NOT-FOR-PROFIT NEWSLETTER

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1 WINTER 2017 Certified Public Accountants Business Consultants NOT-FOR-PROFIT NEWSLETTER istockphoto thinkstock IN THIS ISSUE A List of Projects from the IRS s Priority IRS Updates Safe Harbor Conditions for Management Contracts When Using Tax-Exempt Bonds Claiming an Education Tax Credit or Deduction Now Requires a Form 1098-T with Some Exceptions Penalty Relief for Form 1098-T Reminder on Reporting Requirements for 501(c)(4) Organizations IRS Releases 990 Data in Machine-Readable Format ABOUT MOSS ADAMS Across the nation, Moss Adams LLP provides insight and expertise to public, private, and notfor-profit organizations in a wide range of industries. To discover how we can make a difference to your organization, visit Prepare for Change As you begin to prepare for the filing season, there are a lot of changes that will affect tax-exempt organizations. We ve compiled the most pressing updates and due dates below, from revised safe-harbor conditions for certain management contracts to education credits and penalty relief for eligible institutions to new reporting requirements for social welfare organizations, and more. A List of Projects from the IRS s Priority By Joua Lo, Senior Manager, Not-for-Profit Practice On August 15, 2016, the IRS and the Department of the Treasury issued the Priority Guidance Plan. The plan includes 281 projects that the IRS and the Treasury intend to actively work on during the 12-month period from July 2016 through June It includes some projects that carried over from the plan as well as a number of new items. Updates will be provided during the plan year to reflect additional items that become priorities and any published guidance. Projects that may be of interest to exempt organizations are listed below. Projects for Exempt Organizations Here are items projects that will be updated: Revenue procedures for grantor and contributor reliance criteria under Sections 170 and 509 Revenue Procedure for EO Select Check Revenue Ruling , which discusses changes to an exempt organization s structure that would result in filing Form 1023 Revenue Procedure 92-94, which discusses the equivalency determination process for purposes of Sections 4942 and 4945 Projects being finalized include regulations and guidance related to: Sections 501(a), 501(c)(3), and 508 to streamline the application process for eligible organizations applying for recognition of tax-exempt status under Section 501(c)(3) final and temporary regulations were published on July 2, 2014 Section 506 as added by the Protecting Americans from Tax Hikes Act of 2015 final and temporary regulations were published on July 12, 2016, and Revenue Procedure was published July 25, 2016 Section 509(a)(3) supporting organizations proposed regulations were published February 19, 2016

2 Section 512 regarding methods of allocating expenses relating to dual-use facilities Section 529A on Qualified ABLE Programs as added by Section 102 of the ABLE Act of 2014 proposed regulations were published June 22, 2015 Section 4941 regarding a private foundation s investment in a partnership in which disqualified persons are also partners Excise taxes on donor-advised funds and fund management Section 6033 for the reporting of contributions Section 6104(c) proposed regulations were published March 15, 2011 Section 7611 for church tax inquiries and examinations proposed regulations were published August 5, 2009 Projects for Charitable Contributions Following are guidance and regulations that will be finalized: Section 170 for charitable contributions of appropriative water rights Section 170 for charitable contributions of conservation easements Section 170 for charitable contributions proposed regulations were published August 7, 2008 Section 170(e)(3) for charitable contributions of inventory Projects for Tax-Exempt Bonds There s one set of regulations that will be clarified that refers to the definition of political subdivision under Section 103 for purposes of the tax-exempt, tax credit, and direct-pay bond provisions. Proposed regulations were published February 23, On the list to be updated is Revenue Procedure relating to the conditions under which a management contract doesn t result in private business use under Section 141. Expected to be finalized are guidance and regulations on these topics: Remedial actions for tax-advantaged bonds under Sections 54A, 54AA, and 141 Public approval requirements for private activity bonds under Section 147(f) proposed regulations were published September 9, 2008 Arbitrage investment restrictions under Section 148 final regulations were published as TD 9777 on July 17, The definition of issue price for tax-exempt bonds under Section 148 proposed regulations were published June 24, 2015 Bond reissuance under Section 150 The Priority Guidance Plan also includes projects related to employee benefits retirement benefits, executive compensation, health care, and employment taxes. To understand how these projects might affect your business, contact your Moss Adams professional. IRS Updates Safe Harbor Conditions for Management Contracts When Using Tax-Exempt Bonds by Renié Burbank, Senior Manager, Health Care Practice Certain management contracts with professional service providers can now look to new guidance on revised and broader safe harbor conditions to avoid being characterized as a private business using bond-financed property. The conditions under Revenue Procedure (Rev. Proc ) relate to projects financed with the proceeds of tax-exempt governmental bonds or qualified 501(c)(3) bonds. page 2

ma-no istockphoto The IRS rules, released August 22, 2016, apply to private activity bonds, which is part of a bond issue that meets both private business use and the private security or payment

3 ma-no istockphoto The IRS rules, released August 22, 2016, apply to private activity bonds, which is part of a bond issue that meets both private business use and the private security or payment tests. Private Business Use Private business use is determined by looking at direct or indirect use of proceeds of an issue by a person in a trade or business other than a governmental unit. A nongovernmental person may be a user of bond proceeds and bond-financed property as a result of: Ownership Actual or beneficial use of property pursuant to a lease Management contract or an incentive payment contract if the contract provides for compensation for services where compensation is based on a share of net profit from the operations of the facility Certain other arrangements An issue generally meets the private business use test if more than 10 percent of the issue s proceeds are used for any private business use, according to Income Tax Regulations (a)(1). Safe Harbor Conditions The safe harbors originally set forth in Revenue Procedure 97-13, which was later modified by Revenue Procedure and amended by Notice , were built upon rigid terms for compensation arrangements and term provisions. When the procedures were modified, they provided certain conditions where compensation arrangements in management contracts do not result in private business use. All compensation for services is based on permissible arrangements under existing guidance, which include a stated amount, a periodic fixed fee, capitation fee, per-unit fee, or a combination of all the above. Contracts for Services Contracts for services that are incidental to the functions of a facility such as janitorial services, office equipment repair, hospital billing, or similar services aren t considered as private business use. In addition, eligible expense reimbursement arrangements are covered under safe harbor rules when a management contract provides compensation consisting of reimbursements of direct expenses paid by the service provider to unrelated parties as well as reasonable overhead costs. Modification Highlights Under Rev. Proc The revised safe harbor provisions generally permit any type of fixed or variable compensation to the service provider that s reasonable compensation for services rendered during the term of the contract. The revised provisions retain existing constraints when compensation to the service provider can t be based on a share of net profit arrangements. Conversely, compensation arrangements may include a percentage of gross revenue, adjusted gross revenue, or expenses of a facility, page 3

4 ma-no istockphoto but not both revenue and expenses. If the management contract provides incentive compensation that s tied to the provider s performance, then the service provider must meet one or more measurable quality standards. The revised provisions provide guidance for eligible expense reimbursement arrangements. Rev. Proc states that it applies a more principles-based approach to safe harbor treatment of management contracts, focusing on factors such as: Control. A qualified user (government or 501(c)(3) organization with qualified 501(c)(3) bonds) must exercise a significant degree of control over the use of the managed property. Risk. Governmental or 501(c)(3) organization must bear the risk of loss upon damage or destruction of the managed property. A safe harbor management contract may not in substance impose the burden of bearing any share of net losses by the service provider from the operation of the managed property. Term. The term of a safe harbor management contract, including any renewal options, and the economic lives of the managed project can t exceed the lesser of 30 years or 80 percent of the weighted average reasonably expected economic life of the managed property. Under Rev. Proc , the revised safe harbors are effective for any management contract that s entered into on or after August 22, 2016, and an issuer may apply the revised safe harbors to any management contract that was entered into before that date. In addition, an issuer may apply the existing safe harbor provisions to a management contract that s entered into before August 18, 2017, and that isn t materially modified or extended on or after August 18, 2017 (other than according to a permitted renewal option). For more insight on this new guidance on revised and broader safe harbor conditions under Rev. Proc , contact your Moss Adams professional. Claiming an Education Tax Credit or Deduction Now Requires a Form 1098-T with Some Exceptions by Tracy Paglia, Partner, Not-for-Profit Practice Individuals planning to claim education credits or deductions for 2016 should be aware of proposed regulations issued by the IRS to implement recent law changes. Unless an exception applies, no education tax credit (the American Opportunities Tax Credit or Lifetime Learning Credit) page 4

5 or deduction will be allowed unless the taxpayer (or his or her dependent) received a Form 1098-T. Taxpayers who haven t received a Form 1098-T by January 31 may still take a credit or deduction, but only if the student has cooperated fully with the institution s efforts to obtain information necessary to furnish the statement, including their Social Security number. As part of the implementation, returns filed for years beginning after 2015 must include the eligible education institution s employer identification number to which qualified tuition and related expenses were paid. This program to regulate education credits and deductions is the latest in a series of actions by the IRS to crack down on the widely publicized abuse of education credits and deductions. Here are two reports from the US Treasury Inspector General for Tax Administration (TIGTA) on the topic: March 2015: Billions of Dollars in Potentially Erroneous Education Credits Continue to Be Claimed for Ineligible Students and Institutions September 2011: Billions of Dollars in Education Credits Appear to Be Erroneous For 2016 and 2017, eligible institutions are required to report tuition and fees paid, rather than billed; previously, either method was allowed. Many institutions won t be ready to implement this change, so the IRS has stated they won t assess penalties on Forms 1098-T filed that report billed rather than paid for the 2016 and 2017 years only. We re anticipating the IRS will have an automatic matching program in the future resulting in notices to Form 1040 filers who don t have a Form 1098-T on file, resulting in reduced refunds or unexpected tax due notices. Institutions issuing Forms 1098-T should be aware of the potential for notices, which could be issued to parents or students as early as spring 2017, and form a communication plan and central point to address questions. Additionally, institutions might consider including additional information warning students of the upcoming program when they send the 2016 Forms 1098-T to them. For help navigating these new forms, contact your Moss Adams professional. Penalty Relief for Form 1098-T By Joua Lo, Senior Manager, Not-for-Profit Practice IRS Announcement provides penalty relief with respect to the 2016 Form 1098-T, which eligible educational institutions are required to file by February 28, 2017 (or March 31, 2017 if filed electronically). Subsequently, the IRS issued Announcement , which extended penalty relief to tax year 2017 with respect to the form 1098-T. The relief only applies to institutions affected by an amendment to Section 212 of the Protecting Americans from Tax Hikes (PATH) Act of With the amendment, eligible educational institutions no longer have the option to report aggregate qualified tuition and related expenses billed for the calendar year. Previously, they could report either amounts received or amounts billed during a calendar year. The amendment to section 6050S(b)(2) made by Section 212 of the PATH Act is effective for qualified tuition and related expenses paid after December 31, 2015, for education provided during academic periods beginning after that date. Due to the difficulty of implementing the change, page 5

the IRS won t impose a penalty if eligible education institutions continue to report the amount billed versus the amount received for calendar years 2016 and 2017.

6 the IRS won t impose a penalty if eligible education institutions continue to report the amount billed versus the amount received for calendar years 2016 and Contact your Moss Adams professional to understand how this might affect you, or visit the IRS Web site for more detailed information. Reminder on Reporting Requirements for 501(c)(4) Organizations by Lindsey Parnell, Senior Manager, and Wendy Campos, Partner, Not-for-Profit Practice With the enactment of the Protecting Americans from Tax Increases (PATH) Act on December 18, 2015, social welfare organizations exempt from tax under Section 501(c)(4) are now required to notify the IRS of their intention to operate as a 501(c)(4) organization within 60 days of formation. Organizations established before the December 18, 2015, enactment date that didn t submit an application for determination of tax-exempt status or file an annual return by that date were required to submit notification within 180 days of the enactment of the act, or by June 15, Failing to meet the new notification requirements within these periods results in a penalty, provided as part of the PATH Act, of $20 per day, but not exceeding $5,000. Background Previously, a social welfare organization was described in Section 501(c)(4) and, therefore, exempt from tax under Section 501(a) if it satisfied the requirements applicable to that status. Although the organization was permitted to apply to the IRS for recognition that it qualified for section 501(c)(4) tax-exempt status, it wasn t required. The only exception was for organizations that failed to file required information returns or notices, according to Section 6033(j)(2). Accordingly, an organization described in section 501(c)(4) that filed the required annual information return or notice, as applicable, wasn t required to seek an IRS determination of its qualification for tax-exempt status. In July 2016, the IRS issued final and temporary regulations and Revenue Procedure providing additional guidance and methods so applicable 501(c) (4) organizations can comply with the new notification requirements under the PATH Act. This followed Notice , which provided interim guidance and relief from the requirements of the PATH Act. The interim notice also extended the due date and provided relief from notification requirements until 60 days after the final and temporary regulations were issued. Organizations established between ma-no istockphoto page 6

7 MOSS ADAMS WINTER 2016 PATH ACT DUE DATE CHANGES NOW DUE Jan. 31 Form W-2 Form W-3 * 1099-MISC An extended electronic filing due date is no longer available for the filing of information on wages reportable on Form W-2 and nonemployee compensation. The due date for employee and payee statements remains the same as under pre-2015 PATH Act law. Changes are effective for returns and statements relating to calendar years beginning after December, 18, 2015, so the 2016 calendar year. *Only for forms reporting amounts in Box 7 (nonemployee compensation) December 18, 2015, and July 8, 2016, don t need to file if they ve filed an annual return or submitted an application for determination of exempt status. Organizations established within that period that haven t met the relief requirements had until September 6, 2016 to submit notification. IRS Releases 990 Data in Machine- Readable Format by Lindsey Parnell, Senior Manager, and Wendy Campos, Partner, Not-for-Profit Practice The IRS announced in June 2016 that the information on all electronically filed Form 990 returns, about 60 percent of total Form 990s, will be available in machinereadable format through Amazon Web Services. Previously this Form 990 data was only available in image files, and the data wasn t generally accessible despite the public inspection requirements in place. With this announcement, data including filings from 2011 to the present will be available for download as XML files via AWS. The publicly available data doesn t include donor information or certain personally identifiable tax identification numbers, but that should come as no surprise because that information has historically been excluded from publicinspection requirements. There are a number of benefits to this release of data: The data will be more widely available and easily accessible to researchers and data scientists who can use the data to provide more insight into the non-profit sector. Users will have access to all publicly disclosed data (rather than the limited portion that was economically viable to transcribe in the past). This allows a first look at data that has never before been analyzed. It will reduce the cost of human transcription that many organizations have incurred in the past. Both the accessibility and analysis of this data will provide increased transparency within the sector. While all organizations are required to file, only very small and very large organizations are required to file electronically. To remedy this, Senate Bill 2750 was introduced on April 6, 2016, and calls for mandatory e-filing of Forms 990. It s been said that there s very little controversial material in this bill, and it will further increase transparency in the not-for-profit sector if it becomes law. If you d like more information about the new format or filing electronically, contact your Moss Adams professional. The material appearing in this communication is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. page 7

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