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?
Pages to are hidden for
"Form 941 Schedule B 2009 - PowerPoint"Please download to view full document