The IRS is now offering Issue Podcasts! Check out the latest podcast: When are Commercial-Type Activities a Substantial Nonexempt Purpose for an IRC 501(c)(3) Organization? Learn about determining when commercial-type activities further a substantial nonexempt purpose for an IRC 501(c)(3) organization. Stay up to date on the latest podcasts by visiting the IRS Stay Exempt page.
On March 14, 2017, I’ll be discussing Exemption Issues and Small Organizations (or, How to Clean Up Messes), as well as participating as a panelist on Practical and Timely Hints for Working with Nonprofits. The annual Nonprofit Law Conference will be held at the Minnesota CLE Conference Center in Minnepolis, and attendees may claim a maximum of 6.5 CLE credits for this seminar. A full list of presenters, topics, and online registration can be found here.
I don’t often address employee benefits issues on this blog because I don’t myself practice in that area. However, a new law that just passed reinstates (to a degree) a health care reimbursement option that some smaller nonprofits may be able to take advantage of! Since I know only enough to get in trouble in this area, I asked my good friend Jewelie Grape to give me a summary. If you want to know more, I suggest you contact her directly or let me know and I would be happy to put you in contact with her!
Great news for small employers who want to provide payment or reimbursement for employees’ individual health insurance policies on a pre-tax basis…On December 13, 2016, President Obama signed into law the 21st Century Cures Act which includes a section allowing qualified small employers to offer a new type of health reimbursement arrangement (HRA) to employees effective January 1, 2017 (the Affordable Care Act previously prohibited most stand-alone HRAs). The new arrangement is called a qualified small employer health reimbursement arrangement (QSEHRA).
Only employers who employ fewer than 50 full-time equivalent employees and do not offer a group health plan to any employee will be allowed to pay or reimburse employees’ eligible medical care expenses through a QSEHRA.
The QSEHRA must:
- be provided on the same terms to all eligible employees of the eligible employer (variation is allowed in the pricing of a policy based on age and number of family members),
- be funded solely by the employer (no employee salary reduction contributions are allowed),
- provide for the payment or reimbursement of eligible medical care expenses incurred by the employee or family members (including premiums for individual health coverage) only after the employee provides proof of health coverage, and
- ensure annual payment or reimbursement does not exceed $4,950 ($10,000 if family members are covered under the HRA) in 2017 (this amount could change in future years).
An eligible employer funding a QSEHRA must provide a notice to eligible employees not later than 90 days before the beginning of the year or the date the eligible employee is first eligible to participate in the QSEHRA.
A few additional points – the health coverage must be minimum essential coverage (as defined under the Affordable Care Act) in order for the payment or reimbursement to be tax-free. Reimbursement amounts may reduce the amount of premium tax credit/marketplace subsidies available to eligible employees, and if the QSEHRA provides “affordable coverage” (as defined under the Affordable Care Act), employees will not be eligible for a marketplace subsidy. Finally, the employer must report QSEHRA reimbursement amounts on employees’ Form W-2s.
This is the final post in my three part blog series on churches as tax exempt organizations. This third section will discuss charitable contributions, special rules limiting the IRS’ authority to audit a church, and 990-series return filing requirements.
The burden is generally on donors to obtain and maintain the documentation they need to be able to take a deduction for a charitable contribution. However, a donor cannot claim a tax deduction for a contribution of $250 or more unless they receive a contemporaneous written acknowledgment of the contribution. The written acknowledgment should include the name of the church/religious organization, date of contribution, amount of cash contribution, and/or description (but not the value) of a non-cash contribution. The written acknowledgment must also contain one of the following: 1. statement saying no goods/services were received in return for the contribution 2. statement saying that any goods/services provided in return for the contribution consisted entirely of intangible religious benefits, or 3. a description and estimate of the value of goods/services other than intangible religious benefits provided in return for the contribution. Intangible religious benefits include things like the admission to a religious ceremony or de minimis tangible benefits like wine for a religious ceremony. Benefits that are not intangible religious benefits include things like the tuition for education leading to a recognized degree, travel services, and consumer goods. There is not a penalty imposed by the IRS for failing to provide a contemporaneous written acknowledgement, but it is good donor relations and in general is provided as a matter of course to the donor. Many churches choose to provide a single notice at the end of the tax year that summarizes the donor’s giving, rather than sending out regular notices.
An organization is required to provide an acknowledgement when a contribution of $75 or more is made in exchange for goods/services. These types of contributions are called quid pro quo contributions. The donor needs to know the value of the goods/services since they can only take a contribution deduction if the donation exceeds the fair market value of the goods/services. The organization will need to provide a written statement to a donor (as outlined in the prior paragraph) for a quid pro quo contribution unless the goods or services received in return for the contribution are of insubstantial value, or if the only benefit received by the donor is an intangible religious benefit.
For more information on charitable contributions and the substantiation and disclosure requirements, see IRS Publication 1771.
Special rules limiting IRS authority to audit a church
The IRS may only initiate an audit if a high level Treasury Department official reasonably believes, based on a written statement of facts and circumstances, that a church does not qualify for exemption, may not be paying taxes on an unrelated business or taxable activity, may not be properly withholding or paying employment taxes, or may have entered into an excess benefit transaction with certain insiders to the organization. Congress has imposed special limitations on how and when the IRS can conduct civil inquiries and examinations, found under IRC Section 7611.
Restrictions on church inquiries are limited to churches, and conventions or associations of the church, and do not apply to people or organizations related to the church, including integrated auxiliaries like a school, missionary group, etc.
Once the reasonable belief requirement is met, the IRS must provide a written notice to the church outlining its concerns and the audit process will proceed as follows:
- The church is allowed a reasonable time period to respond to the IRS with a letter addressing the concerns/provide an explanation
- If the church hasn’t responded in the allotted time or the IRS doesn’t feel the issue was addressed, they will issue a second notice within 90 days, informing the church that they will need to examine the books and records
- After the second notice but before the examination of the books/records, the church can request a conference with the IRS
- An examination of the books/records by the IRS is generally completed within two years from the date of the second notice
If at any time the church provides documentation to the IRS that satisfies their inquiry, the case will be closed without examination.
Churches and 990 filing requirements
The thresholds for determining which Form 990-series return to file are found here. Generally, all religious organizations must file form 990, 990-EZ, or 990-N, unless they are subject to an exception. The correct form must be filed before the 15th day of the 5th month following the end of the organization’s tax year. Form 990-N and Forms 990 for certain large organizations must be filed electronically.
Exceptions to the requirement to file Form 990, 990-EZ, and 990-N are limited to the following:
- Churches (as opposed to “religious organizations”)
- Inter-church organizations of local units of a church
- Mission societies sponsored by or affiliated with one or more churches or church denomination, if more than half of the activities are conducted in, or directed at, persons in foreign countries
- An exclusively religious activity of any religious order
If an organization is not required to file a Form 990-series return, but chooses to do so, it should continue or it will be revoked for failing to file an annual return for three years in a row. Once an organization begins filing, the IRS will have that organization marked as a filing organization unless the organization affirmatively seeks to have its status changed back to that of a non-filer.
Churches and religious organizations are not exempt from the requirement to file a Form 990-T if they generate gross income from unrelated business of $1,000 or more for a taxable year. This form must be filed by the 15th day of the 5th month after the organization’s accounting period ends. There are no exceptions to file form 990-T.
The topics I have covered on churches are only intended as a summary. Organizations are encouraged to look at other resources (not already linked to in these blog posts) that the IRS provides, including:
Publication 463: Travel, Entertainment, Gift, and Car Expenses
Publication 517: Social Security and Other Information for Members of the Clergy & Religious Workers
Publication 526: Charitable Contributions
Publication 557: Tax-Exempt Status for Your Organization
Publication 598: Tax on Unrelated Business Income and Exempt Organizations
Publication 1828: Tax Guide for Churches & Religious Organizations
The IRS has had several outages on the website where organizations need to file the Form 8976, which gives the IRS notice of an organization’s intent to operate as a 501(c)(4). Those outages included much of the day on September 6th, which was the final day for some organizations to get the filing in without being penalized. The IRS just issued an update that stated that they will take the outages into account when reviewing whether to assess penalties for late filing the Form 8976. See the IRS’ update here.
Upcoming presentation on lobbying and political activites for 501(c)(6) organizations!
I will be joining Representative Matt Dean, Senator Jeff Hayden and Todd Rapp as a co-presenter for an event hosted by Associations North, on September 20, 2016. Topics covered at this event will range from lobbying and government relations, to PAC compliance, to grassroots advocacy, public messaging, and new technologies. I will be speaking about lobbying and political activities for 501(c)(6) organizations from 8:30 to 9:30. Please join us at the MN Humanities Center in St. Paul, from 8:15 a.m. – 12:00 p.m.; I’d love to see you there! For additional information and to register online, click here.
The Center for Public Integrity has come out with an amazing new search tool that enables anyone that is interested to better understand how money flows in the nonprofit sector. The tool is in part intended to combat the lack of transparency that exists around funding for “dark money” organizations involved in the political process. However, I think it is also a great tool for donors, potential employees and volunteers, and other interested parties to better (and definitely more efficiently) understand more about who funds any organization. Plug in your favorite organizations and see what you find!
The data in the search function does not cover everything — according to the Center for Public Integrity, they have about 850,000 990s downloaded and in the system from about 250,000 organizations. However, this is a great beginning to enabling more information gathering without having to download and review the 990s yourself. This is an example of the type of information mining that we thought would come out of the requirement that the IRS release 990 data in machine readable and searchable formatting.
Since late December 2015 we have been on the lookout for implementing regulations regarding the new notice requirements on certain 501(c)(4) organizations. The IRS has now issued Revenue Procedure 2016-41 and the Treasury Department issued final and temporary regulations implementing the new requirement that organizations must notify the IRS within 60 days of their creation if they intend to operate as an organization described under Section 501(c)(4).
Section 506 was added to the Internal Revenue Code as a part of the Protecting Americans from Tax Hikes Act of 2015. Section 506 requires that certain Section 501(c)(4) organizations must provide notice to the IRS within 60 days of the organization’s creation if it intends to operate as a 501(c)(4).
Who it does and does not apply to:
- The new requirement does not apply to organizations that, on or before December 18, 2015, applied for a determination letter using Form 1024 or filed at least one 990-series return.
- It does apply to organizations in existence on or before July 8, 2016 that have not applied for a determination letter using Form 1024 or filed at least one 990-series return. Organizations not excluded for meeting either of the above requirements are subject to a transition rule that gives them until September 6, 2016 to file the required notice and not be subject to penalties.
- It does apply to new 501(c)(4) organizations formed after July 8, 2016.
Organizations subject to the Section 506 notice requirement must electronically file Form 8976. This filing is made at https://services.irs.gov/datamart/login.do.* The individual filing the notice should be able to receive confirmation of the filing or notice of non-acceptance. The filing must be accompanied by a $50 user fee, which will be made through www.pay.gov.
Organizations that fail to file the Form 8976 are subject to a $20/day late filing penalty, up to a maximum of $5,000. Certain responsible persons may also be jointly and severally liable for an additional penalty of $20/day up to a max of $5,000. Either penalty can be abated if reasonable cause can be shown.
The above requirements may vary depending on the specific facts associated with your organization. If you want help understanding how the new requirement applies to your organization, or you would like help with the new filing, please contact our office.
*blog post updated 7/19/16 to reflect change in URL for registration/filing