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The PPC Nonprofit Update, June 2010, Volume 17, No.

Reconciliation Act (the Health Care Act) are applicable only for future years.

employees. Who s Eligible to Claim the Credit? A QSBE is generally an employer, including a tax-exempt entity, that meets all of these requirements [IRC Sec.

1 The PPC Nonprofit Update, June 2010, Volume 17, No. 6 THE PPC NONPROFIT UPDATE Health Care Act Includes Insurance Tax Credit Most of the tax provisions of the newly enacted Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (the Health Care Act) are applicable only for future years. However, one substantial provision for tax years beginning in 2010 is a new health insurance tax credit available to qualified small business employers (QSBE) that purchase health insurance for their employees. Who s Eligible to Claim the Credit? A QSBE is generally an employer, including a tax-exempt entity, that meets all of these requirements [IRC Sec. 45R(d)]: z It employs no more than 25 full-time equivalent (FTE) employees during its tax year. FTE employees are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number). However, the maximum hours counted for any one employee is 2,080. The hours worked by seasonal workers are not counted unless they work for the employer more than 120 days during the tax year. z It pays annual FTE wages that average no more than $50,000. This is determined by dividing the total wages paid by the number of FTE employees and rounding that number down to the nearest $1,000. Presumably, wages paid to seasonal workers are excluded if the worker s hours are excluded in determining the number of FTE employees. z The employer has a qualified health insurance plan (or arrangement) that requires it to pay at least 50% of the premiums (on a uniform basis) on behalf of all of its employees who enroll in the plan. Example: During 2010, Philanthropy, Inc. paid wages totaling $600,000 to 12 employees who each worked 2,080 hours and four employees who each worked 1,560 hours. Philanthropy has 15 FTE employees {[(2,080 12) + (1,560 4)] 2,080]}, and its average annual FTE wages are $40,000 ($600,000 15). In this Issue: Health Care Act Includes Insurance Tax Credit Procedural Traps in Charitable Giving Tax Brief FASB Issues ASU to Codify/Amend New M&A Guidance FASB Issues ASU on Fair Value Amendment to Subsequent Events Web Resources This newsletter is also available online. Please call (800) , or order online at ppc.thomsonreuters.com.

2 2 The PPC Nonprofit Update, June 2010, Volume 17, No. 6 Therefore, it will qualify for the small employer health insurance tax credit if it pays all or a uniform portion (but at least 50%) of its employees health insurance premiums under a qualified arrangement. Normally, the employer must pay the same percentage (at least 50%) of all its employees premiums to qualify for the credit. However, the FAQs on the IRS website ( for the Small Business Health Care Tax Credit indicate that the IRS will provide transitional rules for Also, according to the FAQs, premiums paid in 2010 before the Health Care Act was enacted can qualify for the credit. Calculating the Credit For tax years beginning in 2010 through 2013, the credit for eligible tax-exempt employers generally equals 25% of the lesser of [IRC Sec. 45R(g)(2)]: z The amount of contributions the employer made during the tax year to its qualified health arrangement to purchase qualifying health coverage for its employees. z The amount of contributions that the employer would have made during the tax year to its qualified health arrangement if each employee had enrolled in coverage with a small business benchmark premium. The small business benchmark premium will be determined by the Secretary of Health and Human Services each year on a state-by-state basis. The benchmark premiums for 2010 are included in Revenue Rul , IRB. However, the amount of the credit cannot exceed the total amount of income and Medicare tax the employer is required to withhold from employees wages for the year plus the employer s share of Medicare tax on the employees wages. In addition, the full amount of the credit is available only to an employer with 10 or fewer FTE employees who have average annual FTE wages of less than $25,000. (FAQ #7 explains how to calculate the credit when these limits are exceeded.) Also, only nonelective employer contributions qualify, meaning that employee elective contributions to the plan used by the employer to pay for the employee s coverage do not qualify for the credit. UBIT Impact/Refundable Credit For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer can receive a refund (provided it does not exceed the income tax withholding and Medicare tax liability limitation described previously). The employer s unrelated business income tax deduction for premiums it pays on behalf of its employees is reduced by the health insurance credit [IRC Sec. 280C(h)]. Exempt employers and their tax advisers should evaluate their eligibility for the insurance tax credit, and if they qualify, see whether their books and records capture the necessary data. Procedural Traps in Charitable Giving More than a donor s good intentions are required to sustain a charitable contribution deduction. Two recent Tax Court decisions illustrate how the failure to satisfy a procedural rule will preclude deductibility. Facade Easement Contributions Normally a donor cannot claim an income tax deduction for the charitable gift of partial interest in property. However, there are exceptions to this general rule. One of these exceptions is a qualified conservation contribution, defined as a charitable contribution of a qualified real property interest exclusively for conservation purposes [IRC Sec. 170(h)(1)]. A contribution will not be deemed exclusively for conservation purposes unless the conservation purpose is protected in perpetuity [IRC Sec. 170(h)(5)]. Gordon and Lorna Kaufman owned a rowhouse, on which there was a mortgage, in a Boston historic preservation district. In December 2003, they contributed cash and a facade easement (valued at $220,800) in the rowhouse to the National Architectural Trust (NAT). The Tax Court upheld the IRS s denial of the Kaufman s charitable deduction for the facade easement [Kaufman v. Commissioner, 134 TC No. 9 (2010)]. The Court noted that Reg A-14(g)(6)(ii) requires that a donor must agree (at the time of the gift) that the donation of the perpetual conservation restriction creates an immediately vested property right in the donee organization. In addition, that property right must have a fair market value at least equal to the proportionate value that the perpetual conservation restriction bears to the value of the property as a whole at the time of the gift. This proportionate value of the donee s property rights must remain constant.

3 The PPC Nonprofit Update, June 2010, Volume 17, No. 6 3 Since the bank holding the mortgage had a preferential claim to any proceeds from a condemnation of the rowhouse or a casualty loss prior to the full payment of the mortgage, NAT s right to its proportionate share of future proceeds was not absolutely guaranteed. It was not sufficient that NAT might receive its proportionate share of future proceeds (e.g., because the mortgage had been satisfied when condemnation or insurance proceeds were received). Therefore, the conservation easement failed to meet one of the prerequisites for deductibility (enforceability in perpetuity). The Court granted the IRS s motion for summary judgment that the easement was not deductible as a matter of law. Conditional Gifts. No deduction is allowed for a charitable gift that becomes effective only upon the performance of an act or the occurrence of an event, unless the possibility that the charitable transfer will not become effective is so remote as to be negligible [Reg A-1(e)]. As part of the preservation restriction agreement, NAT required the Kaufmans to make a cash contribution, calculated as a percentage of the facade easement s estimated value to provide for its monitoring and administration. The IRS had disallowed the Kaufman s deduction of their cash gift on the grounds, in part, that it was a conditional gift. The easement agreement required NAT to refund the Kaufmans cash gift if it was determined that the facade easement had no value. However, the Kaufmans argued that the potential for a refund did not violate Reg A-1(e) because the possibility that the charitable transfer would not become effective (i.e., that the facade easement would have no value) was so remote as to be negligible. The Court concluded that whether the cash gift satisfied this remoteness test was a factual issue and denied the IRS s motion for summary judgment. There is no indication yet whether the IRS will concede deductibility of the cash gift or proceed to trial. The Domestic Entity Requirement A taxpayer can claim a deduction for a charitable contribution only if the contribution is made to, or for the use of, an eligible organization. To be an eligible organization, an entity must, among other things, have been created or organized in the U.S. or under U.S. law [IRC Sec. 170(c)(2)]. The taxpayer in Anonymous v. Commissioner, TC Memo (2010) was originally born in an unnamed foreign country but is now a U.S. citizen. The taxpayer had previously returned to her native country and was motivated by the extreme poverty she found to contribute money and services to help rebuild Catholic churches there. These churches provided food, education, and shelter to the poor. During one of her trips home, the local police detained and interrogated the taxpayer about her activities. The police also informed her that they were monitoring her whereabouts in the country and were aware of her family s support for the former government. Fearing for her life, the taxpayer disguised her contributions to churches by wiring funds to a relative (in her native country) who then transferred these funds to selected Catholic churches. The taxpayer asserted that the ultimate beneficiary of the wire transfers was the Roman Catholic Church, a qualified donee under IRC Sec. 170(c)(2). However, the Court refused to treat the foreign church recipients as U.S. entities simply by virtue of their global association with Catholic entities actually organized under U.S. law. Therefore, the Court denied a deduction for the wire transfers. Observation: The taxpayer should have made her gifts to a U.S. Catholic entity with a request (but not a requirement) that the entity use the funds to assist churches in her native country. The IRS and the courts generally construe charitable contribution rules strictly, regardless of circumstances. Therefore, donors must carefully adhere to the requirements to avoid losing deductions. Tax Brief NEW FORM A change in an organization s accounting method generally requires advance approval by the IRS [IRC Sec. 446(e)] and is either automatic or nonautomatic. Accounting method changes under Rev. Proc , CB 680 (nonautomatic changes) and many under Rev. Proc , CB 587 as amplified, clarified, and modified by Rev. Proc , IRB 371 (automatic changes) are made by filing Form 3115 (Application for Change in Accounting Method). Form 3115 was revised in December 2009, and this version replaces the December 2003 version. Taxpayers can now use only the December 2009 version.

4 4 The PPC Nonprofit Update, June 2010, Volume 17, No. 6 FASB Issues ASU to Codify/Amend New M&A Guidance Beginning in October 2009, we discussed the important new provisions in SFAS 164, Not-for-Profit Entities: Mergers and Acquisitions, in a series of articles that highlighted how the statement would change GAAP for nonprofit organizations. SFAS 164 had not been included in the FASB s Accounting Standards Codification (ASC) at the time our articles were published. The FASB has now issued ASU , Not-for-Profit Entities: Mergers and Acquisitions, which provides the amendments necessary to incorporate the guidance originally issued in SFAS 164 into the FASB ASC. As a result of the amendments provided in ASU , SFAS 164 is codified primarily in FASB ASC subtopic , Not-for-Profit Entities Business Combinations. You ll find, however, that SFAS 164 in its entirety isn t located in that subtopic. Since the guidance in SFAS 164 was built upon many of the principles already established in FASB ASC 805 Business Combinations [formerly SFAS 141(R)], ASU only makes amendments to add guidance or requirements from SFAS 164 that are specific to nonprofits. Rather than adding duplicative content, ASU amends FASB ASC to refer to the general topic at FASB ASC 805 for the applicable guidance that is required for all types of entities. The nonprofit-specific content at FASB ASC , for example, contains significant implementation guidance about distinguishing between nonprofit mergers and acquisitions, and FASB ASC describes the disclosures that only apply for nonprofit financial statements. Other notable amendments are made by ASU It updates FASB ASC , Not-for-Profit Entities Consolidation, principally to provide guidance The amendments to the FASB Codification made by ASU should be applied prospectively to mergers on or after the beginning of an initial reporting period beginning on or after December 15, 2009, and acquisitions on or after the beginning of the first annual reporting period beginning on or after December 15, Early adoption is not permitted. on noncontrolling interests. It also amends FASB ASC 350 Intangibles Goodwill and Other, to make the requirements in the topic applicable for nonprofits and to provide the associated transition guidance. FASB Issues ASU on Fair Value In January 2010, the FASB issued Accounting Standards Update (ASU) , Improving about Fair Value Measurements, as another refinement of the guidance on fair value disclosure. Most of the new requirements in ASU are effective for reporting periods beginning after December 15, Early adoption is permitted. The biggest change financial statement preparers will notice in ASU is the increased level of disaggregation required when disclosing the level of the fair value hierarchy (That is, Levels 1, 2, or 3) within which fair value measurements fall. ASU requires this disclosure to be provided for each class of assets and liabilities. Previously, the disclosure was made for each category of assets and liabilities. The appropriate classes to be used in the disclosure should be determined on the basis of the nature and risks of the assets and liabilities and their classification in the fair value hierarchy. ASU points to guidance at FASB ASC for determining classes of investments for disclosure purposes. The following characteristics should be considered: z (Shared) activity or business sector. z Vintage. z Geographic concentration. z Credit quality. z Economic characteristic. The new guidance states judgment will be required for determining the appropriate classes of other assets and liabilities measured at fair value. ASU requires separate disclosure of significant transfers in and out of Levels 1 and 2, and the reasons for the transfers. In addition, the policy for determining when transfers between levels are recognized must be disclosed. Also, more detailed information about the valuation techniques and inputs used for measurements that are within Levels 2 and 3 of the fair value hierarchy is required.

5 The PPC Nonprofit Update, June 2010, Volume 17, No. 6 5 In fiscal years beginning after December 15, 2010, ASU requires gross (rather than net) disclosure of purchases, sales, issuances, and settlements of items that are in Level 3 fair value measurement hierarchy and measured on a recurring basis. ASU is codified primarily at FASB ASC through 50-6A. However, ASU also amends the implementation guidance at FASB ASC through 55-64A and provides new implementation guidance at FASB ASC A and 55-22B. Amendment to Subsequent Events ASU revises the recognition and disclosure requirements related to subsequent events. The revisions address an important topic, but won t have extensive impact for nonprofit organizations. Let s hit the highlights. The changes impacting nonprofit organizations are that the ASU: z Amends the Master Glossary of the FASB Accounting Standards Codification (FASB ASC). z Clarifies the date through which subsequent events should be evaluated. z Refines the scope of current disclosure requirements for revised financial statements. Revisions to the Master Glossary The ASU eliminates the term public entity and adds the terms SEC filer and revised financial statements to the FASB ASC Master Glossary. The term public entity is no longer necessary due to other changes in the ASU. An SEC filer is generally defined as an entity required to file or to furnish its financial statements with either the SEC or another agency if the entity is subject to Section 12(i) of the Securities Exchange Act of The definition of revised financial statements includes statements revised only for the correction of an error or the retrospective application of U.S. GAAP. Evaluation of Subsequent Events The ASU requires SEC filers and conduit bond obligors for conduit debt securities traded in a public market to evaluate subsequent events through the date the financial statements are issued. Other entities must evaluate subsequent events through the date the financial statements are available to be issued. Entities that are not SEC filers must continue to disclose both: z the date through which subsequent events have been evaluated, and z whether that date is when the financial statements were issued or available to be issued. The disclosure checklists in PPC s Guide to Audits of Nonprofit Organizations, PPC s Guide to Preparing Nonprofit Financial Statements, PPC s Interactive Disclosure Library for Nonprofit Organizations, and PPC s SMART Practice Aids Disclosure include all the relevant disclosures. Revised Financial Statements The ASU refines the scope of the reissuance disclosure requirements to include revised financial statements only. Non-SEC filers are required to disclose in the revised financial statements the dates through which subsequent events have been evaluated in both: z the issued or available-to-be-issued financial statements, and z the revised financial statements. Effective Date Most provisions of the ASU were effective upon issuance of the ASU (February 2010), except for the use of the issued date by conduit debt obligors. That amendment is effective for periods ending after June 15, The Auditing Standards Board is addressing auditing considerations related to subsequent events as part of its Clarity Project.

6 6 The PPC Nonprofit Update, June 2010, Volume 17, No. 6 Web Resources The following websites offer information of interest to the nonprofit sector. Idealware is a nonprofit organization that provides Consumer Reports-style reviews and articles about software aimed at nonprofits. The reviews offer product comparisons, recommendations, case studies, and software news to enable nonprofits to make the best software purchasing and use decisions. Assisting the small staff of Idealware are more than 100 content contributors from a range of nonprofit technology professionals. Recent reports and articles include topics on data warehousing, low-cost data visualization, the role of in communications, online versus traditional software, collaboration software, donor management software, open source content management systems, and RSS tools. Idealware also offers low-cost online seminars via two options. Live 90-minute seminars, with a 25-participant maximum limit, are $40 per session. In addition, ondemand recordings of seminars are available at $20. In addition, the site offers a monthly electronic newsletter. The co-founder of Facebook, Chris Hughes, has created an online platform for nonprofit causes, Jumo.com. The site touts an ambitious goal: to connect individuals with nonprofit causes and organizations. Many charitable groups currently use Facebook to connect with donors, employees, partners, and clients. Will Jumo reel them in? Still in the development stage, a more complete launch is expected in the fall. If you want to know at a glance what s happening that is of interest to nonprofits, head over to this Alltop web page. This site is a collection of the latest headlines from, presumably, every nonprofit corner of the web, including popular nonprofit organizations, news sites, and blogs. The layout is clean and neat, with advertising served up sparingly. Better yet, there is no need to navigate around the web to find the details: there s a pop-up summary of each article when you hover the mouse pointer over each headline. Be sure to read the About page for some interesting insights (the link is at the bottom of the page) and view the tutorial. An oldie, but a goodie! This IRS website provides a wealth of tax-related information for nonprofits. Information includes timely discussions on current issues (such as changes to Form 990, updates to user fees, new mailing addresses for returns, recent revocations of 501(c)(3) status, and on-going political activity) as well as basic resources (web-based training for tax-exempt organizations, summaries of return due dates, educational materials about annual return filings, examination materials, and FAQs). The PPC Nonprofit Update is published monthly by Thomson Reuters/Tax & Accounting, P.O. Box 966, Fort Worth, Texas , (800) COPYRIGHT 2010 BY THOMSON REUTERS/ PPC. Reproduction is prohibited without written permission of the publisher. Not assignable without consent. This publication is designed to provide accurate information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, investment, or other professional advice. If such assistance is required, the services of a competent professional should be sought. Reports on products or services are intended to be informative and educational; no advertising or promotional fees are accepted. Tax & Accounting Research and Guidance P.O. Box 966 Fort Worth, Texas PRSRT STD U.S. POSTAGE PAID Thomson

To assist organizations in measuring

THE PPC NONPROFIT UPDATE THE PPC NONPROFIT UPDATE, MAY 2012, VOLUME 19, NO. 5 More on the AICPA Whitepaper on Fair Value Measures To assist organizations in measuring items unique to the nonprofit sector,