25th Annual Health Sciences Tax Conference

Transcription

1 25th Annual Health Sciences Tax Conference December 7, 2015

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Karla Fisher The Carle Foundation Urbana, IL Jeanne Schuster Ernst & Young LLP Boston, MA Kathy Pitts Ernst & Young LLP Birmingham, AL Angie Moore Ernst & Young LLP Indianapolis, IN Page 3

4 Learning objectives 2014 and 2015 Form 990 significant changes Understand IRS areas of interest on Form 990 Unrelated business income IRS audit De-mythologize Form 990 (address common misconceptions) Address frequently asked questions (FAQs) about Form 990 Page 4

5 2014 and 2015 Form 990 significant changes Page 5

6 2014 Form 990 significant changes Form 990 Schedule A significant changes! Part I reformatted; moved some questions to new Part IV Parts II and III no changes Part IV new (two pages)! Listed by name in governing documents of supported org Supporting a 501(c)(4), (5) or (6) Supporting foreign activities Substitution or adding of supported organizations Transactions with disqualified persons Sections specific to Type I, II, III Functionally integrated integral part test Page 6

7 2014 Form 990 significant changes Sec. 501(c)(3)/Sec. 509(a)(3) supporting organization (SO) must meet four tests: Organizational test purposes, powers and beneficiaries Operational test permissible beneficiaries and activities Control test disqualified persons Relationship test Type I Type II Type III Functionally integrated Non-functionally integrated Page 7

8 2014 Form 990, Schedule A New Part IV, Sec. A new part/questions Are all the supported organizations listed by name in the SO s governing documents? Did the SO have any supported organizations that do not have an IRS determination of status under Section 509(a)(1) or 509(a)(2)? Did the SO have a supported organization described in Section 501(c)(4), 501(c)(5) or 501(c)(6)? Was any supported organization not organized in the US? Did the SO add, substitute or remove any supported organizations during the year? Did the SO provide support to anyone other than its supported organizations, individuals in their charitable class or other SOs that support any of the supported organizations? Did the SO provide a grant, loan, compensation or similar payment to a substantial contributor, family member or 35% controlled entity thereof, or another disqualified person? Page 8

9 2014 Form 990, Schedule A New Part IV, Sections B-D Part IV, Sec. B Type I SOs Did the supported organization(s) have power to regularly appoint or elect at least a majority of the SO s directors or trustees? Did the SO operate for the benefit of any supported organization other than that which supervised or controlled the SO? Part IV, Sec. C Type II SOs Were a majority of the SO s directors/trustees also a majority of the directors/trustees of each of the supported organizations? Part IV, Sec. D all Type III SOs Did the SO meet its notification requirement to its supported organizations? Was there a close and continuous working relationship? How did the supported organization have a significant voice in the SO s investment policies and in directing use of its income/assets? Page 9

10 2014 Form 990, Schedule A New Part IV, Sec. E Type III functionally integrated SOs How did the SO satisfy the integral part test? It satisfied the activities test. SO is a parent of each of its supported organizations. SO supported a governmental entity (see Notice ). If activities test box is checked: Did substantially all of the SO s activities directly further supported organization(s) exempt purposes? But for the SO s involvement, would one or more of the supported organizations have engaged in the activities? If parent box is checked: Did the SO have the power to regularly appoint or elect a majority of the supported organizations officers, directors or trustees? Did the SO exercise a substantial degree of direction over the policies, programs and activities of each of its supported organizations? Page 10

11 2014 Form 990, Schedule A New Part V Type III non-functionally integrated SOs Sec. A: Adjusted net income Sec. B: Minimum asset amount Sec. C: Distributable amount Sec. D: Distributions Sec. E: Distribution allocations Similar to distribution requirement provisions in Form 990-PF Page 11

12 2014 Form 990, Schedule B Schedule of Contributors Revised on-form instructions clarify when a public charity can exclude from Schedule B contributors that fall below the greater-than-$5,000/2% threshold. The organization must complete Schedule A, Part II to show that it is described in Section 170(b)(1)(A)(vi) and qualifies to use the greater-than-$5,000/2% threshold. Page 12

13 2014 Form 990, Schedule L instructions Definition of interested persons 2014 Schedule L instructions Purpose of changes Increase consistency Decrease confusion Decrease burden Key change: more uniform definition of interested persons for Parts II-IV Page 13

14 2014 Form 990, Schedule L instructions Definition of interested persons Interested person definition: For Schedule L, Part I no change Disqualified persons under Code Section 4958 For Schedule L, Parts II-IV (expansion): The creator or founder of the organization And their family members Substantial contributors reported in Schedule B (expanded to Parts II and IV) And their family members 35% controlled entities (expanded to Part II) Page 14

15 2014 Form 990, Schedule L instructions Definition of interested persons Interested person for Sch. L, Pts II-IV (contraction) Removed (from Part II): highest compensated employees and Section 4958 disqualified persons Removed (from Part IV): entity of which a current or former officer, director, trustee or key employee, or any family member thereof, was serving as a: Director, officer or trustee Or Partner, member or shareholder with a direct or indirect ownership interest in excess of 5% in a professional corporation or entity treated as a partnership Removed (from Part IV): non-stock organizations more than 35% controlled by other interested persons The reference to Section 267(c) regarding constructive ownership is also omitted from the 2014 instructions Page 15

16 2014 Form 990, Schedule L instructions Other changes Other 2014 Schedule L instructions changes Uniform reasonable efforts definition that applies to all parts (not just Parts III and IV) Part I (excess benefit transactions): identify in Part V organization manager(s), if any, that knowingly participated in the excess benefit transaction Part II (loans): clarification that split-dollar life insurance arrangements described in Regs. Section are loans reportable in Part II Part IV (business transactions): new reporting exception for transactions with publicly traded corporations in the ordinary course of business, on the same terms as are generally offered to the public Page 16

17 2015 Form 990 changes Page 6 General Instructions, E., When, Where and How to File DHL is removed from the IRS-designated private delivery services list to meet the timely mailing as timely filing/paying rule for tax returns and payments. FedEx First Overnight, FedEx International Next Flight Out, FedEx International Economy and UPS Next Day Early AM are added as the IRS-designated private delivery services list to meet the timely mailing as timely filing/paying rule for tax returns and payments. Private delivery services delivery address and zip code changed to: 1973 Rulon White Blvd., Ogden, Utah Page 17

18 2015 Form 990 changes Page 13 Part IV, Line 11 Leasehold improvements added to the sentence: Answer Yes, if the organization reported an amount for land, buildings, equipment or leasehold improvements Page 37 Part VIII Updated NAICS website for six-digit activity codes: Page 47 Part X, Line 10a Leasehold improvements was added Page 18

19 IRS search queries Page 19

20 IRS search queries IRS Exempt Organizations is taking a more data-driven approach to exam selection. Greater reliance on Form 990 data Less emphasis on subsector compliance projects Data-driven approach involves use of Form 990 condition codes, or queries. Using data transcribed from Form 990 onto IRS Business Master File Queries are intended to identify noncompliant or potentially noncompliant organizations for exam Page 20

21 IRS search queries Failure to file a complete and accurate return (e.g., missing schedules or parts of schedules, name/ein mismatch, lack of signature) E-filing can significantly reduce the potential for such errors Prohibited political campaign activity (for a 501(c)(3) organization): answering Yes to Part IV, line 3 Excess benefit transaction with disqualified person: answering Yes to Part IV, line 25a or 25b Page 21

22 IRS search queries Significant diversion of assets (fraud, embezzlement): answering Yes to Part VI, line 5 Unrelated business income (UBI) and 990-T filing: organization indicates it had UBI (checked Part V, line 3a Yes ) but did not file Form 990-T for the tax year Page 22

23 IRS search queries Lack of independent board leading to possible private inurement If less than 50% of board members are independent (Part VI, line 1b) Board members had family or business relationships with one another (Part VI, line 2 is checked Yes ) The organization reports transactions with interested persons on Schedule L, Part IV Or organization has made loans to insiders (Part X, lines 5-6, column B) Page 23

24 IRS search queries Possible private inurement Board members had family or business relationships with one another (Part VI, line 2 is checked Yes ) Organization made more than $5,000 in grants and other assistance to individuals (Part VI, line 22 is checked Yes ) Possible private inurement: Part X, lines 5 and 6 no change in receivables from one year to another for three years Could suggest that an insider is deriving an excess benefit by not paying back principal and/or interest to the organization Page 24

25 IRS search queries Excessive (or potentially excessive) compensation Compensation of each officer, director and key employee reported in Part VII, Section A averages greater than $500,000 or exceeds the organization s total gross receipts for the year Receivables from insiders (Part IX, lines 5 and 6) exceed the organization s gross receipts (Header, line G) Excessive fundraising expenditures Fees paid for professional fundraising services (Part IX, line 11e) are either: Greater than 50% of total expenses (Part IX, line 25) Greater than 50% of total contributions for the year (Part VIII, line 1h) Page 25

26 IRS search queries Employment tax liability: The organization reports that it has employees (Part V, line 2a) but did not file Form 941. The number of W-2s the organization filed deviated by 25% or more from the number of employees it reports on Form 990, Part V, line 2a. International expenditures: more than 50% of total expenditures (Part IX, line 25, col. A) comprise foreign grants (Part IX, line 3). Page 26

27 Unrelated business income IRS audit Page 27

28 Unrelated business income IRS audit Takeaways from recent audit experience: Loss activities Daycare Durable medical equipment (DME) to the general public Offshore captive Research contracts Dug into the details of requesting the published articles Page 28

29 Common Form 990 errors and misconceptions Page 29

30 Common Form 990 errors and misconceptions Misconception: There s always a right answer! Misconception: 990 financial information must always conform with GAAP/audited financials (e.g., comp reporting in Part VII, donated services/use of facilities reported as revenue in Part VIII and Sch. A, reporting revenue on a net rather than gross basis in Part VIII). Error: Not filing required schedules or parts of schedules (e.g., not filing Schedule L if organization reports a loan or receivable from or payable to any officer, director, trustee, key employee, highest compensated employee or disqualified person). Page 30

31 Common Form 990 errors and misconceptions Error: Professional fundraising fees reported in Part I, line 16a fail to include the portion of the amount in Part IX, column (A), lines 5-6 that comprises fees for professional fundraising services paid to officers, directors, trustees, key employees and disqualified persons. In addition to fees reported in Part IX, column (A), line 11e Misconception: Original return is not subject to public disclosure after it is amended. Misconception: It s OK to file a facsimile of Schedule B but not the real thing. Page 31

32 Common Form 990 errors and misconceptions Misconception: Businesses do not need to be listed as independent contractors in Part VII, Section B because the filing organization does not issue Forms 1099 to them. Misconception: Colleges/hospitals cannot complete Sch. A Part II if they check the 170(b)(1)(A)(ii) or (A)(iii) box in Sch. A Part I, and therefore cannot qualify for the greater-than-$5,000-or-2%- of-contributions threshold for reporting contributors on Schedule B. Error: The board review process for Form 990 is not described in Schedule O. Error: Revenue is dumped in miscellaneous revenue and expenses in other expenses instead of on the appropriate lines of Parts VIII and IX. Page 32

33 Common Form 990 errors and misconceptions Error: Failing to report or fully report compensation from related organizations in Part VII and/or Schedule J Error: Ignoring the final redemption date for the refunded bond in an advance refunding in completing Schedule K Part II Line 6, Refunding escrows Line 11, Other spent proceeds Error: Reporting that a rebate payment obligation exists when it does not in Schedule K Part IV, Lines 1 and 2 (filing of Form 8038-T) Page 33

34 Common Form 990 errors and misconceptions Misconception: If a parent files a 990 group return for a subordinate and includes that subordinate on its list of subordinates attached to the 990, that subordinate gets credit for filing a return even if it is not already listed in the IRS Supplemental Group Return Information for that group ruling. Misconception: The IRS reviews every single line of every single Form 990. Page 34

35 IRS Form 990 FAQs Page 35

36 Form 990 FAQs Attachments IRS filing tips Question: Form 990 General Instructions state, in Section J, that only certain types of attachments are permitted. Why are these permitted but others are not? Answer: The Form 990 was redesigned, in part, to promote uniform reporting and to provide a structured format for attaching information to the Form. Schedule O was designed to be the mechanism for reporting any information that does not fit on the core form or the other schedules. Only the following additional documents may be included as attachments to the Form: Name change amendment to organizing document, as required by Item B in the Form 990 heading List of subordinate organizations included in a group return, as required by the instructions to item H in the Form 990 heading Letters regarding termination of tax-exempt status, as required by Schedule N Articles of merger or dissolution, resolutions and plans of liquidation or merger, as required by Schedule N Reasonable cause explanation for a delinquent return A copy of the most recent audited financial statements of a hospital organization that files Schedule H (Form 990), Hospitals Page 36

37 Form 990 FAQs Attachments IRS filing tips Note: A reasonable cause explanation for a late-filed return must be made in a separate attachment, rather than in Schedule O, because such explanation would be publicly disclosed if included in Schedule O. The documents are permitted as attachments, outside of Schedule O, because they are either separate documents that can only be provided by attaching a photocopy or a.pdf file, or they must be provided separately so they can be processed by the IRS (e.g., list of group return affiliates or reasonable cause explanation for a delinquent return). Page 37

38 Form 990 FAQs Attachments IRS filing tips Question: What happens if an organization that files electronically attempts to include other types of attachments? Answer: An incoming e-filed return will be rejected if it includes attachments other than those permitted by the e-file system specifications. Page 38

39 Form 990 FAQs Governance IRS filing tips Question: Can an organization answer yes to the question about having a policy if a committee of the board, rather than the board itself, adopted the policy, and was authorized to do so? Answer: Yes. The organization may answer Yes to any question in Section B of Part VI, Form 990 that asks whether the organization has a particular policy if the organization s governing body (or a committee of the board, if the board delegated authority to that committee to adopt the policy) adopted the policy by the end of its tax year. Page 39

40 Form 990 FAQs Governance IRS filing tips Question: If the filing organization is controlled by an organization with a conflicts of interest policy, whistleblower policy, and document retention and destruction policy, should the filing organization answer Yes or No to Part VI Questions 12a, 13 and 14? Answer: Because these questions ask whether the filing organization has these policies, answer Yes only if the filing organization s governing body has adopted the policies of the controlling organization or other such policies. Otherwise, answer No. The filing organization can explain in Schedule O how it is governed or otherwise affected by the policies of its parent. Page 40

41 Form 990 FAQs Compensation IRS filing tips Question: The core form Part VII, Section A instructions say to list persons in a particular order, beginning with trustees or directors, followed by officers, then key employees, then highest compensated employees, then former such persons. Why should these persons be listed in this order? Page 41

42 Form 990 FAQs Compensation IRS filing tips Answer: If a person is a director, trustee or officer of the organization, he or she cannot be listed as a key employee of that organization in Part VII. Accordingly, officers, directors or trustees should be listed in Part VII before the organization determines which key employees to list. Likewise, in determining its five most highly compensated employees who received more than $100,000 of reportable compensation, the organization is not to consider persons who are already listed in Part VII as officers, directors, trustees or key employees of the organization. Page 42

43 Form 990 FAQs Compensation IRS filing tips Question: How should an organization list in Part VII, Form 990 a person who is a current officer or director for part of the year and a former officer or director for the rest of the year as a current, former or both? What about persons who are key employees or highest compensated employees for only part of the year? Page 43

44 Form 990 FAQs Compensation IRS filing tips Answer: The filer should list in Part VII, Section A, Form 990 any person who was a current officer or director at any time during the tax year, even if the person is not an officer or director at the end of the year. All of that person s compensation from the organization should be listed in Part VII, Section A, whether received as a current officer or director, a former officer or director or in another capacity (e.g., independent contractor). A current key employee or highest compensated employee is a person who was a key employee or highest compensated employee for the calendar year ending with or within the organization s tax year, even if he or she is not an employee of the organization at the end of that year. A former officer, director, trustee, key employee or highest compensated employee should be listed in Part VII, Section A, only if such person is not listed in Part VII, Section A in any other capacity. Page 44

45 Form 990 FAQs Schedule F IRS filing tips Question: Does an organization report expenses on Schedule F, Form 990 if it sends board members to board meetings or to attend and speak at seminars and conferences outside the United States? Answer: Yes; if the organization exceeds the $10,000 revenue or expense threshold, it will need to report these activities in Part I of Schedule F, listing the region(s) in which the activities are conducted, the type of activities conducted in each region and its total expenditures in each region. However, it will not need to report any of its board members as agents in column (c) if all of them serve the organization as volunteers. Page 45

46 Form 990 FAQs Schedule F IRS filing tips Question: Should a payment that our organization made to a foreign government s representative or agency that is located in the United States be reported in Part II of Schedule F, Form 990? Answer: Yes, if the payment is a grant over $5,000. Grants to foreign governments must be reported in Schedule F, Part II, regardless of where the government agencies or representatives are located. For instance, a $6,000 grant to a foreign embassy based in Washington, DC, should be reported in Schedule F, Part II. Page 46

47 Form 990 FAQs Schedule R IRS filing tips Question: Schedule R, Part V, Form 990 requires reporting of transactions between the filing organization and its related organizations. Do all transactions between the filing organization and its related organizations have to be reported? Page 47

48 Form 990 FAQs Schedule R IRS filing tips Answer: No. Schedule R, Part V, line 1 requires check-box reporting of whether the organization was engaged in certain kinds of transactions with any related organizations. The following transactions must be reported in greater detail in line 2: All transactions described in line 1a, which includes all receipts or accruals of interest, annuities, royalties or rent from a controlled entity under section 512(b)(13), regardless of amount Transactions described in lines 1(b) through 1(r) with controlled entities if the amounts involved during the tax year between the filing organization and a particular controlled entity exceed $50,000 Section 501(c)(3) organizations transactions with related tax-exempt organizations not described in section 501(c)(3) (including section 527 political organizations) if the total amounts related to those transactions exceed $50,000 during the tax year Page 48

49 Questions? Page 49

50 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None