As many not-for-profit organizations plan for a successful 2019, it’s important to stay abreast of changing regulations and trends in the industry. The following is a synopsis of major Internal Revenue Service (IRS) updates pertaining to tax exempt organizations.
Form 990 Instructions
It’s significant to first note that the IRS earlier this year released Form 990, Return of Organization Exempt from Income Tax, and its accompanying instructions for 2018.
This form is used by most tax-exempt organizations, nonexempt charitable trusts, and section 527 political organizations to provide the IRS with an annual information return concerning an organization’s exempt activities.
Noted in the form’s 2018 instructions, some items were added to Form 990 impacting not-for-profit organizations. While the IRS did not make significant changes to the form or instructions, the following is a list of new changes for exempt organizations to consider:
- Excise tax on executive compensation in excess of $1 million, Part V
- Excise tax on net investment income of certain colleges and universities, Part V
- FASB changes, instructions to Form 990 reflecting financial statement reporting changes under the Accounting Standards Update 2016-14 (ASU 2016-14), Presentation of Financial Statements of Not-for-Profit Entities, issued by the Financial Accounting Standards Board. ASU 2016-14 changes the way not-for-profit organizations classify net assets, Part X
- An increase in UBTI by disallowed fringe (read more here)
- Changes to Schedule B for certain organizations (reporting of donor information)
Forms 990-T and 990-PF
Form 990-T, Exempt Organization Business Income Tax Return, and Form 990-PF, Return of Private Foundation, instructions were recently updated as well.
Not-for-profit organizations use Form 990-T to report unrelated business income. Form 990-PF returns are filed by private foundations.
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Form 990-T’s instructions were updated to incorporate changes resulting from the Tax Cuts and Jobs Act, including:
- Tax rate change to a flat 21% for corporate organizations
- Repeal of the Alternative Minimum Tax for corporations
- New qualified business income deduction for certain taxpayers
- Guidance on the calculations of separate UBTI for each trade or business
- Notice 2018-100 potential underpayment penalty relief related to qualified transportation fringe benefit tax
- Increase in UBTI by disallowed qualified transportation fringes
- Updates to net operating loss carryover rules
- Potential excess business loss limitations for noncorporate taxpayers
- Potential limitation on business interest expense
The following is an overview of what is new on Form 990-PF’s instructions:
- Tax on excess executive compensation to covered employees over $1 million
- Inclusion of global intangible low-taxed income (GILTI)
- Increase in UBTI by disallowed qualified transportation fringe benefits
- Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) changes to reporting of net assets
IRS 2018 Accomplishment Letter
Furthermore, the IRS released a Fiscal Year 2018 Accomplishment Letter to summarize the Tax Exempt and Government Entities (TE/GE) 2018 achievements. The letter reports the launch of the Tax Exempt Organizations Search (TEOS) to serve users in finding an organization’s federal tax status and filings. This will assist not-for-profits, their donors, and other interested parties in identifying their eligibility to receive tax deductions for their charitable contributions as well as information on their Form 990 series returns.
The letter discusses TE/GE’s commitment to utilizing a data-driven approach when identifying high risk areas of noncompliance for exam selection. Specific to exempt organizations, the TE/GE states that they improved and will continue to improve compliance models based on Form 990 and Form 990-PF. They will also continue to monitor private foundations by paying mind to existing irregularities on filed forms. The letter additionally covers referrals and other casework, indicating the IRS’s persistent search for cases of noncompliance and continued monitoring of entities filing and receiving exemption under Form 1023-EZ.
In 2019, the IRS plans to focus on the examinations of 501(c)7 social clubs, organizations that were formerly for-profit entities, and worker classification audits. They will continue to use data-driven approaches and case selection models, receive referrals for audits, and will concentrate on utilizing the Lean Process for carrying out examinations.
Looking Forward
The recent government shutdown raised several questions on the IRS’s activity; however, they reported that they were still accepting mail and processing received payments during the shutdown. The IRS, at this time, is reviewing the backlog of inventory that compiled during the shutdown. According to the IRS, their current processing time for correspondence is approximately 55 days.
Our tax experts will continue to monitor the IRS’s activity to provide you with updated information. If you have questions about Form 990, 990-T, or 990-PF, please contact your Sikich representative.
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About the Authors
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Bryan Pautsch CPA, JD
Partner
Bryan has extensive experience in structuring and tax planning for both tax-exempt and taxable organizations. His expertise includes working with closely held businesses to identify planning opportunities and assist them as they implement these strategies.
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Jill Boyle, CPA
Senior Manager, Not-for-Profit Tax
Jill has more than 13 years of experience providing tax and compliance services to a variety of clients, with a concentration in serving not-for-profits and individual taxpayers. Jill primarily serves public charities, private foundations, and professional organizations. She is an extraordinary resource to clients and provides direction and leadership for the tax team.
