Here are some new developments nonprofits need to know:
New rules for tax returns starting in 2017. Congress doesn’t get a lot done, but they did something good when they reauthorized the Highway Funding Bill. They changed some of the rules for filing form 990. Currently, nonprofits must file a form 990 no later than 4 ½ months after the close of their fiscal year. This means that calendar year organizations must file no later than May 15. If you can’t file by the deadline, you can apply for an automatic 3-month extension. Calendar year taxpayers can therefore move the deadline to August 15. If you need a second extension, which happens with some frequency, you need to ask for a second extension and give a good excuse. While getting the extension is not usually difficult, you often need to get a second extension, especially if your audit is not done. Under the new rules, which go into effect for 2016 returns to be filed in 2017, your return would still be due 4 ½ months after the close of your fiscal year. However, if you need an extension you can ask for an automatic 6-month extension. This will save you the hassle of making a second request and save the beleaguered IRS some time reviewing your request.
Focus on Joint Ventures – The IRS is focusing attention on the increasing use of joint ventures between nonprofits and for-profit organizations.
They are permitted, as long as the nonprofit is careful to observe the following rules:
- The joint venture must further the nonprofit’s mission.
- If the joint venture uses a separate entity such as a limited liability company, the IRS requires that the nonprofit maintain control of the Board of Directors or other governing body. It is still decided whether a 50/50 split of the Board is enough, or whether the nonprofit must have 50% + 1. We will keep you posted.
- If you are considering a joint venture pay attention to Revenue Rulings 98-15 and 2004-51. These layout examples of what the IRS considers acceptable.
- One other important question the IRS is examining: If received separately by the nonprofit, would the income from the joint venture be unrelated to business income and subject to tax? This requires some careful planning when entering into a joint venture so that the unrelated business income doesn’t jeopardize your tax-exempt status.
State Tax Issues – if you operate in more than one state, be careful about rules in the other state.
- If you operate in California or New York, be very careful. Both states are very aggressive in enforcing their regulations on nonprofits. The California Attorney General has begun asking organizations for a copy of their Schedule B from form 990, which is the list of contributors.
- Nexus-if you operate in another state, understand that your connection to that state may trigger oversight by the state Attorney General, state filing requirements, and various state taxing requirements, such as property taxes unless you can successfully apply for an exemption.
- You are allowed to use form 1023 if you expect to have less than $50,000 in revenue in each of the first 3 years and less than $250,000 in assets.
- It is 3 pages long and is normally approved in significantly less time.
- You are still subject to requirements for conflict of interest policy, approving bylaws, and other requirements that the IRS imposes on organizations that use form 1023.
- The IRS has stated they will audit 1023-EZ filers after the fact to make sure they are complying with the rules. Don’t assume you are immune from the audit.
These short articles are intended to provide general information only and are not intended to create an attorney-client relationship. If you have questions about a particular fact situation please call for an appointment. Also, remember that preventing a problem is much less expensive than creating one after the fact.