By David Heinen, North Carolina Council of Nonprofits
February 14 Update
President Trump Recommends Steep Cuts to Safety Net Programs in Budget Proposal
On Monday, President Donald Trump began the annual federal budget process by releasing his budget proposals for FY2021 that begins on October1, 2020. The documents released by the White House call for steep cuts to many safety net programs, including Medicaid, Medicare, Supplemental Nutrition Assistance Program, and Temporary Assistance for Needy Families. Although anxiety-inducing for many nonprofits, the reality is that the President’s proposals are only a wish list and are extremely unlikely to be passed by Congress this year.
IRS Guidance Expected on Silo-ing of Unrelated Business Income Tax
Next month, the IRS is expected to issue final regulations on unrelated business income taxes on separate trades or businesses. The 2017 federal tax law changes added Section 512(a)(6) to the Internal Revenue Code. This new subsection requires nonprofits to calculate taxes on a business-by-business basis, rather than aggregating all revenues and expenses and paying the tax only on the profit of the whole. The National Council of Nonprofits submitted public comments on the IRS’s original proposed regulations with suggestions for ways they could be improved.
New IRS Guidance Suggests that 501(c)(3) Subsidiaries Cannot Form PACs
Last month, the IRS issued a private letter ruling that suggests that a 501(c)(3) hospital system would be engaged in impermissible political activity if its for-profit subsidiary created a political action committee (PAC) that solicited funds from hospital employees. Charitable nonprofits are, of course, not permitted to engage in partisan political activities like making campaign contributions or supporting or opposing candidates for office. While this ban on electioneering means that it is impermissible for 501(c)(3) nonprofits to form PACs, some charitable nonprofits have related 501(c)(4) social welfare organizations that are allowed to participate in the political process. Some observers wonder whether the latest IRS ruling, which is not binding precedent, could call into question the common practice of the creation of PACs by 501(c)(4) organizations that have an affiliated 501(c)(3) nonprofit.
IRS Holds Hearing on Donor Disclosure Requirements for Non-501(c)(3) Organizations
Last Friday, the Internal Revenue Service (IRS) conducted a public hearing on proposed regulations to eliminate the requirement that 501(c)(4) social welfare nonprofits confidentially disclose the identities of their significant donors. Representatives of a few organizations expressed support for the proposed change in longstanding law, saying the IRS doesn’t need the Form 990 Schedule B for law enforcement purposes and expressing fear the information could be accidentally leaked to the public. However, the proposed regulations drew strong criticism from a few witnesses who said that failure to disclose the names of donors to groups that can engage in partisan, election-related activities would invite foreign nations to illegally and surreptitiously interfere in American elections. Previously, the National Association of State Charity Officials, the National Council of Nonprofits, and many other groups submitted public comments in opposition to the proposed changes. The Internal Revenue Code requires 501(c)(3) nonprofits to disclose significant donors to the IRS, so the IRS can’t change this requirement through the regulatory process.
January 31 Update
IRS Requiring Tax Exemptions to be Filed Electronically
Beginning today, the Internal Revenue Service is requiring nonprofits seeking tax exemption as 501(c)(3) organizations to file their Form 1023 application for exemption electronically. The IRS is allowing a 90-day grace period when nonprofits can still submit paper forms. Small nonprofits that use the short-form (and controversial) Form 1023-EZ already have to file electronically. To help nonprofits avoid common errors in applying for tax-exempt status, the IRS has also developed an interactive version of the Form 1023.
February 14 Update
IRS Provides Guidance to Help Nonprofits Get Refunds of Parking Tax
On Wednesday, the IRS issued guidance that will help nonprofits quickly get back taxes paid on the recently repealed tax on nonprofit parking and transportation expenses. Nonprofits that paid this tax in 2017 or 2018 can get a refund by filing an amended Form 990-T with the IRS and writing “Amended Return” (or “Amended Return – Section 512(a)(7) Repeal” if the amended return is only being filed to claim a refund of unrelated business income tax (UBIT) paid for parking and transportation expenses). Nonprofits may file for refunds within three years of the filing date of their Form 990-T or within two years of the time they paid the tax, whichever is later.
OMB Proposes New Rules to Improve Uniform Guidance Indirect Cost Guarantee
On Wednesday, the U.S. Office of Management and Budget (OMB) proposed revisions to the Uniform Guidance, the rules governing federal grants to nonprofits. Most notably, the proposed revisions to the OMB Uniform Guidance would strengthen the guarantee that grantees receive reimbursement of indirect costs of at least 10 percent of their modified total direct costs (de minimis rate).
The proposed rules also clarify that all granting agencies paying nonprofits with federal funds – whether federal, state, or local governments, native tribes, or other nonprofits – must pay nonprofits using the nonprofit's existing negotiated indirect cost rates and, if no negotiated rate exists yet, then they have the obligation to negotiate rates, at the option of the nonprofit. To date, various granting agencies have misinterpreted the rules in ways that deny nonprofits' rights under the Uniform Guidance.
In other changes, the proposed rules would:
- Provide greater flexibility under procurement standards;
- Implement standard data elements across agencies and grants;
- Promote the collection of data in machine-readable formats;
- Allow federal agencies greater flexibility in terminating grants to nonprofits if the agencies’ policy goals change; and
- Strengthen end-of-grant closeout procedures and enforcement.
The National Council of Nonprofits has prepared an excellent analysis of the proposed regulations and what they mean for nonprofits with federal grants.
OMB is accepting public comments on the proposed regulations through March 22, 2020.
Recent Change in Retirement Laws Does Not Affect IRA Charitable Rollover
As part of Congress’s year-end spending and tax legislation, several federal retirement laws are changing this year. One of the changes raises the age when individuals must start making minimum distributions from their individual retirement accounts (IRAs) from 70 ½ to 72 years of age. Nothing in this law made changes to the IRA charitable rollover – a popular federal tax incentive for charitable giving. Individuals aged 70½ and older may still make tax-free distributions to nonprofits from their IRAs, even if they are not yet required to make distributions from their IRAs because they have not yet turned 72.
The IRS has announced that the standard business mileage rate will decrease to 57.5 cents per mile in 2020 (down from 58 cents per mile in 2019). Many nonprofits use this rate when reimbursing their employees for work-related driving. The volunteer mileage rate – the amount that's tax-deductible when your nonprofit's volunteers drive on behalf of your organization – remains at 14 cents per mile and can only be changed by Congress. The Nonprofit Relief Act (H.R. 3323), which was introduced last year, would raise the volunteer mileage rate to be consistent with the standard business mileage rat
Report Documents Failures of Flawed Form 1023-EZ
In its annual report to Congress that was filed this week, the National Taxpayer Advocate noted that the IRS’s flawed Form 1023-EZ (short form application for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code) remains a major compliance issue. The report cites a 2019 study showing that the IRS erroneously granted tax-exempt status to nearly half (46%) of the organizations using Form 1023-EZ. Notably, the rate of erroneously granted tax exemption determinations increased after the IRS revised the form in 2018 to require applicants to provide a description of their mission or most significant activities. Some organizations were granted 501(c)(3) status despite being organized and operated for overly broad and vague purposes such as “helping people in need” and “community outreach.” The Center has expressed concerns that the IRS's continued use of the overly-simple Form 1023-EZ could harm the public's trust in nonprofits by allowing some organizations to be granted tax-exempt status as 501(c)(3) public charities even though they do not satisfy the basic legal criteria to merit this tax exemption.
Taxpayer Advocate Report Highlights Recent Court Challenges to Charitable Contributions
The National Taxpayer Advocate report to Congress also included an analysis of 17 cases decided between June 1, 2018 and May 31, 2019 challenging the deductibility of charitable contributions. The three main reasons the IRS (mostly successfully) challenged taxpayers’ charitable donations were:
- Failure of taxpayers to adequately substantiate their contributions;
- Improper valuation of donations of property; and
- Misapplication of the laws on contributions of conservation easements.
Nonprofits receiving large contributions of property or conservation easements may want to work closely with their donors to ensure that they are complying with federal tax law when making these donations.
New Federal Budget and Tax Laws Include Many Provisions Affecting Nonprofits
On December 20, 2019, President Donald Trump signed into law two massive federal appropriations bills that provide $1.4 trillion in funding for the federal government for the remainder of the current fiscal year (through September 30, 2020) and make several tax law changes. The Center has published summaries of the tax policy changes and of the spending provisions affecting nonprofits.
December 19 Update
The IRS has clarified the new online filing requirements for tax-exempt organizations (IR-2019-206). The new e-filing requirements, enacted as part of the Taxpayer First Act, will be in effect for most nonprofits in tax years after July 1, 2019. As a result, electronic filing of the Form 990 will be required for the December 15, 2020 due date. Form 990-EZ filers were granted a one-year extension for paper submissions, leaving online filing as a voluntary option in those cases. In 2020, the IRS will continue to accept paper forms that have not yet been converted to electronic format, such as the Form 990-T used for reporting unrelated business taxable income.
Protect Your Website’s .ORG Registry from Price Hikes
Prices for nonprofit website addresses ending in .org may soon increase dramatically, and censorship may become a distinct possibility because of two seemingly connected events. Earlier this year, the Internet Corporation for Assigned Names and Numbers (ICANN) – the governing body overseeing the .org domain – removed price caps on domain names. The removal leaves nonprofits vulnerable to abrupt, unanticipated, and significant cost increases at a moment’s notice. Then, last month, the nonprofit Internet Society announced it had sold its ownership of the .org Public Interest Registry to a private equity firm, Ethos Capital
The proposed sale would put the rights to more than 10 million domains in the hands of venture capitalists, who – without the longstanding cost controls in place to protect nonprofits – could take more than $750 million dollars from nonprofit missions. The conversion of the .org registry to for-profit control raises the specter of corporate interests shutting down websites that do what nonprofits do: speak truth to power.
A new letter sent to the Internet Society in opposition to the sale, which the Center and more than 11,000 others have already signed, also states, “Decisions affecting .org must be made with the consultation of the [nonprofit] community, overseen by a trusted leader. If the Internet Society can no longer be that leader, it should work with the [nonprofit] community and [ICANN] to find an appropriate replacement.”
Your nonprofit can help protect its .org domain name as well as the entire nonprofit community by signing on to the letter in opposition to the sale found at SaveDotOrg.org. The National Council of Nonprofits has resources on additional actions nonprofits can take to protect .org domain names.
NC Congressman Introduces Universal Charitable Giving Act
On Giving Tuesday, Congressman Mark Walker (R-NC) re-introduced the Universal Charitable Giving Act (H.R. 5923). The bill would increase giving among low and middle class Americans by creating a new, above-the-line, non-itemizer charitable deduction. The Center strongly supports this bill, which has bipartisan support. By encouraging all Americans to give more generously to support the work of charitable nonprofits, the Universal Charitable Giving Act would strengthen nonprofits’ capacity to provide essential services in communities across North Carolina.
The Universal Charitable Giving Act is particularly important in light of recent trends in charitable giving. Because of the structural federal tax changes in the 2017 Tax Cuts and Jobs Act, more than 21 million Americans stopped using the charitable deduction last year. Preliminary data suggests that this tax law change has led to a small reduction in individual donations supporting the work of charitable nonprofits. The Center has provided an analysis of the latest trends in charitable giving that explains why new incentives for charitable giving are critical to sustaining the work of nonprofits in communities.