Form 990 Challenges for Tax Return Preparers

Transcription

1 Form 990 Challenges for Tax Return Preparers Lessons from Changes to the Non-Profit Information Return and Schedules WEDNESDAY, OCTOBER 22, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection and phone line (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Respond to verification codes presented throughout the seminar. If you have not printed out the Official Record of Attendance, please print it now. (see Handouts tab in Conference Materials box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Complete and submit the Official Record of Attendance for Continuing Education Credits, which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 ( star zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

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4 Form 990 Challenges for Tax Return Preparers Oct. 22, 2014 Amanda Adams Blazek & Vetterling John Panetta Armanino

5 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

6 Amanda Adams, Blazek & Vetterling PROGRAM SERVICE ACCOMPLISHMENTS

7 Program Service Accomplishments This can potentially be the most important part of return: IRS can use to evaluate whether org continues to qualify for exempt status and funders can use to determine whether to give money. Delicate balance between providing sufficient information to evidence activities and so much information that reader loses interest. Try to fit on form rather than Schedule O. Consider comparison between revenue earned and expenses of a program is it profitable? Disclosures regarding new and discontinued activities consider what was presented in 1023 and 990s since then. 7

8 John Panetta, Armanino REPORTING COMPENSATION: A REVIEW

9 Armanino LLP Certified Public Accountants & Consultants John Panetta phone: Armanino LLP amllp.com Armanino LLP amllp.com

10 Compensation A tax-exempt organization may pay compensation to members of its board and key employees so long as the amounts paid are reasonable. For 501(c)(3) and (c)(4) organizations, Intermediate Sanctions rules impose penalties on disqualified persons (insiders) that receive payments that are found not reasonable. A penalty equal to 25 percent of the excess payments can be imposed, and any excessive pay must be returned by a person receiving such payments from a 501(c)(3) or (4) entity. Other transactions between such organizations and insiders can also expose the insider and organization to the same sanctions. 10 Armanino LLP amllp.com

11 Compensation (continue) Reasonableness revolves around whether the compensation paid is comparable to that which a person with comparable experience and training in a position with comparable responsibilities for an organization with comparable resources located in a comparable area. For asset sales or usage, the test would be based on appraisals of value or normal rental for use of like assets. All organizations providing compensation of $100,000 or more should review and incorporate the rules for protecting against sanctions with a rebuttable presumption of reasonableness. 11 Armanino LLP amllp.com

12 Compensation (continue) Form 990 requires organizations to provide details regarding compensation packages and processes. Key questions are: o Who has to be reported? Review definitions of Officer, Director/Trustee, Key Employee and Highly Compensated employee. o What must be reported? o Where does it get reported? Presentation of compensation also applies to payments from related organizations. Schedule R. 12 Armanino LLP amllp.com

13 Form 990, Part VII This part reports compensation of Officers, Directors, Trustees, Key Employees, and Highly Compensated Employees. These Employees and Independent Contractors may need to also be reported on Schedule J. Amounts disclosed in Part VII and Schedule J are reported on a calendar year basis (even if organization is on a non-calendar fiscal year). When determining whether an individual is a current or former officer, director or trustee. They are considered current if the individual served in that role at any time during the organization s current fiscal year. Formers have 5-year look back period. 13 Armanino LLP amllp.com

14 Form 990, Part VII Individual Threshold Current officers, directors/trustees $ 0 (senior management/financial officials) Current key employees $150,000 Current high 5 employees & independent contractors $100,000 Former officers, key & high 5 employees $100,000 Former board members/trustees $ 10, Armanino LLP amllp.com

15 Form 990, Part VII Columns A, B & C = Name, Avg. Hrs./Wk. & Position Column D - Reportable compensation = W-2 Medicare taxable income (Box 5) for employees or Form 1099 (Box 7) for directors & independent contractors. Column E - Related entity compensation in if it exceeds $10,000 (even if from several related entities). Reasonable effort to identify related comp (questionnaire provided to and returned by board members and affected employees). 15 Armanino LLP amllp.com

16 Form 990, Part VII Column F Other comp includes: Tax-deferred employer contributions to qualified or non-qualified defined contribution plan, Increase in actuarial value of defined-benefit plan Value of health insurance/reimbursement plans provided by employer Tax-deferred employee/employer contributions to a nonqualified defined contribution plan Items not reportable on W-2 or 1099 if they total >$10,000 per entity o (e.g. Adoption or education assistance, long term care or disability insurance) Part VII instructions contain a comprehensive chart of various types of compensatory items and where to report on Part VII and Schedule J. 16 Armanino LLP amllp.com

17 Schedule J Compensation Information Part I Q. 1 Travel, Companion travel, Housing allowance & Health Club membership o Per se Violations of Intermediate Sanction Rules Q. 2 Accountable plan process in place Q. 3 How compensation is set? Intermediate Sanction process Q. 4 Severance, change of control or SERP payments Q. 5 Compensation contingent on Revenue Q. 6 Compensation contingent on Earnings 17 Armanino LLP amllp.com

18 Schedule J (continue) Part I Column A, B (i), B(ii) Name, Base Comp & Bonus Column B (iii) Other Reportable Comp o Payments of deferred amounts, severance or change of control payments, length of service awards & amounts vested under a 457(f) plan. Column C Current year deferrals (more than 2.5 months after current tax year) Column D Nontaxable benefits Education & Adoption Assistance, Disability & Long term Care Insurance Column E Totals of Prior Columns Column F Earned but deferred to future year 18 Armanino LLP amllp.com

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20 Amanda Adams, Blazek & Vetterling PUBLIC CHARITY STATUS

21 Schedule A Public Support 501(c)(3) organizations are further classified into public charities and private foundations. Donations to public charities are subject to more favorable deduction limits and private foundations face stricter rules under Chapter 42. Public charities are divided into eight main categories. Some of the categories qualify as public based on the nature of their activities while others must prove their public status based on the revenue they receive. 21

22 Schedule A Public Support The organizations that must qualify based on their sources of support include the following: 170(b)(1)(A)(iv) organizations operate for the benefit of a college or university owned or operated by a governmental unit. They check Sch A, Pt 1, Box 5 and complete Schedule A, Part II. 170(b)(1)(A)(vi) organizations must receive at least 33 1/3% of their support from a governmental unit or the general public. They check Sch A, Pt 1, Box 7 or 8 (if a community trust) and complete Schedule A, Part II. 509(a)(2) organizations must receive at least 33 1/3% of their support from a governmental unit or the general public and no more than 33 1/3% from investment income and UBTI. They check Sch A, Pt 1, Box 9 and complete Sch A, Part III. 22

23 Schedule A Public Support Schedule A Part II, Line by line Line 1: Gifts, grants, and contributions reported on Part VIII, line 1h of Form 990. Line 2: Tax revenues levied for your benefit. This amount may be reported on Part VIII, line 11 of Form 990. Line 3: The value of services furnished by a governmental unit without charge. This amount may not be reported on 990 because the instructions explicitly indicate donated services are not to be reported as revenue or expense. Line 8: Gross income from interest, dividends, payments received on securities loans, (990 Part VIII, Line 3), rents (990 Part VIII, Line 6a), royalties (990 Part VIII, Line 5), and income from similar sources (990 Part VIII, Line 4 and possibly 11). Line 9: Net income from unrelated business activities not reported on line 12. Examples include income from special events (990 Part VIII, Lines 8a and 9a), advertising (Part VIII, Line 11), and rents from debtfinanced property (Part VIII, Line 6d). Line 10: Other income. Line 12: Gross receipts from merchandise sold (990 Part VIII, Line 10a), services performed (990 Part VIII, Line 2) are reported, and certain other income excluded from UBI under 513 (1) activity conducted by volunteers (990 Part VIII, Line 10a or 11), (2) activity conducted for the convenience of members (990 Part VIII, Line 2, 10a, or 11), selling of donated merchandise (990 Part VIII, Line 10a), income from trade show/qualified public entertainment activity (990 Part VIII, Line 2), bingo (990 Part VIII, Line 9a), rental of member list (990 Part VIII, Line 5 or 11). 23

24 Schedule A Public Support Schedule A, Part II, Line 5 (Private Support) Line 5 seeks to determine amounts received from substantial contributors that should be treated as private support. A list needs to be prepared that includes the name and amounts given by any individual or organization (other than a 509(a)(1) public charity or governmental unit) during the period that gave more than 2% of Line 11f of Sch. A, Part II (the total revenue received by the organization during the period covered by the support schedule except amounts reported on Line 12). These are considered to be substantial contributors and any amounts they gave over the 2% are added together and reported on line 5. 24

25 Schedule A Public Support Worksheet for Schedule A, Part II: Public Support Total Contributions (990 p.1, line 1e) 800, , ,000 1,000,000 1,200,000 Total Line 1 (FRAGMENTED) 800, , ,000 1,000,000 1,200,000 4,650,000 Tax revenues levied for org's benefit Total Line 2 (PUBLIC SUPPO RT) Svcs/Facilities donated by govt unit Total Line 3 (PUBLIC SUPPO RT) Interest 7,500 8,000 6,500 7,000 9,000 Dividends 60,000 62,000 70,000 71,000 80,000 Gross Rents Other investment income Total Line 8 (PRIVATE SUPPO RT) 67,500 70,000 76,500 78,000 89, ,000 Net unrelated business income Total Line 9 (PRIVATE SUPPO RT) Other income Total Line 10 (PRIVATE SUPPO RT) % Ln 11 Total Line 11 (TO TAL S UPPO RT) 867, , ,500 1,078,000 1,289,000 5,031, , Total Excess Major Donor A 600, ,000 80,000 50,000 25, , ,380 Major Donor B 30,000 30,000 30,000 30,000 30, ,000 49,380 Major Donor C , , ,380 Other donors under 2% 170, , , , ,000 3,120,000 Total Line 5 800, , ,000 1,000,000 1,200,000 4,650,000 1,228,140 Public Support Percentage (Line 14) 68.02% Program service revenue (990 p.1, line 2) 3,000 5,000 2,000 1,500 5,000 Gross sales of inventory (990 p.1, line 10a) Unrelated business income excl. under 513 Total Line 12 (EXCLUDED FRO M SUPPO RT) 3,000 5,000 2,000 1,500 5,000 16,500 25

26 Schedule A Public Support Important distinctions between 509(a)(1) and 509(a)(2) test are: (1)Exempt function revenue not included as support in 509(a)(1) test (2) Calculation of private support very different 26

27 Schedule A Public Support Schedule A Part III, Line by line Line 1: Gifts, grants, and contributions reported on Part VIII, line 1h of Form 990. Line 2: Gross receipts from merchandise sold (990 Part VIII, Line 10a), services performed (990 Part VIII, Line 2), and any other income derived from activities related to the organization s exempt purpose (990 Part VIII, Line 11) are reported. Line 3: Gross receipts from other activities excluded from UBI under 513 (1) activity conducted by volunteers (990 Part VIII, Line 10a or 11), (2) activity conducted for the convenience of members (990 Part VIII, Line 2, 10a, or 11), selling of donated merchandise (990 Part VIII, Line 10a), income from trade show/qualified public entertainment activity (990 Part VIII, Line 2), bingo (990 Part VIII, Line 9a), rental of member list (990 Part VIII, Line 5 or 11. Line 4: Tax revenues levied for your benefit. This amount may be reported on Part VIII, line 11 of Form 990. Line 5: The value of services furnished by a governmental unit without charge. This amount may not be reported on 990 because the instructions explicitly indicate donated services are not to be reported as revenue or expense. Line 10a: Gross income from interest, dividends, payments received on securities loans, (990 Part VIII, Line 3), rents (990 Part VIII, Line 6a), royalties (990 Part VIII, Line 5), and income from similar sources (990 Part VIII, Line 4 and possibly 11). Line 10b: Unrelated business taxable income less any tax paid (990-T Line 13 Column (A). Line 11: Net income from unrelated business activities not reported on lines 3 or 10b. Examples include income from special events (990 Part VIII, Lines 8a and 9a) and research (Part VIII, Line 11). Line 12: Other income. 27

28 Schedule A Public Support Schedule A Part III, Line 7a Donations received from disqualified persons the board members, key employees, substantial contributors, and their family members. A substantial contributor is one that has donated more than 2% of the total contributions the organization has received over its entire life. All amounts received from disqualified persons are reported on Line 7a of Sch. A, Part III and treated as private support. 28

29 Schedule A Public Support Cumulative list of Substantial Contributors This report is updated annually to maintain historic data needed to identify donors who have become substantial contributors. Cumulative Donations 2% floor All years to date 12,000, ,000 Current year 1,000,000 new cumulative amount $ 13,000,000 $ 260,000 Cumulative Donations Updated Donations this Cumulative to date Year Donations Donor ABC 5,000,000 1,000,000 6,000,000 Donor DEF 100, , ,000 **** Donor GHI 1,000,000 1,000,000 Donor JKL 50,000 50,000 *** Under IRC section 507(d)(2), this donor became a substantial contributor. 29

30 Schedule A Public Support Schedule A Part III, Line 7b The second type of potentially private support relates to income reported on Lines 2 and 3 of Sch. A, Part III. Any individual or organization that purchased the larger of $5,000 or 1% of the total of such revenue for the year. The amount given in excess of the 1% (or $5,000) is treated as private and reported on Line 7b. 30

31 Schedule A Public Support Worksheet for Schedule A, Part III: Public Support 509(a)(2) TEST Total Contributions (990 p.1, line 1e) 80, , ,000 75, ,000 Total Line 1 (FRAGMENTED) 80, , ,000 75, , ,000 Program service revenue (990 p.1, line 2) 800,000 1,000,000 1,200, ,000 1,000,000 Gross sales of inventory (990 p.1, line 10a) Total Line 2 (FRAGMENTED) 800,000 1,000,000 1,200, ,000 1,000,000 4,900,000 Gross unrelated business income excl. under ,000 25,000 30,000 40,000 15,000 Total Line 3 (FRAGMENTED) 20,000 25,000 30,000 40,000 15, ,000 Tax revenues levied for org's benefit Total Line 4 (PUBLIC SUPPO RT) Svcs/Facilities donated by govt unit Total Line 5 (PUBLIC SUPPO RT) Interest (990 p.1, line 4) 4,500 5,000 6,000 7,500 9,000 Dividends (990 p.1, line 5) 40,000 50,000 55,000 62,000 71,000 Gross Rents (990 p.1, line 6a) Other investment income (990 p.1, line 7) Total Line 10a (PRIVATE SUPPO RT) 44,500 55,000 61,000 69,500 80, ,000 Unrelated bus. taxable inc. (990-T, p.1, ln 34) Total Line 10b (PRIVATE SUPPO RT) Net unrelated business income not incl. above Total Line 11(PRIVATE SUPPO RT) Other income Total Line 12 (PRIVATE SUPPO RT) Total Line 13 (TO TAL S UPPO RT) 944,500 1,180,000 1,441,000 1,084,500 1,295,000 5,945,000 1 % 9,445 11,800 14,410 10,845 12,950 DP Donations - Line 7a Total Disqualified person - Board 25,000 25,000 25,000 50,000 20,000 Disqualified person - SC 20,000 20,000 20,000 20,000 20,000 Total Line 7a 45,000 45,000 45,000 70,000 40, ,000 Major Vendors - Line 7b Vendor A 10,000 12,000 15,000 20,000 13,000 Vendor less 1% of line 13 x number of EFP (9,445) (11,800) (14,410) (10,845) (12,950) Total Line 7b , ,550 Public Support Percentage 88.30% 31

32 Schedule A Public Support Special Situations 1. Unusual Grants - A number of factors are taken into account, no single factor is determinative, and not all factors need be present. The public support percentage must be above 33 1/3% after the unusual grant has been accounted for. 2. Facts and Circumstances - 509(a)(1) organizations also can use this exception to retain public status even though their percentage is below 33 1/3% as long as it is above 10%. A number of factors are taken into account, no single factor is determinative, and not all factors need be present. 32

33 Schedule A Public Support Unusual Grant Factors: The contribution is received from a party with no connection to the organization The gift is in the form of cash, marketable securities, or property that furthers the organization's exempt purposes. No material restrictions are placed on the gift. The organization attracts a significant amount of support to pay its operating expenses on a regular basis, and the gift adds to an endowment or pays for capital items. The gift is a bequest. An active fundraising program exists and attracts significant public support. A representative and broadly based governing body controls the organization. Prior to the receipt of the unusual grant, the organization qualified as publicly supported 33

34 Schedule A Public Support Facts and Circumstances Factors: The organization must have an active continuous and bona fide fund-raising program designed to attract new and additional public and governmental support. The composition of the board is representative of broad public interests (rather than those of major contributors). Some support comes from governmental and other sources representative of the general public (rather than a few major contributors). Facilities and programs are made available to the general public. Programs appeal to a broadly based public (and in fact the public participates). The fact that an organization is an educational or research institution that regularly publishes scholarly studies that are widely used by colleges and universities and the general public. The participation in, or sponsorship of, the programs of the organization by members of the public having special knowledge or expertise, public officials, or civic or community leaders. For a membership organization, the solicitations for dues-paying members is designed to enroll a substantial number of persons in the community or area and the dues amount makes membership available to a broad cross section of the interested public. 34

35 Schedule A Public Support Supporting organizations are operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified public charities. Supporting organizations must be operated by, supervised by, controlled by, or operated in connection with, one or more public charities. Supporting organizations cannot be controlled, directly or indirectly, by one or more disqualified persons. 509(a)(3) organizations are further classified as Type I, II, III Functionally Integrated, and Type III Non- Functionally Integrated. 35

36 Schedule A Public Support NEW Parts IV and V added to Draft 2014 Schedule A Part IV asks questions to determine qualification as a supporting organization Part V calculates satisfaction of new spending requirement for Type III Non-Functionally Integrated organizations. 36

37 Schedule A Public Support ALL SUPPORTING ORGANIZATIONS MUST ANSWER: 1 Are all of the organization s supported organizations listed by name in the organization s governing documents? 2 Did the organization have any supported organization that does not have an IRS determination of status under section 509(a)(1) or (2)? 3a Did the organization have a supported organization described in section 501(c)(4), (5), or (6)?. 3b Did the organization confirm that each supported organization qualified under section 501(c)(4), (5), or (6) and satisfied the public support tests under section 509(a)(2)? 3c Did the organization ensure that all support to such organizations was used exclusively for section 170(c)(2)(B) purposes? 4a Was any supported organization not organized in the United States ("foreign supported organization 4b Did the organization have ultimate control and discretion in deciding whether to make grants to the foreign supported organization? 4c Did the organization support any foreign supported organization that does not have an IRS determination under sections 501(c)(3) and 509(a)(1) or (2)? 5a Did the organization add, substitute, or remove any supported organizations during the tax year? 5b Type I or Type II only. Was any added or substituted supported organization part of a class already designated in the organization's organizing document? 5c Substitutions only. Was the substitution the result of an event beyond the organization's control? 37

38 Schedule A Public Support 6 Did the organization provide support (whether in the form of grants or the provision of services or facilities) to anyone other than (a) its supported organizations; (b) individuals that are part of the charitable class benefited by one or more of its supported organizations; or (c) other supporting organizations that also support or benefit one or more of the filing organization s supported organizations? 7 Did the organization provide a grant, loan, compensation, or other similar payment to a substantial contributor (defined in IRC 4958(c)(3)(C)), a family member of a substantial contributor, or a 35-percent controlled entity with regard to a substantial contributor? 8 Did the organization make a loan to a disqualified person (as defined in section 4958) not described in line 7? 9a Was the organization controlled directly or indirectly at any time during the tax year by one or more disqualified persons as defined in section 4946 (other than foundation managers and organizations described in section 509(a)(1) or (2))? 9b Did one or more disqualified persons (as defined in line 9(a)) hold a controlling interest in any entity in which the supporting organization had an interest? 9c Did a disqualified person (as defined in line 9(a)) have an ownership interest in, or derive any personal benefit from, assets in which the supporting organization also had an interest? 10a Was the organization subject to the excess business holdings rules of IRC 4943 because of IRC 4943(f) (regarding certain Type II supporting organizations, and all Type III non-functionally integrated supporting organizations)? 10b Did the organization have any excess business holdings in the tax year? 11 Has the organization accepted a gift or contribution from any of the following persons? a A person who directly or indirectly controls, either alone or together with persons described in (b) and (c) below, the governing body of a supported organization? b A family member of a person described in (a) above? c A 35% controlled entity of a person described in (a) or (b) above? 38

39 Schedule A Public Support Section B. Type I Supporting Organizations 1 Did the directors, trustees, or membership of one or more supported organizations have the power to regularly appoint or elect at least a majority of the organization s directors or trustees at all times during the tax year? 2 Did the organization operate for the benefit of any supported organization other than the supported organization(s) that operated, supervised, or controlled the supporting organization? 39

40 Schedule A Public Support Section C. Type II Supporting Organizations 1 Were a majority of the organization s directors or trustees during the tax year also a majority of the directors or trustees of each of the organization s supported organization(s)? 40

41 Schedule A Public Support Section D. All Type III Supporting Organizations 1 Did the organization provide to each of its supported organizations, by the last day of the fifth month of the organization s tax year, (1) a written notice describing the type and amount of support provided during the prior tax year, (2) a copy of the Form 990 that was most recently filed as of the date of notification, and (3) copies of the organization s governing documents in effect on the date of notification, to the extent not previously provided? 2 Were any of the organization s officers, directors, or trustees either (i) appointed or elected by the supported organization(s) or (ii) serving on the governing body of a supported organization? 3 By reason of the relationship described in (2), did the organization s supported organizations have a significant voice in the organization s investment policies and in directing the use of the organization s income or assets at all times during the tax year? 41

42 Schedule A Public Support Section E. Type III Functionally-Integrated Supporting Organizations 1 Check the box next to the method that the organization used to satisfy the Integral Part Test during the year (see instructions): The organization satisfied the Activities Test. Complete line 2 below. The organization is the parent of each of its supported organizations. Complete line 3 below. The organization supported a governmental entity. Describe in Part VI how you supported a government entity (see instructions). 2 Activities Test. a Did substantially all of the organization s activities during the tax year directly further the exempt purposes of the supported organization(s) to which the organization was responsive? b Did the activities described in (a) constitute activities that, but for the organization s involvement, one or more of the organization s supported organization(s) would have been engaged in? 3 Parent of Supported Organizations. a Did the organization have the power to regularly appoint or elect a majority of the officers, directors, or trustees of each of the supported organizations? b Did the organization exercise a substantial degree of direction over the policies, programs, and activities of each of its supported organizations? 42

43 Schedule A Public Support 43

44 Schedule A Public Support 44

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46 John Panetta, Armanino FOREIGN ACTIVITIES, INCLUDING INVESTMENTS

47 Schedule F Activities Outside US There is no geographic limit on where programs qualifying for exemption can be operated. Part I General Information: threshold $10,000 of revenue or expense for all non- U.S. activity. Q. 1 Questions addressing selection process, eligibility for grants or assistance & selection criteria Private foundation procedures for foreign grants including Pre-grant inquiry and Expenditure Responsibility follow-up reports can serve as a good model for documenting Q. 2 Calls for description of grant monitoring process. Q. 3 Information on: where 1 of 9 regions; number of employees or agents (visitors & volunteers are not counted), Activities (Programs, Investments, Fundraising) & amounts of expenditures and investments 47 Armanino LLP amllp.com

48 Schedule F Activities Outside US (continue) Part II Grants to Entities Outside US Threshold - $5000 per recipient. Challenge will come from line 2 and 3 that ask for number of recipient organizations that have U.S. or non-us government recognition of exempt status plus those for which equivalency was performed. Part III Grants to Individuals Outside US Threshold is $5,000 in total. Assistance to non-us individuals by type (tuition, food, and vaccinations), region, total amount of cash assistance and method of disbursement and valuation method for of non-cash assistance 48 Armanino LLP amllp.com

49 Schedule F Activities Outside US (continue) Part IV - Foreign Forms Six Yes/No questions intended to: o Elicit additional reporting for transfers to foreign corporation or o Disclose interests held in foreign corporation, trust, partnership or PFIC, or o Disclose operations in countries subject to US boycott. Penalties: o Failure to File 926 Transfer to Foreign Corporation = 10% on amount transferred o Failure to File Interest in Foreign Corporation = $10,000 each up to $50,000 o Failure to File 8865 Interest in Foreign Partnership = $10,000 each up to $50,000 o Failure to File 3520 Interest in Foreign Trust = minimum $10,000 o Failure to File 5713 Boycott = $25,000 or imprisonment or both. o Form 8621 PFIC no filing required unless UBI present 49 Armanino LLP amllp.com

50 Amanda Adams, Blazek & Vetterling REPORTING FOR SPECIAL FUNDRAISING EVENTS

51 Schedule G Fundraising Events Valuation of benefits provided to attendees: The purchase of an event ticket that provides benefits to attendees is presumed to lack donative intent and is not deductible as a charitable donation. To overcome this presumption, the donor must prove an intention to make a payment to charity that exceeds the value of benefits received. For gifts of more than $75, the charity must provide a receipt and is responsible to value benefits provided. Items to consider for valuation purposes include: food, drink, entertainment (speaker fee), facility rental (or tent rental if outdoors), equipment/furniture rentals, goody bags, etc. Items provided to attendees must be valued even if they have been provided to the organization at no charge. Benefit value is said to be that amount a willing buyer in the marketplace where such items are sold would pay. Many special events have no commercial counterpart creating a valuation challenge. When the cost of an event exceeds the ticket portion disclosed as the value of benefits, a loss will appear on Part VIII, line 8, of Form 990. To date the IRS has not challenged loss reporting, but we recommend avoiding such a loss if possible. 51

52 Schedule G Fundraising Events Auction items: Generally speaking, the purchase of an auction item has no donative element. However, if the purchaser pays more than the fair market value for the item, a donation can potentially be claimed for the excess if the purchaser intended to pay more than fair market value. The organization can assist by providing a list at the event of the items along with their estimated fair market values. Often, the auction items will have been donated to the organization. The Form 990 requires such items to be reflected as noncash contributions in Part VIII and Schedule M even though they are not typically reflected as such in financial statements prepared according to GAAP. If your clients systems do not currently track such items, you should consider recommending they adopt a new methodology so they will be able to obtain this information for the return. 52

53 Schedule G Fundraising Events Event #1 Event #2 Event #3 Event #4 Total Events Name Gross receipts per financial statements - Value of auction items donated to the organization* - Less: gross revenue from below Charitable contribution portion Cash prizes - Non-cash prizes - Rent/Facility costs - Food and beverages - Entertainment - Value of auction items donated to the organization* - Other direct expenses - Direct expense summary Net income summary Calculation of gross revenue portion of event You calculate the non-charitable portion and subtract that amount from the total receipts, thereby making the charitable contribution portion a plug to keep the equation in balance. Event #1 Event #2 Event #3 Event #4 Auction income** Raffle income Non-deductible portion of ticket sales*** Other income not considered to be a donation Total non-charitable portion

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55 John Panetta, Armanino TRANSACTIONS WITH INTERESTED PERSONS

56 Schedule L Transactions with Interested Persons Parts I, II and III All transactions are reported regardless of amount Individual and aggregate reporting thresholds are provided for Part IV Parts III and IV Contain reasonable effort instructions, which essentially expect the organization to make annual inquiries to its officials in a best effort to identify relationships and which the organization may rely on to satisfy reporting requirements for those Parts There is a separate definition of interested person for each Part of the Schedule, so a person who is an interested person for one Part may not be an interested person for other Parts of the Schedule 56 Armanino LLP amllp.com

57 Schedule L (continue) Part I Excess Benefit Transactions Excess benefit transactions: name of disqualified person; relationship to organization description of transaction & if corrected. Part II Loans Loans to and from interested persons that are outstanding at the end of the tax year reported, regardless of amount. This also includes loans with third parties that were transferred and became loans between the organization and an interested person. Interested persons for purposes of reporting loans on Schedule L, Part II include: o Current or former officers, directors, trustees, key employees, and the five highest compensated employees listed in Part VII, Section A of Form 990 o Disqualified persons essentially those above plus relatives 57 Armanino LLP amllp.com

58 Schedule L (continue) Part III - Grants or Assistance Benefitting Interested Person Requires organizations to report each grant (scholarships, fellowships, internships, prizes, awards, etc.) or other assistance (provision of goods, services, or use of facilities) provided by the organization to any interested person, regardless of amount. Interested persons for purposes of reporting grants on Schedule L, Part III include: o Current or former officers, directors, trustees, and key employees o Substantial contributors o Persons related to those above 58 Armanino LLP amllp.com

59 Schedule L (continue) Related persons include: Members of the organization s grant selection committee Family members (includes brothers & sisters and everybody s spouses) of officers, directors, trustees, key employees, substantial contributors, or members of the organization s grant selection committee A 35% controlled entity of an officers, directors, trustees, key employees, substantial contributors, or members of selection committee Employees of substantial contributors or of a 35% controlled entity of a substantial contributor if the employee received the grant or assistance due to the advice of the substantial contributor or 35% controlled entity or pursuant to a program funded by the substantial contributor primarily to benefit such employees. 59 Armanino LLP amllp.com

60 Schedule L (continue) Part IV Business transactions Requires organizations to report business transactions for which payments were made during the organization s tax year between the organization and an interested person if the payments exceed one of the reporting thresholds and regardless of when the transaction was entered into between the parties. Reporting thresholds: All payments during the year between the organization and the interested person exceed $100,000 All payments during the year from a single transaction exceed the greater of $10,000 or 1% of the filing organization s total revenues Compensation payments paid by the organization to a family member of a current officer, director, trustee, or key employee exceeds $10, Armanino LLP amllp.com

61 Amanda Adams, Blazek & Vetterling RELATED ORGANIZATIONS

62 Schedule R Related Organizations For purposes of determining related organizations, control means, in regards to nonprofit organizations, whether taxable or tax-exempt: In the case of a parent/subsidiary relationship: power to remove and replace (or to appoint or elect, if such power includes a continuing power to appoint or elect periodically or in the event of vacancies) a majority of the nonprofit organization s or other organization s directors or trustees, management or board overlap where a majority of the subsidiary organization s directors or trustees are trustees, directors, officers, employees, or agents of the parent organization. In the case of brother/sister nonprofit organizations: the same persons constitute a majority of the members of the governing body of both organizations. 62

63 Schedule R Related Organizations In the case of stock corporations and other organizations with owners or persons having beneficial interests, whether such organization is taxable or tax-exempt, control means any of the following relationships: ownership of more than 50% of the stock (by voting power or value) of a corporation, ownership of more than 50% of the profits or capital interest in a partnership, ownership of more than 50% of the profits or capital interest in a limited liability company taxed as a partnership, regardless of the designation under state law of the ownership interests as stock, membership interests, or otherwise, being a managing partner or managing member in a partnership or limited liability company which has three or fewer managing partners or managing members (regardless of which partner or member has the most actual control), being a general partner in a limited partnership which has three or fewer general partners (regardless of which partner has the most actual control), being the sole member of a disregarded entity, or ownership of more than 50% of the beneficial interest in a trust. 63

64 Schedule R Related Organizations Control may be indirect. In other words, if the organization controls Entity A which in turn controls Entity B, the organization will be treated as controlling Entity B. To determine indirect control through constructive ownership of a corporation, the principles of the rules under section 318 (relating to constructive ownership of stock) shall apply for purposes of determining constructive ownership of another entity (a partnership or trust). If an entity (X) controls an entity taxed as a partnership by being one of three or fewer partners or member, then an organization that controls X also controls the partnership. 64

65 Schedule R Related Organizations Schedule R, Part V - Transactions with related organizations Receipt of interest, royalty, rent, etc. from controlled org Gift, grant, etc. to or from Loan to or from Sale/Purchase/Exchange of assets Lease of facilities, equipment, etc. Performance of services Sharing of facilities, equipment, mailing lists, etc. Sharing of paid employees Reimbursement of expenses Other transfer of cash or property 65

66 Schedule R Related Organizations Three important thresholds for reporting specific numbers related to transactions with related organizations: First report transaction of any amount which is described on line 1a interest, annuities, royalties or rent from a controlled entity. (Potential UBI ramifications.) Second report transaction of any other character which is with a controlled entity and which exceeds $50,000. Third report transaction which is with a related organization not described in 501(c)(3) and which exceeds $50,