Priority Guidance Plan for 2021-2022: Nonprofits
The Treasury Department has released its Priority Guidance Plan (PGP) for 2021-2022, a projection of what they want to accomplish during the 2021-2022 fiscal year. The PGP provides an indication of where the Treasury wants to focus, which includes several issues relevant to nonprofit organizations.
The following is a summary of the issues that impact nonprofits, published by Thomson Reuters.
Subordinate organizations (chapters) can obtain tax-exempt status as a group and file a combined 990 if they are under the supervision and control of a central organization (headquarters). However, the IRS stopped accepting new group exemption ruling requests after June 17, 2020. The IRS issued Notice 2020-36, proposing new procedures for obtaining and maintaining a group exemption. The PGP indicates that finalizing these procedures is a priority for the IRS.
The original guidance for group exemptions was in Rev. Proc. 80-27. Notice 2020-36 contains updated procedures that must be followed by the chapters and by headquarters. These updated procedures are designed to promote compliance, increase efficiency, improve accuracy, and enhance the transparency of group exemptions.
The procedures require that the headquarters have no more than one group exemption. There could no longer be two or more groups of chapters under a single headquarters organization. The headquarters would be required to have at least five chapters when applying for a group exemption, and it must maintain at least one chapter in all subsequent years.
The procedures would strengthen the level of supervision and control that the headquarters organization is required to exercise over the chapters, such as appointing a majority of each chapter’s governing body. In general, the headquarters organization would no longer be allowed to have a tax-exempt status that differs from the chapters. For example, if the headquarters is exempt under IRC Sec. 501(c)(4), it couldn’t request a group exemption for chapters that are exempt under IRC Sec. 501(c)(3). Each chapter would be required to adopt uniform governing documents, with certain exceptions for charitable organizations with differing missions. Also, chapters other than those described in Section 501(c)(3) would all need to have a similar purpose as defined by their NTEE codes.
The procedures would allow a chapter to operate in a foreign country as long as it is organized in the United States. Group exemptions could not include Type III supporting organizations or Section 501(c)(29) organizations. Chapters that have had their exempt status revoked and not yet reinstated would not be eligible for inclusion in a group exemption. The procedures include enhanced requirements for the headquarters to maintain and update the list of chapters included in the group exemption. Every chapter operating as a Section 501(c)(4) must submit its own Form 8976, Notice of Intent to Operate Under Section 501(c)(4), or authorize the headquarters organization to file the form on its behalf.
A transition rule allows preexisting group exemptions one year to ensure that the headquarters organization has no more than one group exemption, and that each group has at least one chapter. Under a grandfather rule, preexisting group exemptions would not be required to comply with the new procedures for stricter supervision over and qualification of chapters.
Supporting organizations are Section 501(c)(3) public charities that avoid classification as private foundations even though they may be unable to pass the public support tests of IRC Sec. 509(a)(1) or (2). There are proposed regulations regarding supporting organizations. The PGP indicates that finalizing these regulations is a priority for the IRS.
The proposed regulations clarify the due date for the supporting organization to supply certain required information to the organization it supports. Specifically, the information must be postmarked no later than the end of the fifth month after the end of the tax year. For example, a supporting organization with a June year end must submit all the required documentation to the supported organization no later than November 30. The postmark date is deemed to be the date of delivery.
The proposed regulations clarify that a supporting organization must demonstrate that it meets the requirements of the responsiveness test for all the organizations it supports. The regulations address Type III functionally integrated supporting organizations, including when the supported organization is the parent or is a governmental entity. They also clarify the definition of a non-functionally integrated Type III supporting organization.
Unrelated Trade or Business Expenses
Exempt organizations reporting income from more than one unrelated trade or business (UTB) on Form 990-T must report each activity separately. Losses from one activity may not be used to offset net income from other activities (siloing). In general, net operating losses (NOLs) may not be carried back to previous tax years. However, the CARES Act passed in 2020 provided that NOLs from tax years beginning after December 31, 2017, and before January 1, 2021, may be carried back five years. Some of those carryback years may be prior to the implementation of the siloing rules.
The PGP indicates that issuing new regulations addressing the use of CARES Act NOLs in relation to the siloing rules is an IRS priority. The regulations are also expected to provide much needed guidance on how exempt organizations should allocate expenses to an unrelated trade or business.
IRS Disclosure of Information to State Officials
IRC Sec. 6104 discusses the disclosure requirements related to exempt organizations. Prior to the Pension Protection Act of 2006, the IRS was only able to disclose to state officials that it had denied an exemption application, revoked the exempt status of a charity, or issued a notice of deficiency for termination or excise taxes. It could provide additional information to state officials related to such issues. The Pension Protection Act expanded the permissible IRS disclosures to include proposed denials and revocations prior to final appeal, as well as identifying information about organizations that have applied for Section 501(c)(3) status.
Proposed regulations provide that the disclosures are no longer automatic and are generally limited to the state’s interest in regulating charitable solicitations. Disclosures are subject to confidentiality requirements under federal law. The IRS may make the disclosures on its own initiative when it determines that state laws have been violated.
The Priority Guidance Plan indicates that the IRS intends to finalize the proposed regulations, particularly with respect to whether the regulations completely describe the types of organizations for which the state officials might need such information.
Church Tax Inquiries and Examinations
IRC Sec. 7611 states that the IRS may make a tax inquiry into a church only if an appropriate high-level Treasury official reasonably believes that the church may not be exempt or is carrying on taxable activities. Previous regulations had defined the appropriate official as a Regional Commissioner, a position that was eliminated in 1998. In 2009, a federal district court held that the IRS official who authorized a church inquiry, the Director of Exempt Organizations Examinations, lacked the political accountability and national policy viewpoint to be considered an appropriate high-level Treasury official. While the former Regional Commissioner was only one management level below the IRS commissioner, the Director of Exempt Organizations Examinations was four levels below.
The IRS had not undertaken any procedures to amend its own policies. After the court’s determination, the IRS issued a proposed regulation assigning responsibility for making the required determination regarding a church tax inquiry to the Director of Exempt Organizations. The Priority Guidance Plan indicates that finalizing these regulations is an IRS priority.
Defining How an LLC Can Qualify as a 501(c)(3)
Tax-exempt organizations generally do not have owners. The common structures for a Section 501(c)(3) organization are corporation, trust, or association. A limited liability company (LLC) is a business entity with one or more members that can operate for various purposes. The IRS will not grant tax-exempt status directly to an LLC because its members are typically owners of the business.
Usually, a nonprofit organization is formed as a corporation, and the corporation can become the single member of an existing LLC. The nonprofit corporation would have full control over the activity and assets of the LLC. The LLC’s organizing documents must meet12 conditions imposed by the IRS, most of which apply to its activities and ownership structure. The Priority Guidance Plan indicates the IRS intention of providing further guidance on circumstances where an LLC can qualify for recognition under IRC Sec. 501(c)(3).
Donor Advised Funds
A donor advised fund (DAF) is a separately identifiable account maintained by a Section 501(c)(3) organization (sponsoring organization). The donor is granted advisory privileges with respect to the distributions made from the DAF by the supporting organization.
The IRS can impose excise taxes on the sponsoring organization if the DAF is used to provide impermissible economic benefits to the donor or the donor’s family. The IRS can impose excise taxes on a donor who receives impermissible economic benefits in the form of grants, loans, excess compensation, or similar payments from a DAF. The PGP indicates that the IRS intends to issue regulations regarding the excise taxes applicable to DAFs.
IRC Sec. 4941 imposes a tax on self-dealing between a private foundation and a disqualified person. The PGP indicates that the IRS will provide guidance on whether self-dealing occurs when a private foundation holds an investment in a partnership in which one or more of the other partners is a disqualified person with respect to the private foundation.
Since 1974, our trusted advisors have partnered with nonprofit organizations to navigate every step of the financial journey. At Dugan & Lopatka, our CPAs and consultants are always on the cutting edge of changes in the nonprofit sector. We understand the challenges you face—the special accounting, auditing and reporting requirements of your organization—and we use our deep expertise to deliver exceptional service tailored to your needs.