policies
    – National Council of Nonprofit Associations –
      www.ncna.org
    – The Nonprofit Policy Sampler –
      www.boardsource.org
Part VI: Governance, Management & Disclosure

 • Process for determining compensation of the
   CEO, Executive Director, or top management official
    – An organization can only answer “Yes” if the organization used a
      process for determining compensation that included all of the
      following:
        • Review and approval by a governing body or compensation committee
        • Use of data as to comparable compensation for similarly qualified persons
        • Contemporaneous documentation and recordkeeping
    – Process for determining compensation for other officers or key
      employees must also include all the elements listed
                    Quote

“The salary of the chief executive of a large
  corporation is not a market award for
  achievement. It is frequently in the nature of a
  warm personal gesture by the individual to
  himself.”
                      ~ John Kenneth Galbraith
Part VI: Governance, Management & Disclosure

 • Relationships among officers
    – An organization must make a reasonable effort to obtain the
      necessary information to disclose if any of the organization’s trustees,
      directors, officers, or key employees (TDOKEs) had a family or
      business relationship with another of the organization’s TDOKEs at
      any time during the tax year
        • May rely on information it obtains in response to a questionnaire sent
          annually to each member of the governing body that includes the name,
          title, date, and signature of each person reporting the information and
          contains the necessary instructions and definitions
        • Business transactions in the ordinary course of business on the same
          terms as offered to the general public are not required to be disclosed
    Part VI: Governance, Management
         and Disclosure Overview
•   Organization’s board composition
•   Level of Independence
•   Governance and management structure
•   Changes to governing documents
•   Documentation of board and key committees
•   Policies - e.g. whistleblower, document
    retention, Conflict of Interest, etc.
   Receivables from and Payables to
      Officers (Core Part X) - New
• Are there receivables or payables from current
  and former officers, directors, trustees, key
  employees or other related parties – Complete
  Part II of Schedule L
• These individuals may be considered
  “disqualified persons”
           Disqualified Persons
• Do you know who your disqualified persons are?
  – Any person who was, at any time during a 5-year look
    back period ending on the date of the transaction:
     In a position to exercise substantial influence over the
      organization (e.g., Directors & Officers, senior managers, facts &
      circumstances)
     Family members of such persons
     Companies 35% controlled by foregoing
  – Best practices would suggest each organization to keep a
    current and updated list of disqualified persons
         Core Form (continued)
• Parts VIII, IX, X, XI (financial information is
  largely unchanged)
• Revenue
• Functional Expenses
• Balance Sheet
• Financial Statements
        List of 16 Schedules
• Designed to gather specific information about
  organization’s activities
• Complete only relevant ones to your
  organization
     16 Supplemental Schedules
• Schedule A- Public Charity Status and Public Support
• Schedule B- Schedule of Contributors – contributions
  of $5,000 or more from any one contributor
• Schedule C- Political Campaign and Lobbying
  Activities
• Schedule D- Supplemental Financial Statements
• Schedule E- Schools
     16 Supplemental Schedules
• Schedule F- Statement of Activities Outside the United
  States
• Schedule G- Supplemental Information Regarding
  Fundraising or Gaming Activities- will also apply to Form
  990EZ filers if gross revenue from special events and
  activities is more than $15,000
• Schedule H- Hospitals
• Schedule I- Supplemental Information on Grants and
  Other Assistance to Organizations, Governments and
  Individuals in the US
    16 Supplemental Schedules
• Schedule J- Compensation Information
• Schedule K- Supplemental Information on Tax
  Exempt Bonds
• Schedule L- Transactions with Interested Persons
• Schedule M- Non-Cash Contributions
• Schedule N- Liquidation, Termination, Dissolution or
  Significant Disposition of Assets
    16 Supplemental Schedules
• Schedule O- Supplemental Information
• Schedule R- Related Organizations and Unrelated
  Partnerships
                  Quote

“The difference between death and taxes is
  death doesn’t get worse every time Congress
  meets.”
                               ~ Will Rogers
            Recommendations
• Educate board and management
• Plan properly to identify & correct potential
  problem areas
• Work on mission statement, program descriptions
  Will set the stage for all info in Form 990
• Identify disqualified persons & update list annually
• Examine board independence
  Recommendations (continued):
• Examine and formalize Form 990 review process
• Prepare and present policies to Board for approval
      Conflict of Interest
      Whistleblower
      Document retention and destruction
      Compensation review
      Gift acceptance
• Consider public disclosure practices
  Recommendations (continued):
• Consider formation of Audit/Finance Committee
• Review financial arrangements with disqualified and
  interested persons
   Restructure problematic arrangements if possible

                OVERALL GOAL:
   Present as good a public profile as possible.
  Unrelated Business Income Tax
• What is the Unrelated Business Income Tax?
• Which organizations are subject to UBIT?
• What public broadcasting activities are subject to
  UBIT?
• How to avoid or minimize the tax
• Other Matters
   –   In-Kind donations
   –   Vehicle donations
   –   Excess compensation and benefits
   –   Low-cost articles/Insubstantial benefits
Unrelated Business Income Tax


 What is the Unrelated Business
           Income Tax?
  Unrelated Business Income Tax
• The IRS definition:
  – “Income from a trade or business, regularly
    carried on, that is not substantially related to the
    charitable, educational or other purpose that is
    the basis of the organization’s exemption.”
  Unrelated Business Income Tax
• Trade or Business
   – Any activity carried on for the production of income from selling
     goods or performing services.
• Regularly Carried On
   – If they show a frequency and continuity, and are pursued in a manner
     similar to, comparable commercial activities of nonexempt
     organizations.
• Not Substantially Related
   – A business activity is not substantially related to an organization’s
     exempt purpose if it does not contribute importantly to that purpose
  Unrelated Business Income Tax
• The underlying rationale of the unrelated
  business income tax is to place certain
  activities of exempt organizations on an even
  playing field with for-profit entities.
  Unrelated Business Income Tax
• If your organization has $1,000 or more
  income from an unrelated business, you must
  file a Form 990-T and pay income tax.
• If applicable, both federal and state.
Which organizations are subject to UBIT?

 •   Exempt organizations under 501(c)
 •   State and municipal colleges and universities
 •   Individual retirement plans (IRAs, SEPs, etc.)
 •   Qualified state tuition programs
 •   Medical savings accounts
                 Quote

“The income tax has made more liars out of
the American people than golf has.”

                             ~ Will Rogers
    What public broadcasting activities are
              subject to UBIT?
•   Advertising
•   Underwriting
•   Production
•   Premium sales
•   Building/land rental
•   Studio/facilities/equipment rental
•   Channel/tower rental
•   Special events
    What public broadcasting activities are
              subject to UBIT?
•   Sale of broadcast rights
•   Travel tours
•   Sale of membership lists
•   Exchange of membership lists
•   Sale of donated merchandise
•   Auction revenue
•   Interest and dividends
•   Royalties
    What public broadcasting activities are
              subject to UBIT?
•   Gains from disposition of property
•   Income from partnerships/S corporations
•   Paid endorsements
•   Affinity card income
•   Management fees
              General Rule
• If excluded from Nonfederal Financial Support
  (NFFS), is most likely UBIT
                 Quote

“The hardest thing in the world to understand
is the income tax.”

                   Albert Einstein
  How to Avoid or Minimize UBIT
• It is “advertising” or “sponsorship”
• Avoid services with rental income
• Include personal property as “incident to” real
  estate rental if possible
• Be careful of Internet links – sponsors can turn
  in to advertisers
• Offset income subject to UBIT with “ordinary
  and necessary” deductions
                Other Matters
•   Non-cash Donations
•   Vehicle Donations
•   Excess Compensation and Benefits
•   Low-cost Articles/Insubstantial Benefits
•   Pension Protection Act of 2006
          Non-cash Donations
• Donor reporting (Form 8283)
  – Required for items valued over $500
  – Need appraisals for items (other than traded
    securities) valued over $5,000
  – Donee required to acknowledge if valued over
    $5,000
          Non-cash Donations
• Exceptions
  – Items costing less than $500
  – Items consumed or distributed for charitable
    purposes
            Vehicle Donations
Valued at $500 or less
• If sold by organization:
  – Deduction is lesser of gross proceeds or $500
  – Contemporaneous written acknowledgement
• If used by an organization:
  – Deduction is fair market value
  – Contemporaneous written acknowledgement
     If value is greater than $500
• If sold:
   – Deduction is gross proceeds received from sale
   – Contemporaneous written acknowledgement
     (Form1098-C)
• If significant intervening use or material
  improvement:
   – Deduction is fair market value
   – Contemporaneous written acknowledgement
     (Form 1098-C)
    If value is greater than $500
• If sold at less than fair market value to needy
  individual in direct furtherance of
  organization’s charitable purpose:
  – Deduction is fair market value
  – Contemporaneous written acknowledgement
    (Form 1098-C)
               Form 1098-C
• Furnish to donor within 30 days of sale
• Furnish to donor within 30 days of
  contribution if kept for use or provided to the
  needy
• Significant penalties if not filed
   Excess Compensation & Benefits

• Significant tax on excess benefits
• Need to have active board oversight of
  compensation matters
• Establish legal protection by meeting the
  “rebuttable presumption” of reasonableness
  by using comparables
   Excess Compensation & Benefits

• Insure that reporting forms are timely and
  properly completed to avoid automatic excess
  benefit transactions
• Transparency is important – even though a
  board delegates duties, it is still ultimately
  responsible for compensation decisions
             Low-cost Articles
• Charitable organizations can normally
  distribute low-cost articles related to a fund-
  raising campaign without the fear the IRS will
  treat the activity as an unrelated business
  activity.
  – A low-cost article is an item that costs no more
    than $9.60 in 2010 (up from $9.50 in 2009).
         Insubstantial Benefits
• The deductible portion of a donor’s
  contribution normally must be reduced by the
  value of anything received in return.
  – However, an insubstantial benefit can be ignored,
    thus allowing a full deduction if the gift otherwise
    meets the requirements for claiming a deduction.
             Insubstantial Benefits
• The following alternative limitations are used to
  determine if benefits are insubstantial:
   – The FMV of all benefits received is not more than the lesser of $96 for
     2010 (up from $95 in 2009) or 2% of the contribution
   – The contribution is at least $48 for 2010 (up from $47.50 in 2009) and
     the cost of the benefits received is no more than the “low-cost article
     value” of $9.60 for 2010
   – In connection with a fund-raising campaign, the benefits are
     distributed free to potential donors who neither requested nor
     expressly consented to receiving them, and their cost is no more than
     the “low-cost article value” of $9.60 in 2010
  Pension Protection Act of 2006
• Controlling organizations must report income
  from and loans to controlled organizations
• Unrelated business income tax returns (990-T)
  must be available for public inspection
• Private foundation and excess benefit penalty
  excise taxes are doubled
  Pension Protection Act of 2006
• Donor advised funds, supporting
  organizations and credit counseling
  organizations subject to new requirements
• Life insurance contracts subject to new
  reporting requirements
• IRA owners 70 ½ or older can make direct
  transfers of up to $100,000 per year to charity
  (2006 and 2007 only)
   Pension Protection Act of 2006
• Charitable contribution deductions for food, books and
  certain conservation property are increased
• Charitable contribution deductions for monetary donations
  (now need bank records or written communication from
  charity), certain easements, taxidermy property, clothing and
  household goods and certain other items are limited
• Beginning in 2008, exempt organizations with gross receipts
  under $25,000 must file an annual notice (e-Postcard Form
  990-N)
QUESTIONS?

								
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