Magazine article The CPA Journal

Navigating the Not-for-Profit Tax Minefield

Magazine article The CPA Journal

Navigating the Not-for-Profit Tax Minefield

Article excerpt

Whether a large established charity, a small not-for-profit private foundation, a school club, or anything in between, there are many ways for not-for-profit organizations to run afoul of 1RS rules and regulations. A simple misstep in management can change the organization from a taxexempt entity to a taxpaying entity and result in substantial taxes on the organization's management. This article addresses a few of the critical issues facing not-for-profits who wish to remain tax exempt.

What to File and When

Most not-for-profit organizations' only interaction with the 1RS involves the submission of an annual information report, Form 990, at the end of the year. This imposing form requires detailed reporting of revenue, expense items, and balance sheets. The most intimidating facet, however, is Form 990's required nonfinancial disclosures. Over too questions await the Form 990 preparer, covering topics such as officer and director compensation, governance, programming, lobbying, and political activity. Up to 16 additional schedules may also be required depending on the organization's operations, such as Schedule A for public charities, Schedule B for a list of contributors, and Schedule C for political and lobbying activities. Form 990 is due by the 15th day of the fifth month after the not-for-profit's year-end. An automatic three-month extension is available to not-for-profit filers who file Form 8868, and a second, nonautomatic three-month extension may also be requested.

Some degree of relief is available to smaller organizations. Many not-for-profits with gross receipts less than $200,000 and total assets less than $50,000 at year-end can file Form 990-EZ, which requires roughly half the information reported in Form 990. Form 990-EZ is also due by the 15th day of the fifth month after year-end, and automatic and nonautomatic extensions of time are also available. Form 990-N is available to many not-for-profits whose annual revenues are $50,000 or less. Known as the e-Postcard, this form is filed online and requires answering eight basic questions. It is also due by the 15th day of the fifth month after year-end, but no extension is available.

Key Issues

There are several key issues that should be reviewed and addressed by board members, management, donors, and accountants prior to an annual Form 990 filing. Lack of attention to these topics could, in some cases, lead to substantial excise taxes and the possible loss of not-for-profit status.


Paramount among these issues is the determination of reasonable compensation paid by the entity; no other single item on Form 990 requires such an extensive level of reporting. This is not unfair; donors and other sources of funding rightfully have an expectation that their support is being prudently used and not improperly enriching employees. Not-for-profits are required to report individual compensation information for officers, directors, trustees, key employees, highly compensated employees, and independent contractors on Form 990. A determination by the 1RS of excess benefits, including compensation, paid to these parties will result in an excise tax of 25% imposed on the recipient and potentially an excise tax of 10% on the organization's manager. The size, scope, number of excess transactions, safeguards, and corrections of past transactions may also lead the 1RS to revoke an organization's not-for-profit status.

The 1RS defines reasonable compensation as the value that would ordinarily be paid for like services by like enterprises under like circumstances. There is a rebuttable assumption of reasonableness if the following three conditions are met:

* The transaction is approved by an authorized body of the organization (or an entity it controls) composed of individuals who do not have a conflict of interest concerning the transaction;

* Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability; and

* The authorized body adequately documents the basis for its determination concurrent with that determination. …

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