Form 990 Issues Pitfalls and Red Flags Richard M. Jacobs, CPA and LaKrisha J. Watson, CPA. not-for-profit

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1 Form 990 Issues Pitfalls and Red Flags Richard M. Jacobs, CPA and LaKrisha J. Watson, CPA 1

2 Importance of Compensation Reporting 6/22/2016 2

3 Importance of Compensation Reporting The public wants to know: Where s my contribution going? Is the amount of compensation appropriate? Is there an excess benefit transaction? Compensation was one of the key areas of the Final Report for the Colleges and Universities Compliance Project conducted by the IRS 3

4 Importance of Compensation Reporting Who and how much to report? Directors/Trustees Officers Key Employees Highest compensated employees Related party compensation Benefits housing allowance, expense accounts, non-qualified retirement plans 4

5 Importance of Compensation Reporting Section 4958 Safe Harbor Required documentation for a rebuttable presumption: Use appropriate comparability data Have board or committee of the board approve the compensation Document contemporaneously the decision of the board or committee of the board and the fact that comparability data was used. 5

6 Importance of Compensation Reporting Form 990, Part VII 6

7 Importance of Compensation Reporting Schedule J, Part II 7

8 Importance of Compensation Reporting Required Disclosures that are not clear in Schedule J questions: Example: Schedule J, Part I, line 1a disclosure - Type of benefit - Listed person who received benefit - Whether benefit or any part was treated as taxable to the listed person 8

9 Alternative Investments 6/22/2016 9

10 Alternative Investments What is an Alternative Investment? Investment in non-traditional assets hedge funds, private equity funds, venture capital funds, real estate partnerships, & trust commodities Tax Forms of Alternative Investments: Partnership Corporation S-Corporation 10

11 Form 990, Schedule F Foreign Investments 6/22/

12 Form 990, Schedule F Foreign Investments In addition to foreign program service activities, Schedule F can be required for investments Schedule F, Part I Held foreign investments with book value of $100,000 or more Pay attention to footnotes of K-1s Schedule F, Part IV Foreign Forms 12

13 Form 990, Schedule F Foreign Investments Schedule F, Part IV 13

14 Form 990, Schedule F Foreign Investments Foreign Forms Form 926 Transfer of Property to Foreign Corporation Form 5471 Information Return with Respect to Certain Foreign Corporations Form 8865 Transfer of Property to Foreign Partnership FinCEN Form 114 Report of Foreign Bank and Financial Accounts (FBAR) 14

15 Form 990-T 6/22/

16 Form 990-T Unrelated Business Income (UBI) Trade or business, regularly carried on, not substantially related to exempt purpose Second key area of the Final Report for the Colleges and Universities Compliance Project conducted by the IRS Common Sources of UBI for Colleges and Universities: Advertising, Arena use, facility rentals, and the operation of fitness & recreation centers, sport camps, and golf courses 16

17 Form 990-T Unrelated Debt-Financed Income Investment property with acquisition indebtedness Common form: Rent Special exception from the definition of acquisition indebtedness is available to Qualified Organizations 17

18 Form 990-T Alternative Investments Partnership Trade or business activity not substantially related to exempt purpose Debt-financed investment or property Most K-1 s received will have UBI indicated in the footnotes Corporation Create for substantial UBI activity S-Corporation All income from S-Corporation is Unrelated Business Income (UBI) 18

19 Form 990-T Net Operating Losses (NOLs) IRS is asserting that NOLs should not be taken if there have been consistent losses 2 years or more Lacking Profit Motive Continue reporting activity on 990-T but limit losses to gross receipts for activity 19

20 Miscellaneous Points 6/22/

21 Miscellaneous Points Public Disclosure of 990 An exact copy must be provided Other than name and address of donors listed on Schedule B Original and amended returns are subject to the public inspection requirements Form 1098-T, Tuition Statement No penalties for 2016 filing (due on 2017) if amount billed (box 2) is reported Form 990 Extension One 6 month extension starting with 2016 tax years 21