No More Paper
As we enter the primary tax return filing season (or as we CPAs call it, “busy season”), the COVID-19 pandemic continues to have a lasting impact on nonprofit operations, including annual 990 information returns. For several years, the IRS has been gradually “getting with the times” by progressively adding to the list of forms that must be electronically filed. This year is no different.
Nonprofits (Exempt Organizations or “EOs”) who file form 990-N (e-Postcard) have been doing so electronically for several years. Now, fiscal-yearend 990-EZ filers will join their calendar-year-end brethren in the digital arena. 990 forms required for electronic filing include:
- Form 990 (for tax years beginning after July 1, 2019)
- Form 990-T (for tax years ending December 1, 2020 or later)
- Form 990-EZ (for tax years ending July 31, 2021 or later)
These forms must be filed with the IRS using one of the IRS approved Modernized e-File (MeF) providers detailed in a list on their website.[1] If you have been preparing your own 990 and sending it in the mail, this might be the year you want to find a preparer who is already paying for software capable of e-filing your return for you.
In addition to the suite of 990 forms, the IRS has been progressively transitioning the applications for recognition of tax-exemption to electronic submission. These are the forms filed by organizations requesting tax-exempt status for the first time or for reinstatement of their tax-exempt status if it was revoked. Tax-exempt forms required for electronic filing now include:
- Form 1023[2] (since January 31, 2020)
- Form 1023-A[3] (since January 5, 2021)
- Form 1024[4] (effective January 3, 2022) — NEW!
There is a 90-day grace period where they will accept paper-filed applications, but after April 4, the form must be submitted electronically on their website.[5]
An Unreachable IRS
The continued transition to electronic filing is partly an attempt to combat the severe personnel shortage the IRS continues to experience. Anyone who has tried to call the IRS during the past several years can tell you that their phone support has been almost nonexistent. During the first half of 2021, the IRS reported that it had fewer than 15,000 workers to handle the 240 million incoming calls, which is one person for every 16,000 calls. According to the Taxpayer Advocate Service’s mid-year report, only 7% of taxpayers reached an agent during last year’s filing season. Staffing is especially light in the EO area as, by definition, EOs are not a hot source of revenue for the government.
As if being unable to get assistance on your information return wasn’t enough, the processing time of the abovementioned applications for tax exemption has been running upward of 6-9 months, with some applications taking over a year to receive approval. This delay can snowball into further lags for California organizations that also need to file for exemption with the California Franchise Tax Board (FTB). Organizations that have received their determination letter from the IRS can file the streamlined form 3500A with the FTB, which is generally approved within weeks, rather than the lengthier form 3500, which can take months to be approved. This means organizations can spend almost a year trying to solicit contributions from donors without any guarantee that their tax-exempt status (and the deductibility of those contributions) will be approved.
Some Hope for Increased Giving
Currently stalled on the Hill, the Build Back Better Bill (BBBB) includes implications for both the IRS’s staffing issue as well as charitable giving in 2022. High state and local tax (SALT) jurisdictions like California and New York would be especially impacted. The BBBB, which has passed the House, is currently sitting with the Senate Finance Committee. In addition to a large increase in funding for the IRS, the Committee’s draft of the BBBB contains a placeholder for an increase in the SALT deduction for the 2021-2030 period. This measure would increase the number of individuals in those high-SALT jurisdictions that can utilize itemized deductions, including the charitable contribution deduction. This could motivate people to give more in order to lower their personal tax bills, benefiting charitable organizations.
The Downside of Large Donations
The onset of COVID presaged a shift in giving toward causes related to curing disease, addressing hunger, and responding to local community needs. In addition, there has been a trend toward fewer donors providing larger gifts. While this can be seen as a great boon to some organizations, it is something that 501(c)(3) organizations need to keep a close eye on. Schedule A must be filed by all 501(c)(3) organizations as a part of the Form 990 information return. This schedule calculates an EOs “public support percentage” during the current and four prior years. In other words, what percentage of their income comes from public sources (governments, other public charities, and miscellaneous unrelated donors). However, the cumulative amount of contributions from any individual, corporation, or private foundation that can be treated as “public” for this calculation, is limited to 1 or 2% depending on the organization. That means if an organization receives a significant portion of its income from just a few large donors, the majority of those donations will be backed out of the “public” support for this test, driving down their “public support percentage.” If this percentage falls below 33.3% of total support, it starts to get the attention of the IRS (though public charity status can still be maintained through a “facts & circumstances test”). If it falls below 10%, the organization is likely to be reclassified by the IRS as a private foundation and potentially subject to excise taxes and other requirements. It is imperative that 501(c)(3) organizations maintain their ongoing efforts to solicit donations from a wide variety of sources to support their public charity status, even if they are the recipient of a few significant contributions.
Inflationary Adjustments
Another COVID related effect on EOs is the rising inflation. The IRS issues annual Revenue Procedures updating several statutory and regulatory amounts for inflation. The following 2022 inflation adjustments may be of interest to Exempt Organizations:
- For purposes of defining the term “unrelated trade or business,” the unrelated business income of certain exempt organizations will not include a “low-cost article” of $11.70 or less.
- The $5, $25, and $50 guidelines for disregarding insubstantial benefits received by a donor in return for a fully deductible charitable contribution under Section 170 will be $11.70, $58.50, and $117, respectively.
- For tax years beginning in 2022, the annual per person, family, or entity limitation to qualify for the reporting exception for nondeductible lobbying expenses under section 6033(e)(3) will be $124 or less.
- The exemption of annual dues to be paid by a member to an agricultural or horticultural organization will be $178.
The United States of Registration
Finally, this is the time of year when we recommend our clients review their list of donors from the prior year and determine from which states their contributions have originated. Every state has its own requirements that dictate when an organization must register, with whom they must register and if there is an annual filing requirement and fee. Having any employees in a state generally means that an organization is “doing business” in that state. This means they must register with the Secretary of State and potentially with the attorney general. A significant concentration by dollar amount or percentage of total contributions in any state could be a warning that registration is required. Most states require some level of “active” solicitation within their borders, a threshold not met simply by having a website where donors from any state can contribute. Repeated or large donations from any one donor could be enough to meet the requirements, so we recommend an annual review of your donor lists and a consultation with a state compliance specialist if there are any concerns.
Summary of Key Points
- Nonprofits with a tax year ending after July 31, 2021, must file their information returns (990, 990-EZ, 990-N, and 990-T) electronically using one of the IRS’s approved e-file providers.
- All applications for tax exemption (forms 1023, 1023-A, and 1024) must be filed online at Pay.gov beginning April 4, 2022.
- Expect long wait times or no answer when you call the IRS again this filing season.
- The Build Back Better Bill, currently stalled in the Senate, has the potential to increase IRS funding/staffing and increase the state & local tax deduction for some taxpayers, giving them increased incentive to make charitable donations for 2021-2030.
- The IRS released the annual inflation adjustments.
- Nonprofits should check their donor lists annually to determine state registration requirements.
Did you find this article helpful? You might also be interested in Nonprofit Need to Know: Changes to GIK Presentation and Disclosure Requirements
[1] https://www.irs.gov/charities-non-profits/tax-year-2020-exempt-organizations-modernized-e-file-mef-providers The IRS updates the list annually but has not published their 2021 list as of this writing.
[2] Form 1023 is used by organizations requesting exemption under Section 501(c)(3)
[3] Form 1023-A is used by organizations requesting exemption under Section 501(c)(4)
[4] Form 1024 is used by organizations requesting exemption under all other subsections of Section 501(a) or Section 521