Non-Profit

Tax Provisions: Inflation-Adjusted Amounts for 2021

Recently, the IRS issued the 2021 annual inflation adjustments for many tax provisions, including several that pertain to nonprofit organizations. Let’s take a look at the adjustments that matter to you:

Low-cost Articles

Normally, charitable organizations can distribute low-cost articles in connection with a fundraising campaign without fear that the IRS will treat this as an unrelated business activity [IRC Sec.513(h)(1)(A)]. A low-cost article is an item that costs the organization no more than $11.30 in 2021 (up from $11.20 in 2020).

Insubstantial Benefits

Normally, the deductible portion of a donor’s contribution must be reduced by the value of anything received in return. However, an insubstantial benefit can be ignored, therefore allowing a full deduction, if the gift otherwise meets the requirements for claiming a contribution. The following alternative limitations are used to determine if benefits are insubstantial:

  • The fair market value of all benefits received is not more than the lesser of $113 for 2021 (up from $112 in 2020) or 2% of the contribution.
  • The contribution is at least $56.50 for 2021 (up from $56 in 2020), and the cost of the benefits received is no more than the low-cost article value of $11.30 for 2021 (up from $11.20 for 2020).
  • In connection with a fundraising campaign, the benefits are distributed free to potential donors who neither requested nor expressly consented to receiving them, and their cost is no more than the low-cost article value of $11.30 for 2021.

Lobbying Expenditures

Normally, if a Section 501(c)(4) social welfare organization, a Section 501(c)(5) agricultural or horticultural organization, or a Section 501(c)(6) organization has any lobbying expenditures, it must notify members of the portion of their dues that is nondeductible because of such expenses [IRC Sec. 6033(e)(1)(A); Rev. Proc. 98-19 ()].

However, Section 501(c)(4) and (c)(5) entities are exempt from the notification requirements if (1) more than 90% of the annual dues comes from certain other tax-exempt entities, or (2) more than 90% of the dues comes from members who annually pay $120 or less for 2021 (up from $119 for 2020).

Agricultural or Horticultural Organization

If the annual dues do not exceed $173 for 2021 (up from $171 in 2020) [IRC Sec. 512(d)(1)], the dues and similar income of an agricultural or horticultural organization are not subject to unrelated business income tax, regardless of the benefits or privileges to which the entity’s members are entitled.

Penalty Provisions

Some of the penalty provisions under IRC Sec. 6652 are adjusted for inflation. Those that apply to tax-exempt organizations or their managers are summarized as follows:

Failure to File Return under IRC Sec. 6033(a)(1).

Exempt organizations can be assessed penalties for failure to file returns. The following penalties (not all inclusive) are for returns required to be filed in 2022.

SCENARIO DAILY PENALTY MAXIMUM PENALTY
Organization with gross receipts of $1,904,500 or less $20 Lesser of $10,500 or 5% of the organization’s gross receipts for the year
Managers $10 $5,000
Public inspection of annual returns $20 $10,500
Public inspection of exemption applications and notice of status $20 No limit

For a tax-exempt entity with gross receipts over $1,094,500, the daily penalty is $105, with a maximum penalty of $54,500. Failure to File Disclosure Required under IRC Sec. 6033(a)(2).

The daily penalty is $105, with a maximum penalty of $54,500. Failure to File Return under IRC Sec. 6043(b). Terminated exempt organizations and their managers can be penalized. This list is not all-inclusive.

SCENARIO DAILY PENALTY MAXIMUM PENALTY
Organization $10 $5,000
Managers $10 $5,000

Other Penalty Provisions.

There are several other penalty provisions (both taxpayer and preparer) that are adjusted annually for inflation, but they are not specific to tax-exempt organizations. See Rev. Proc. 2020-45 for additional inflation-adjusted amounts for various penalties.

For specific guidance, learn more about Dugan & Lopatka’s nonprofit solutions or contact us at info@duganlopatka.com.

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