Tax Changes May Be Coming for Nonprofits
By Charles Ciccone
Regulatory changes and areas of focus can be hard to predict, but the Internal Revenue Service and Treasury Departments plans for fiscal 2016 provide a good indication for what may be coming down the line for nonprofit organizations.
The IRSs tax-exempt/government entities priorities for fiscal 2016, which started Oct. 1, and the Treasury Departments 2015-2016 Priority Guidance Plan indicate a number of reporting areas that the regulatory agencies want to improve in the coming year. Nonprofits should keep a close eye on these focus areas to be prepared for the potential impact these changes could have on their operations.
Compliance Focus Areas
Some of the areas the IRS will focus on include employee benefit plans, tax exempt bond compliance, and organizations that received their exempt status from the on-line Form 1023-EZ.
Employee Benefit Plan Reporting IRS monitoring of employee benefit plans will target three areas: specialty programs that include multiemployer plans and 403(b) and 457(b) plans; traditional casework that focuses on profit sharing, money purchase, 401(k), and defined benefit plans; and supplemental work, including Individual Retirement Arrangements and Form 5500-EZ.
Tax-Exempt Bonds Half of the IRSs Tax-Exempt Bond Offices budget for 2016 will be devoted to compliance-related examinations. Eighty percent of the budget allocated for compliance purposes will be targeted at market segment programs and 20% will address whistleblower referrals.
Form 1023-EZ The IRS will begin post-determination compliance enforcement for entities that received tax exempt status using the streamlined determination process with Form 1023-EZ. Other compliance resources will mainly be divided among these five regulatory areas of reporting:
Finalized Regulations Expected
- Exemption issues, which evaluates non-exempt purpose activity and private inurement;
- Protection of assets, which looks at self-dealing, excess benefit transactions and loans to disqualified persons;
- Tax gap, which examines an organizations employment tax and unrelated business income tax liabilities;
- International dealings, which includes oversight on funds spent outside the United States and Report of Foreign Bank and Financial Accounts filing requirements; and
- Emerging issues, such as hospital's compliance with IRC section 501(r) put in place by the Patient Protection and Affordable Care Act of 2010 (ACA).
The IRS will also re-examine Form 1023-EZ for potential improvements to the application and review process.
Included among the Treasurys projects affecting exempt organizations are the following:
Changes Coming for Private Foundations
- 509(a)(3) Supporting Organizations Issue final regulations and additional guidance on Section 509(a)(3) supporting organizations.
- Dual Use Facilities Additional guidance on the methods to allocated expenses on dual use facilities.
- Political Campaign Intervention Additional regulations for organizations exempt under section 501(c).
- Qualified ABLE Programs Final regulations under section 529A on Qualified ABLE Programs (meeting the qualified disability expenses of a designed beneficiary) will be issued.
- Tax-Exempt Bonds Final regulations related to public approval requirements for private activity bonds subject to Section 147(f), as well as regulations related to arbitrage investment restrictions under Section 148.
When private foundations are considering grants to foreign charitable organizations, they must make a good faith determination that they are making a qualifying distribution. Foreign organizations must qualify as a public charity or private operating foundation in order for the distribution to be considered qualified. If the foreign entity did not qualify, the grant would be a taxable expenditure. Proposed regulations for the reliance standards provide additional guidance for Sections 4942 and 4945 of the Code, and the Department of the Treasury would like to finalize those proposed changes.
The Treasury Department is looking at finalized guidance for private foundations making program-related investments. The proposed guidance provides examples of investments that qualify as program-related. Feedback from the proposed guidance raised additional examples, which the Department of the Treasury would look to incorporate into the regulations outlined in Section 4944 of the code.
In its budget proposal, the IRS Exempt Organization division asked that the private foundation excise tax be moved from a two-tier system to a flat rate for ease of calculation. The Presidents Fiscal Year 2016 budget also contained a provision to replace the two tax rates with a single rate of 1.35% on a private foundations net investment income.
Charles Ciccone is a senior tax associate at CBIZ Tofias. Email him at email@example.com or call 617-761-0613.