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2008 Issue 4
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Changes to the Form 990 Governance Section Understanding Schedule C of the New Form 990 New Rules for Public Charities IRS Announces Inflation-Adjusted Rates for 2009 Harmon Curran Welcomes New Attorney A Note About This Issue This issue of the Nonprofit Navigator is primarily devoted to the recently finalized revisions to Form 990 and Form 990-EZ and the impacts they will have on the many nonprofit organizations required to file those forms each year. The new forms are effective for tax years ending on or after December 31, 2008, and the IRS has issued lengthy instructions for each section. We have focused on the two sections that we find most pertinent to the nonprofit organizations that we advise: Part VI, on governance, and Schedule C, on political campaign and lobbying activities. As we approach year's end, organizations need to be prepared for the new requirements that will be imposed and the inquiries that the IRS will soon be making. For further information you can refer to the IRS website, which has made detailed section-by-section instructions available, or contact us for assistance.  Changes to the Form 990 Governance Section The Form 990 is used by the IRS as the primary tax compliance tool for tax exempt organizations. Highlighted below are several new segments in the governance section (Part VI of the Form). Organizations should consider reviewing this section of the 990 before year's end as there is still time to adopt certain organizational policies and procedures about which the new form inquires. The governance section is generally designed to elicit information about the organization's governing structure and operational policies. Question 1.b requires organizations to state the number of independent voting members that comprise the organization's governing body. Note in the instructions that independence is defined narrowly. Question 2 asks about family and business relationships between officers, directors, trustees, and key employees ("ODTKEs"). A key employee is someone whose reportable compensation exceeds $150,000 and who satisfies one of three responsibility criteria. While a similar question is on the current Form 990, the revised 990 provides more explicit definitions of business relationships and guidance for obtaining the information. If a family or business relationship exists among any of the current and/or certain former officers, directors and/or key employees, the relevant individuals and the existence of the relationships must be disclosed in Schedule O of the Form 990. Judging by some of the questions asked on the revised Form 990, it is clear the IRS would like to see that organizations adopt certain operational procedures. For example, question 8 asks whether the organization contemporaneously documents meetings and actions, while question 10 asks about the governing body's review of Form 990. While answering "no" to either question does not indicate the organization has violated any federal law or regulation, funders and members of the public may perceive that answering "no" suggests the organization does not use "best" governance practices. Therefore, if you cannot currently answer "yes," you may wish to consider whether the organization should adopt practices that will enable it to do so. In a similar vein, the questions suggest an IRS preference for certain policies. For instance, the form inquires about the existence, operation, and enforcement of the organization's conflict of interest policy. If an organization answers "yes" that it monitors and enforces its conflict policy, it is asked to describe the process in Schedule O. Other policies about which the form asks are document retention and whistle-blower policies. Again, answering that the organization does not have such policies does not indicate a violation of the law, but may be viewed by some as an indicator of less-than-ideal governance. An organization should consider its own needs and not adopt boilerplate policies. Document retention policies should be carefully tailored to consider the types of documents that may be created by your organization and the laws that could require or merit a specific retention period. While it is best to have a well-designed document retention and destruction policy and to follow it, organizations that are uncertain of their ability to do so should consider a more bare-bones policy which simply states that no one with custody of any of the organization's records may destroy, delete, or alter any document in order to obstruct or influence a pending or anticipated investigation, and that any records potentially relevant to litigation or governmental investigation must be retained. Such a policy should be enforced through appropriate disciplinary action as necessary. A whistle-blower policy should encourage staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, while specifying that the organization will protect the individual from retaliation. The policy should also identify staff, board members, or outside parties to whom such practices can be reported. By Rachel Jacobs Understanding Schedule C of the New Form 990 Of particular interest to us in the revised Form 990 is the new Schedule C on Political Campaign and Lobbying Activities, which must be filed by all section 501(c) and 527 organizations that engage in any political campaign or lobbying activities. It captures a great deal of information in a single schedule and must be filed by any organization that engages in direct or indirect political campaign activities on behalf of or in opposition to any particular candidate. The principal change in Schedule C is its expanded coverage of political activities. It asks non-501(c)(3) organizations to report more extensively on a broad range of political campaign activities and any transfers of funds to section 527 organizations. The sections that are new to Schedule C request detailed information on 527 expenditures made and volunteer hours utilized for political campaign activities. Seeking information on volunteer hours may suggest the IRS will consider volunteer hours in evaluating an exempt organization's "primary purpose." Additionally, the new schedule requests the names, addresses, and EINs of all 527 organizations to which payments were made and the amounts of those payments. Organizations to which these sections pertain should be aware of the changes, as they impose additional recordkeeping requirements. Many 501(c)(3) organizations will be required to file Schedule C to report on their lobbying activities, and these organizations should note that they are only required to fill in Part II of the schedule and should ignore the rest (unless they need to provide additional details in Part IV). Moreover, the information requested on lobbying activities in Part II is no different from what was previously requested on the old form, so Schedule C does not impose any additional burden on 501(c)(3) organizations. The new schedule also includes questions about the deductibility of membership dues paid to 501(c)(4), 501(c)(5), and 501(c)(6) organizations and section 6033(e) proxy taxes, though the content of those questions is identical to relevant sections of the old Form 990. As the deadline for filing the new Form 990 draws near, organizations should be aware of the changes wrought by the new Schedule C and prepare accordingly. By Christine Tschiderer New Rules for Public Charities Public charities and organizations seeking to become public charities take note. The IRS has issued temporary income tax regulations regarding the redesigned Form 990 that eliminate advance rulings from the 501(c)(3) application process, extend the public support computation period, and change the accounting method used to calculate public support. Advance Rulings Eliminated Most section 501(c)(3) charities need to maintain an adequate level of "public support" in order to avoid classification by the IRS as private foundations, which are subject to additional regulatory requirements and a higher tax burden. The Internal Revenue Code generally subdivides publicly supported charities into two types - organizations described in sections 509(a)(1) and 509(a)(2). For organizations applying for recognition as a public charity under sections 509(a)(1) and (a)(2), the new regulations have eliminated advance rulings and the need to file Form 8734 (Support Schedule for Advance Ruling Period). Before the rule change, an organization seeking classification as a public charity had two options when applying for tax exempt status under section 501(c)(3) - to request either a definitive or an advance ruling. An organization requesting a definitive ruling demonstrated it was publicly supported based on its years of existence, an often difficult process for newly formed organizations. In contrast, an advance ruling request gave a new organization time to build up broad public support during the first five years of its existence, after which the organization was required to file Form 8734 to prove it satisfied the public support test during the advance ruling period. Under the new regulations, an organization applying for 501(c)(3) tax-exempt status and recognition that it is not a private foundation under Section 509(a)(1) or (a)(2) will receive a definitive ruling that it is a public charity if it can demonstrate in its initial application to the IRS that it can reasonably be expected to be publicly supported. This is the same standard an organization seeking an advance ruling was required to meet. A new organization will maintain its status as a public charity regardless of its level of public support for its first five taxable years. Thereafter, the IRS will monitor the organization's public charity status using the public support information reported on Schedule A of Form 990. If the organization fails the public support test in its sixth year and cannot otherwise establish it is not a private foundation, it will be reclassified as a private foundation and will start to become liable for the private foundation excise taxes found in Chapter 42 of the Internal Revenue Code (such as the tax on net investment income). It is important to recognize that the new regulations affect only an organization's classification as a public charity or a private foundation and not its tax-exempt status. Also, organizations that have already received an advance ruling under the old regulations can now consider their advance ruling letter to be their final determination letter, and donors can rely on such letters for proof of an organization's public charity status. Public Support Computation Period Extended The regulations have changed the computation period for public support from a four-year period comprised of the four years prior to the current year to a five-year period that includes the current year (that is, the year being tested). As before, any organization that meets a public support test for the current taxable year is treated as publicly supported for the current taxable year and the immediately succeeding taxable year, regardless of whether it satisfies the test in that next year. Since all organizations will now use a five-year computation period for public support calculations, the substantial and material change exception, which allowed organizations to use a five-year period rather than a four-year period computation period under certain circumstances, has been eliminated. Recognizing that an organization may not be able to compute its public support for the current taxable year until some time in the subsequent taxable year, the IRS will not assert private foundation taxes or penalties for all or part of the first taxable year for which an organization is reclassified as a private foundation due to a failure to satisfy a public support test in cases where the imposition of such taxes would lead to unfair or inequitable results. For example, an organization will likely not be penalized if the change in public support was unforeseeable or due to circumstances beyond the organization's control. An organization that believes the IRS has unfairly or inequitably imposed private foundation excise taxes or penalties for all or part of the year in which it was reclassified as a private foundation can contact the IRS Exempt Organizations Division's Office of Rulings and Agreements, Washington, DC, at (202) 283-4905 to request relief. Be prepared to provide to the IRS all of the relevant facts and circumstances that establish that the imposition of private foundation taxes is unfair or inequitable. Accounting Method Change for Public Support Calculation Before the new regulations were issued, an organization was required to use the cash method of accounting to report the amount of public support it received on Schedule A of Form 990. Now, a public charity must use the same accounting method it uses in keeping its books. As a result, organizations that use the accrual method of accounting will no longer be able to use support information reported on Form 990 for prior years. In addition, organizations using the accrual method could find themselves failing the public support test if they are required to report a substantial multi-year grant in a single tax year. To address this issue, organizations may want to check with their tax professionals and/or grantors to see if it is possible to structure such a grant so that it does not have to be allocated in its entirety to one year. By Rachel Jacobs IRS Announces Inflation-Adjusted Rates for 2009 Recently, the IRS announced new inflation-adjusted rates for the 2009 tax year, which will be of interest to individuals and nonprofit corporations. Low Cost Article The unrelated business income of certain exempt organizations does not include proceeds from the distribution of "low cost articles" related to charitable solicitations (such as mugs or key chains imprinted with the organization's logo). For the 2009 tax year, the value of a "low cost article" is $9.50 or less. 2008: $9.10 2009: $9.50 Other Insubstantial Benefits In Revenue Procedure 90-12, the IRS provided guidelines for charitable organizations on the amount deductible from contributions made by contributors who receive something in return for their payments. The original guidelines stated that the value of benefits received by a donor in return for a fully deductible charitable contribution may be disregarded under one of two circumstances:
2008: $9.10/$45.50/$91.00 2009: $9.50/$47.50/$95.00 Mileage Effective January 1, 2009, the mileage rate for business use of a vehicle decreases to 55 cents per mile from the 58.5 cents mileage rate for the second half of 2008. The mileage rate for medical use of a vehicle also decreases: the new rate is 24 cents per mile, down from 27 cents per mile. The IRS issued a rare mid-year adjustment to mileage rates this past July in response to rapidly rising gasoline costs, but the new rates reflect the recent reversal of that trend. The standard mileage deduction rate for volunteer or charitable use of a vehicle remains at 14 cents per mile, as set by Congress. 2008: 58.5 ¢/mile 2009: 55 ¢/mile Reporting Exemption for Lobbying Expenditures In 1998, the IRS issued Revenue Procedure 98-19, which established the amount of annual dues that section 501(c)(4) social welfare organizations and 501(c)(5) agricultural and horticultural organizations may receive from a person, family, or entity without being subject to the reporting requirements under section 6033(e) of the Internal Revenue Code. Section 6033(e) requires a tax exempt organization incurring non-deductible lobbying expenditures to notify its members of the organization's reasonable estimate of the portion of dues allocable to lobbying expenditures. Such notification must occur at the time that the dues are assessed or paid. The 2009 annual dues limitation for the reporting exception for organizations with nondeductible lobbying expenses is $101 or less. 2008: $97 2009: $101 Member Dues For the 2009 tax year, dues paid by members to 501(c)(5) agricultural or horticultural organizations will not be subject to unrelated business income tax even if the organization provides benefits and privileges to its members, provided the dues are less than $145. 2008: $139 2009: $145 Annual Exclusion for Gifts The first $13,000 of gifts to any person-aside from gifts of future interests in property-will not be included in the total amount of taxable gifts made during the 2009 tax year for gift tax reporting purposes. 2008: $12,000 2009: $13,000 Itemized Deductions The income threshold for the overall limitation on itemized deductions will increase from $159,950 in 2008 to $166,800 in 2009 for married individuals filing a joint return. On separate returns for married individuals, the income threshold will be $83,400, up from $79,975 in 2008. The allowable amount of deductions is reduced for taxpayers with adjusted gross income above that amount. 2008: $159,950 2009: $166,800 Retirement Plan Limits The limit on the maximum annual benefit under a defined benefit plan will increase from $185,000 in 2008 to $195,000 for 2009. The limit on the maximum permissible allocation under a defined contribution plan likewise increases from $46,000 to $49,000. The maximum amount of annual compensation that can be taken into account for those under a qualified plan also increases in 2009 to $245,000 (from $230,000 in 2008). A "highly compensated employee" now is someone who is compensated $110,000 or more per year, up from $105,000. The maximum amount of elective contributions a person can make to their retirement plan will increase from $15,500 to $16,500. The maximum amount of "catch-up contributions" will be $5,500, up from $5,000 in 2008. By Christine Tschiderer Harmon Curran Welcomes New Attorney Harmon, Curran, Spielberg & Eisenberg is pleased to announce that Matthew Fraser has joined us as a new associate in the environmental/nuclear safety and security practice of the firm. Matt joined us this past September after graduating from Tulane University Law School. While attending law school, he worked as a research assistant at the Tulane Institute on Water Resources Law & Policy and as a student attorney at the Tulane Environmental Law Clinic, where he challenged state agencies' right to permit the discharge of wastewaters into state water bodies. In the aftermath of Hurricane Katrina, Matt spent a semester in Washington, DC studying at American University's Washington College of Law. While in DC, he also served as a law clerk with Public Employees for Environmental Responsibility and with the Environmental & Natural Resources Division of the Department of Justice, where he responded to plaintiffs' challenges to environmental impact statements prepared by federal government agencies. In addition to his J.D., Matt holds a Master's Degree in Public Health from the Tulane School of Public Health & Tropical Medicine and a Bachelor's Degree in Business Administration from Bucknell University. He is admitted to practice law in Louisiana. This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required. Newsletter Home | HarmonCurran Home | |