NONPROFIT TAX UPDATE: What the IRS is up to and more!

Transcription

1 NONPROFIT TAX UPDATE: What the IRS is up to and more! MACPA Government and Nonprofit Conference April 26, 2013 R. Michael Sorrells, CPA BDO USA, LLP Page 1 Your Presenter Page 2 1

2 Tax Update Agenda IRS 2013 Workplan: A Roadmap for IRS Hot Issues and Initiatives Alternative Investments: Reading K-1 s and State Tax Implications Compensation and Benefit Issues for Nonprofits Changes for 2012 Form 990 Page 3 Disclaimer To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this presentation (including any handouts) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this tax presentation is meant to provide general information and should not be acted on without professional advice tailored to your organization s or firm's individual needs. Page 4 2

3 2013 IRS Exempt Organization Workplan A Roadmap for IRS Hot Issues and Initiatives BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. IRS 2012 Exempt Organization Annual Report and 2013 Workplan IRS Exempt Organizations Group (EO) issued its 2012 Annual Report and 2013 Workplan on January 25 th The Annual Report contains a look back at EO accomplishments of the past year as well and other information about the group The Workplan contains descriptions of on-going and new projects that EO will be concentrating upon in the current year including areas of audits We will focus on Workplan highlights that are significant for most of you We recommend that you take a look at this entire document at Page 6 3

4 IRS 2013 Exempt Organization Workplan Highlights Continuation of compliance check project on organizations who did not file Form 990 or 990-EZ Analysis of 3,000 spreadsheets from examinations on UBIT issues for controlled subsidiaries (Section 512(b)(13)) report and recommendations to be presented to Department of Treasury Completion of about 2,500 payroll examinations from 3 rd and last year of national project Page 7 IRS 2013 Exempt Organization Workplan Highlights International: Examination program for organizations with large amounts of foreign grant expenditures Completion of examination projects for large private foundations with foreign activities and organizations with significant gift-in-kind programs Group Rulings: Questionnaire developed in 2012 for central organizations with group rulings Distributed to some 2,000 such organizations early in 2013 Data to be analyzed to learn about relationships between central and subordinate organizations and ways that filing requirements can be satisfied Central and subordinate organizations should understand their responsibilities under the group ruling to be sure they are in compliance Page 8 4

5 IRS 2013 Exempt Organization Workplan Highlights Self Declarers: Many non-charitable organizations can operate as tax exempt without filing an exemption application (Form 1024) Questionnaire developed in 2012 will be distributed to 501(c)(4), (5) and (6) organizations who self declared on 2010 or 2011 Form 990 To determine if properly classified and if complying with applicable rules Final report to be issued this year on college and university project started several years ago: Only preliminary report previously issued Awaiting results from examinations resulting from the project EO is developing an interactive version of the Form 1023 Exemption Application featuring pop-up explanations this product should be available in 2013 Page 9 IRS 2013 Exempt Organization Workplan Highlights Several projects have been generated from data gleaned from Forms 990: Examination project for medium/large organizations with significant amounts of fundraising in comparison to program expenditures as well as organizations with significant fundraising and little or no fundraising expense 200 examinations of executive compensation based upon information gathered in 2012 Certain organizations identified as having indicators of non-compliance in area of political activity will be identified for examination with selection done by committee of career civil servants the same committee will also evaluate referrals from outside sources alleging political campaign intervention by 501(c)(3) organizations Page 10 5

6 IRS 2013 Exempt Organization Workplan Highlights Last But Not Least! Perhaps of most significance, EO will continue on its Unrelated Business Income Project begun in 2012 But this year will be examining a statistically valid sample of nonprofits that have reported substantial UBI for 3 consecutive years but have reported no income tax due We see a lot of organizations in exactly this situation - May be legitimate (e.g., LLC/LP investments and/or business activities that will eventually turn around) - May be result of aggressive expense allocations - May be caused by netting a perennial loss activity (that does not qualify as a trade or business) with other activities which do produce UBI - Sometimes, all of the above Page 11 Conclusions About the 2013 Exempt Organization Workplan Fore-warned is fore-armed! Take the time to read this plain language document and determine where your organization might have risk Definitely consult outside experts if you see areas of risk Especially if you have significant unrelated business income and no tax, now is the time to determine if you have a legitimate case to document or if you need to take a hard look at how UBI is calculated Page 12 6

7 PARTNERSHIPS AND ALTERNATE INVESTMENTS Reading and Interpreting Schedules K-1 Page 13 INVESTMENT CONSEQUENCES Higher Returns Bring Increased Complexity Alternative investments provide essential benefits by promising high returns that significantly boost revenue. They also include tax risks that require tax-exempt investors to take additional steps to ensure tax compliance. Investments in the form of partnerships and LLCs treated as partnerships for tax purposes generate Schedules K-1 that provide flow through attributes to partners: - Income - Deductions - Tax credits - Foreign income - Unrelated Business Taxable Income (UBTI) - International reporting responsibilities - State income tax - allocations, apportionment, withholding taxes and credits Page 14 7

8 OVERVIEW Where to Start? Identify investments that are pass-through entities with K-1 reporting Obtain and read Schedule K-1 forms and footnotes Consider tax consequences at the federal level - Reporting for 990 or 990-PF - Reporting for 990-T (UBTI) - Reportable Transactions Consider Foreign/Treasury Department reporting evaluate the implications of underlying international activities and responsibilities that flow to partners - Watch out for hidden reporting of foreign partnerships which may require pro forma K-1 data (as well as foreign reporting on your other investments!) Consider tax consequences at the state and local level Page 15 IDENTIFY INVESTMENTS WITH K-1S Finding hidden tax responsibilities Alternative investments often contain pass-through entities Investments can be made to avoid or include UBIT Investments may be foreign or domestic Domestic partnerships and most LLC investments will provide K-1s S-corporations always taxable 100% Foreign partnerships generally will provide pro forma K-1 or other disclosures Alternatives and Hedge funds what are they? - Funds? - Partnerships? - Ltds? - Corporate entities? Once you categorize you may need to locate the tax reporting information Page 16 8

9 HOW TO REVIEW K-1 AND FOOTNOTES Understanding what is being reported to you Understanding K-1 page 1 what do the numbers mean? Is this an investment or exempt function activity? Debt financed? inside or outside debt UBIT disclosures where are they and what do they mean? Footnotes - Detailed disclosures more geared towards individual and corporate partners - Key footnotes for nonprofits to watch for - Did K-1 preparer include the correct information for tax-exempt entity? Summarizing UBIT income and deductions for 990-T statement Summarizing K-1 data for private foundation reporting of investment income - Capital loss limitations How do I report on 990? IRS has backed down from detailed reporting: just need UBIT numbers to break out Page 17 FEDERAL ISSUES Reporting income and other disclosures Attributes flow to partners retaining their character Partnerships provide detailed footnotes for tax credits, adjustments, etc. K-1s are generally designed for individuals and corporate partners so certain information may not relate to the nonprofit Important to be identified as tax-exempt to receive correct disclosures Report partnership YE that falls within your fiscal year Delays in receiving K-1s IRS allows extension to 15 th of ninth month of partnership s year end How is investment and its income reported in audited financial statements? - Book-to-tax adjustments - Separating UBTI for disclosure and 990-T - Exempt function and excluded income reporting Page 18 9

10 FOREIGN/TREASURY DEPARTMENT REPORTING How to approach foreign filings Responsibility passes through to partners in most instances Compile all available tax reporting documents for review Info may be disclosed in K-1 footnotes or in separate tax reports Thresholds apply to investments in aggregate so you must look at multiple K-1s 990, Sch F, Part IV Foreign Filings (Offshore Voluntary Disclosure Program) - Form 926 Transfer to foreign corporation - Form 3520 Foreign trusts and certain gifts - Form 5471 Ownership of foreign corporation - Form 8621 Ownership of PFIC (Passive Foreign Investment Company) - Form Ownership of foreign partnership - Form 5713 Boycott report Attach to 990-T in most instances. Not part of public disclosures. Form FBAR Foreign Bank and Financial Accounts Org. and Individual Page 19 STATE AND LOCAL TAX Where you need to file and how to allocate Partnership state reporting may be incomplete and require follow-up Many K-1s only provide allocation of total net income by state, not UBTI Need to determine state-by-state UBTI rules differ by state Apportionment vs. Allocable income - Sales - Business vs. Non-business income - Payroll - Property Some investments allow for partnership level composite filing (not always best) Watch for state tax credits and withholdings Consider cost-benefit weighed with risk of filling and accuracy Once you file in a state you will usually need to continue to file Depending upon nexus you may need to register or obtain state exemptions Page 20 10

11 Compensation and Benefit Issues for Nonprofits BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. Three Important Areas of Focus for IRS: Compensation, Employment Status and Healthcare Compensation issues remain a concern of IRS and can be exemption issues or the basis for Intermediate Sanctions. Employment status of individuals is a top priority for IRS because there is a belief that the government loses billions of dollars due to misclassification. The IRS is working diligently to implement the new healthcare law and whether an individual is an employee is key to coverage issues and tax credits under the new law. Page 22 11

12 Governance, Compensation and Exemption Form 990 governance questions--checklist results (only audited charities) Organizations with a written mission statement are more likely to be compliant. Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant. Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant. Organizations that always use comparability data when making compensation decisions are more likely to be compliant. IRS is looking for documentation of a process that is outlined in the Form 990 and can establish the Rebuttable Presumption of Reasonableness. Page 23 Higher Tax Rates and New Taxes on Upper Income Individuals Increased Rates --Higher income taxpayers will have income above certain levels taxed at a 39.6 percent rate. Net Investment Income Tax --A new Net Investment Income Tax goes into effect starting in The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. Additional Medicare Tax--A new Additional Medicare Tax goes into effect starting in The 0.9 percent tax applies to compensation. Employers are responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. Page 24 12

13 Can My Organization Provide Executives with Tax Indemnification or Gross Up for Taxes? Yes, if reasonable. Unreasonable compensation is per se private inurement (exemption issue) and could be Excess Benefit Transaction subject to Intermediate Sanctions: 25 % Initial Tax on Excess Benefit provided by 501(c)(3) or 501(c)(4) organization to a Disqualified Person 200% Second-level tax if not corrected 10% Tax on Knowing Manager Automatic Excess Benefit Transactions--economic benefit to a disqualified person where intent not clearly indicated to be compensation. Tax on 100% involved. Page 25 The Rebuttable Presumption for 501(c)(3) and 501(c)(4) Organizations (and a process for others) Three requirements: 1. Advance approval by an independent Authorized Body 2. Reliance on Comparable Data 3. Concurrent Documentation of Terms and date approved: Members of body present for discussion and who voted Comparability data relied on and how obtained Reasons for any variance from comparability data Actions by any member with a conflict Page 26 13

14 Executive Compensation Comparables Similarly Situated Organizations For-profit comparables How many organizations were used? Is the position functionally comparable? If an organization reviews the Form 990 of other organizations, the Forms relied upon should be in the files and the answers to the questions posed above documented as well. IRS is looking for a process and even though the rebuttable presumption will not apply to a 501(c)(6) organization, for example, the process should be conducted as well. Page 27 Another IRS Focus: Employee versus Independent Contractor FY 2013 is the third and final year of the National Research Program (NRP) IRS looks to three main factors in determining employment status: Behavioral Control Financial Control Relationship of the Parties Just because the individual works part-time does not make him or her an independent contractor. If the person is doing the same job as an individual who is classified as an employee the person is most likely an employee. The new healthcare law is focused on employee health coverage and this issue becomes even more important. How many hours per week does a person work? Example of Adjunct professors For more information see: Page 28 14

15 Another IRS Focus on Employees: New Healthcare Law: Employer Shared Responsibility In 2014, if an employer meets a 50 full-time employee threshold, the employer generally will be liable for an Employer Shared Responsibility payment if: (a) The employer does not offer health coverage or offers coverage to less than 95% of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange; OR (b) The employer offers health coverage to at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value. Page 29 Full Time Employees and Equivalents To be subject to these Employer Shared Responsibility provisions, an employer must have at least 50 full-time employees or a combination of full-time and part-time employees that is equivalent to at least 50 full-time employees (for example, 100 half-time employees equals 50 full-time employees). A full-time employee is an individual employed on average at least 30 hours per week (so half-time would be 15 hours per week). Employees working only abroad, whether or not U.S. citizens, generally will not be taken into account for purposes of determining whether an employer meets the 50 full-time employee (or equivalents) threshold. Page 30 15

16 How does an employer know whether the coverage it offers is affordable? If an employee s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee s annual household income (safe harbor is for employer to look to wages paid as reported in Box 1 of Form W-2), the coverage is not considered affordable for that employee. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement. Page 31 How does an employer know whether the coverage it offers provides minimum value? A minimum value calculator will be made available by the IRS and the Department of Health and Human Services (HHS). Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. Page 32 16

17 Penalties and Additional Information The law imposes penalties on employers who fail to provide coverage to their full-time employees and penalties for failure to provide affordable / adequate coverage For additional information see: Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act Page 33 Small Business Health Care Tax Credit Refundable credit to encourage small employers to offer health insurance coverage Must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. Fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year. For tax years 2010 through 2013, the maximum credit is 25 percent for small tax-exempt employers. On Jan. 1, 2014, the rate will increase to 35 percent. Use Form 990-T to claim the credit and if you missed this, you can file an amended return. For additional information see: Credit-for-Small-Employers Page 34 17

18 Summary Compensation must be reasonable. Document the basis of compensation decisions. Workers should be correctly classified as either employees or independent contractors. If an individual is an employee, it is essential to document the number of hours worked per week. Nonprofit employers should review healthcare coverage requirements and take advantage of tax credits where available. Page Form 990 Changes Thankfully, not too serious! BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 18

19 Significant Form 990 Changes and Clarifications IRS reminds to never put Social Security Numbers on 990 s since subject to public inspection they report a high number of returns with this information Clarifies that short year returns cannot be e-filed unless it is a final return Clarifies that audited financial statements are only required to be attached to 990 by hospitals Page Changes and Clarifications (continued) Schedule D now only has 2 reconciliations the Reconciliation of Change in Net Assets is now eliminated Still has reconciliations for revenue and expenses However, 990 Part XI still has a Reconciliation of Net Assets as in prior year, but with more lines for reconciling items so not as much need to explain on Schedule O (donated services, unrealized gains, prior period adjustments, etc.) Comment: this makes sense, as it seemed duplicative before Page 38 19

20 990 Changes and Clarifications (continued) Clarifies that Schedule R listing of related corporations includes both C Corps and S Corps Part VII compensation schedule now requires that hours worked for related organizations, be reported on this form box for hours has been split in two (this information was previously reported on Schedule O, but often ignored) Clarifies that insurance providers are not to be listed as independent contractors Page Changes and Clarifications (continued) Reporting of partnership revenue, expense and balance sheet no longer required to follow K-1, but rather on basis that it is reported on books and records However, you still need to break out UBIT from K-1 reporting Clarification that all pass-through income from S-Corps is UBI for 501(c)(3) organizations On statement of functional expenses, if Line 11g is more than 10% of total expenses, then breakout of this is required on Schedule O Page 40 20

21 990 Changes and Clarifications (continued) Clarification that any receivable on Line 6 of balance sheet Receivables from Disqualified Persons will generate Schedule L reporting (Transactions with Interested Persons) The instructions and glossary contain many more clarifications you should read before completing a section Page 41 21