Policy & Legislative Update

Impacts on Charitable Donations A WIN: After considerable opposition from a variety of interests, the IRS has withdrawn their proposed rule allowing nonprofits to ask for donor's Social Security numbers (here's our overview from December). Besides the unease of donors with giving this information, nonprofits themselves would've had to invest in secure systems to store this data.   TAKE ACTION! With a similar obligation/cost on nonprofit operations, legislation in New York (A03394) has been reintroduced that would require that nonprofits provide a receipt for donations to determine and disclose how that donation would be allocated internally.  For instance, "administrative expenses"  would have to be differentiated from funds "directly...helping with the...charitable work." This bill would require nonprofits to make a near-immediate internal commitment of donated funds, and maintain an internal accounting system tracking donations of all sizes.The publicly available Federal 990 tax return already provides a pretty clear picture of internal resource allocations. For these, and a variety of other reasons, we encourage NYCON members to contact your representatives and/or bill co-sponsors to share their perspective on the merits of this legislation. Ongoing $15 Minimum Wage Discussions On January 7th, 2016, the NY Senate Standing Committee on Labor invited a diverse cross-section of employers and economists to testify on their view of Governor Cuomo's proposal for a state-wide $15 wage by 2021. To be sure, there was some divergence in the viewpoints on feasibility and net impacts.Only 3 of the official 16 members of the Committee attended. An archived video of the (4.5 hour) hearing is available here NYCON prepared a brief synopsis of the comments offered by the respective parties. Click to Read. Other news Minimum Wage Updates: There are at least a dozen bills pending in the Legislature with bearing on NY's minimum wage. They range from simply tying the existing wage to inflation, to allowing counties to recommend a Living Wage. As NYCON has already said, it will be difficult for NY nonprofits to cope with the proposed increase, even if NY attempted to substantially offset an increased minimum wage, as most nonprofits are funded without NY State participation.  Now, it appears that the Governor's budget proposal leaves even the State's commitment in doubt. As a general reminder, the minimum wage in NY is $9 in 2016, with increases (for those only subject to NY, not Federal, law) in the overtime exempt salary levels of "Administrative" and "Executive" positions from $34,125 to $35,100. On that overtime exempt issue, the latest update on the proposed US Dept. of Labor regulations increasing the overtime exempt salary level (as long as the 'duties' test is also met)...is a midsummer 2016 publishing...with a 60 day implementation period. Again, most nonprofits in NY have activities that keep them outside of the Federal rules...whereby they are covered by NY only. NYCON will keep you updated on any developments. Ongoing Litigation on NY Executive Order 38 Leaves Ambiguity for Many Nonprofits  For those of you not subject to (or familiar with) NY's EO 38, it requires nonprofits that annually receive funding from New York State (or passed through the State) of over $500,000, when that exceeds 30% of their total annual revenues, to be known as "Covered Providers," with limits on administrative expenses and executive compensation. The best guidance we can give is to act as though the entirety of EO 38 is still in effect. Here is an excellent synopsis (from the law firm of Greenberg Traurig) of the litigation and the aspects challenged.

News from The Non-Profit Times

Audits Show Widespread Underreporting of UBI

By The NonProfit Times - April 29, 2013

Unreported unrelated business income in higher education was found in almost every case examined by the Internal Revenue Service (IRS).

“The audits identified some significant compliance issues at the colleges and universities examined,” said Lois Lerner, director, Exempt Organizations division of the IRS. “Because these issues may well be present elsewhere across the tax-exempt sector, all exempt organizations need to be aware of the importance of accurately reporting unrelated business income and providing appropriate executive compensation.”

This is part of the multi-year project on tax-exempt colleges and universities. The Colleges and Universities Compliance Project was launched in 2008 with the distribution of detailed questionnaires to 400 randomly-selected colleges and universities. The IRS selected 34 of the 400 for examination because their questionnaire responses and Form 990 reporting indicated potential noncompliance in the areas of unrelated business income and executive compensation.

Unrelated business income (UBI) is the income from a trade or business regularly conducted by an exempt organization and not substantially related to its exempt purpose. Unrelated business taxable income is the UBI that is taxable after deducting expenses directly connected to the trade or business. Because UBTI is calculated by totaling the UBI from all activities and subtracting the total allowable deductions, losses from one activity can offset profits from another. Examinations have resulted in:

• Increases to UBTI for 90 percent of colleges and universities examined totaling about $90 million;
• More than 180 changes to the amounts of UBTI reported by colleges and universities on Form 990-T; and
• Disallowance of more than $170 million in losses and Net Operating Losses (NOLs, i.e., losses reported in one year that are used to offset profits in other years), which could amount to more than $60 million in assessed taxes.

The primary reasons for increases to UBTI in the completed exams were:

• Disallowing expenses that were not connected to unrelated business activities.

The IRS found that examined colleges and universities were reporting certain losses as connected to unrelated business activities when they were not. The misreporting occurred in two ways:

1. Lack of profit motive: The IRS found that organizations were claiming losses from activities that did not qualify as a trade or business. Nearly 70 percent of examined colleges and universities reported losses from activities for which expenses had consistently exceeded UBI for many years. UBI must be generated by a trade or business.

An activity qualifies as a trade or business only if, among other things, the taxpayer engaged in the activity with the intent to make a profit. A pattern of recurring losses indicates a lack of profit motive. The IRS disallowed reporting of activities for which the taxpayer failed to show a profit motive. Those losses no longer offset profits from other activities in the current year or in future years, with more than $150 million of NOLs disallowed.

2.  Improper expense allocation: The IRS also found that on nearly 60 percent of the Form 990-Ts examined, colleges and universities had misallocated expenses to offset UBI for specific activities. Organizations may allocate expenses that are used to carry on both exempt and unrelated business activities, but they must do so on a reasonable basis and the expenses offsetting UBI must be directly connected to the UBI activities. In many cases, the IRS found that claimed expenses, which generated losses, were not connected to the unrelated business activity.

The IRS checked the calculations for all NOLs reported on returns under exam and found that NOLs were either improperly calculated or unsubstantiated on more than a third of returns. As a result, the IRS disallowed nearly $19 million in NOLs.

The IRS also determined that nearly 40 percent of colleges and universities examined had misclassified certain activities as exempt or otherwise not reportable on Form 990-T. Fewer than 20 percent of these activities generated a loss. The examinations resulted in the reclassification of nearly $4 million in income as unrelated, subjecting those activities to tax.

Examinations resulted in more than 180 changes to UBTI reported for specific activities by colleges and universities. More than 30 different activities were connected to the changes. The majority of these adjustments came from the following activities: Fitness, recreation centers and sports camps; advertising; facility rentals; arenas; and, golf.

To see the online aricle click here.

The NonProfit Times Weekly E-Newsletter

IRS Reports 10,000 Fewer Nonprofits In 2012

There were 10,000 fewer registered tax-exempt organizations in 2012 than in 2011. According to the Internal Revenue Service (IRS) Data Book for 2012, which was released Monday, there were 1,484,818 501(c) organizations for the fiscal year ending in September, compared with 1,494,882 in 2011 – a decrease of 10,064, or about 0.68 percent.Read more... Professional Development... 5 principles for ethical mentoring “I never meant for that to happen.” Just as the above lament can be the swan song for a nonprofit that doesn't follow good organizational practices, it can also be the epitaph for a mentoring partnership gone wrong. Read more... Human Resources... 15 interview questions you can legally ask There are a lot of laws these days that restrict the kind of information you can request from candidates during job interviews. Since you probably don't want to get in trouble with the law, it's important to know the questions that you can and should ask. Read more... Management... 6 reasons change is good It's usual to resist change. Those who aren't pulling their own (or any) weight know that their gigs can be threatened if they don't do a whirlwind job of convincing change agents just how essential they are. Those who are pulling their own weight (or more) know that their livelihoods are threatened because they are too busy working to prove how essential they are to the operation. Read more... To Read More Click Here

Voluntary Compliance Program announced by IRS to address worker misclassification

Information for your members: You may have seen that in late September the IRS announced a voluntary compliance program for employers (including nonprofit employers) to enable those who have mistakenly classified workers as independent contractors to make a correction, along with a modest payment, and avoid the usual penalties of noncompliance. This program’s announcement offers an opportunity to remind nonprofits about the risk of misclassification and share information with them about the voluntary compliance program. See the National Council’s website materials on this topic.

Here is the text of the IRS announcement about the voluntary compliance program (from the IRS’s EO Update circulated on October 4):

“The IRS has launched a new program that will enable many employers, including tax-exempt employers, to resolve past worker classification issues and come back into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit. To be eligible for the new Voluntary Classification Settlement Program an applicant must:

Consistently have treated the workers as nonemployees in the past

Filed all required Forms 1099 for the workers for the previous three years

Not currently be under audit by the IRS, Department of Labor or a state agency concerning the classification of these workers.

Full details, including FAQs, will be available on the Employment Tax Pages of IRS.gov and in Announcement 2011-64.”

After Reports That The IRS May Have Mistakenly Stripped NY Groups Of Tax-Exempt Status, Schumer Urges All Nonprofits To Double Check The IRS List

Report Provides County-By-County Breakdown Of The Over 6,000 New York Nonprofit Groups That Lost Tax Exempt Status – Groups Can Correct Error, But Have To Do It Soon Before Costs Go Up

Schumer: Losing Tax-Exempt Status Could Be An Unfair Blow To New York’s Nonprofits

Today, U.S. Senator Charles E. Schumer unveiled a new section of his website to aid New York nonprofit groups that may have mistakenly lost their tax exempt status. Schumer is strongly encouraging nonprofit groups to check a recently-released Internal Revenue Service (IRS) list, available on Schumer’s website, to ensure that they have not been mistakenly stripped of their tax-exempt status – a move that could cost these groups thousands of dollars. Schumer’s webpage was launched shortly after media reports indicated that several nonprofit groups, including the New Windsor Little League and Plattekill Public Library, were included on the list released June 8th, despite the fact that their paperwork was up to date and filed with the IRS. Several nonprofit groups were never contacted by the IRS, despite several attempts to send mailings and other communications to warn the groups of the looming deadline to avoid losing their designation as a 501(c)(3) group.

“Little leagues, public libraries, museums, meal programs, and other nonprofit organizations that are the very fabric of communities throughout Upstate New York are at risk of losing their tax-exempt status and paying thousands of dollars in penalties through no fault of their own,” said Schumer. “Whether because of a lost notice in the mail or paperwork errors, no nonprofit should needlessly lose their tax exempt status. Every nonprofit group in Upstate New York should take a moment to ensure that they won’t be forced to pay unnecessary taxes this year. I’ve launched this new page on my website to make it easy and painless for groups to make sure that they’re not on the list, and to take steps to correct the problem if they are. Remaining tax-exempt helps keep costs down while boosting fundraising for charity organizations.”

"The good work of community charities has a vital impact on the everyday lives of New Yorkers,” said Doug Sauer, Chief Executive Officer of the New York Council of Nonprofits. “Whether it is providing volunteer first responder assistance, providing food and housing to families in need, caring for our children, disabled and elderly, fostering economic development or creating and promoting arts and culture - charities are integral to our quality of life in ways that are often taken for granted. NYCON is eager to do what we can to assist those organizations whose tax status have been revoked so that they continue their important contributions."

On June 8th, the IRS released a list of 275,000 nonprofits nationwide who automatically lost their tax-exempt status because they failed to file annual reports for three years in a row. The list included over 19,000 New York organizations, including more than 6,000 across Upstate New York. While the IRS believes that many of these organizations are no longer operational, they acknowledge that some groups on the list might not have been aware of the requirement, and are taking steps to allow these nonprofits to reinstate their tax-exempt status. In making the announcement, IRS Commissioner Doug Shulman said that, “We realize there may be some legitimate organizations, especially very small ones that were unaware of their new filing requirement.”

The list includes a diverse range of nonprofit groups including sports leagues, public libraries, museums and other educational programs, conservation groups, religious organizations, business networking groups, and others. There are over 106,000 registered nonprofits in New York state, according to the New York Council of Nonprofits, employing over 1.2 million New Yorkers statewide. Included in this total are 3,000 food pantries that feed approximately 3 million people each year. Over 17,000 people work in New York museums, which help contribute over a billion dollars to the state’s economy each year, thanks to visits from 6.6 million families, senior citizens, and students. In 2010, the American Red Cross in New York responded to 3,920 local disasters, and has trained nearly 590,000 people in First Aid. The group has also trained over 168,000 people in emergency preparedness, collected over 400,000 units of blood, and helped over 66,000 military families through their Armed Forces Emergency Services and Community Outreach Programs, according to the New York Council of Nonprofits. New York charities play an important role in communities across the state, and should be allowed to continue to do their good work in a tax-exempt state that will help their bottom line, allowing the nonprofits to serve more Upstate New Yorkers.

Here is how the nonprofits who lost their tax-exempt status break down across the state:

• In the Capital Region, approximately 952 nonprofits lost their tax-exempt status.



• In Western New York, approximately 687 nonprofits lost their tax-exempt status.



• In the Rochester-Finger Lakes Region, approximately 867 nonprofits lost their tax-exempt status.



• In the Southern Tier, approximately 562 nonprofits lost their tax-exempt status.



• In Central New York, approximately 811 nonprofits lost their tax-exempt status.



• In the Hudson Valley, approximately 1,942 nonprofits lost their tax-exempt status.



• In the North Country, approximately 426 nonprofits lost their tax-exempt status.

Being included on the list means that these nonprofits are no longer eligible to receive tax-deductible contributions, and that any income the group receives may be taxed. This has the effect of raising taxes on the nonprofit, while also putting a serious damper on their fundraising. The Pension Protection Act, passed by Congress in 2007, requires tax-exempt organizations to file an information return or notice each year with the IRS. Smaller groups are required to file for the first time in 2007, and the law automatically revokes the tax-exempt status of groups that do not file for three consecutive years. As a result, the first nonprofits to be revoked under the new law saw their status removed based on 2010 returns, filed in April of this year.

Fortunately, as long as groups are aware that they have been improperly stripped of their tax-exempt status, they can take corrective action at minimal cost to the group. Any nonprofit that can demonstrate that it has met its filing requirement for one or more of the last three years can fax copies of their past tax returns to be reinstated at no cost to the group. Additionally, those groups with under $50,000 in income that have not filed tax returns over the past three years can file for reinstatement for a reduced fee of just $100. If the groups fail to file by December 31, 2011, that fee jumps to $400-850 for 2012. Due to the limited window to take advantage of cheaper and easier ways to reapply for tax-exempt status, Schumer is encouraging nonprofits across Upstate New York to check his website and the list of those that lost 501(c)(3) status to ensure that their paperwork is up to date. If a group finds that they have lost their tax exempt status, they can follow the instructions on Schumer’s website and take steps to see that it is reinstated.

The new section of Schumer’s website can be accessed by visiting http://schumer.senate.gov/Public/irs_6_22_11.htm

Nonprofit Compensation: What is too much? …and who decides?

Are you tired of hearing, "That nonprofit pays its employees too much!" If every nonprofit board followed IRS guidance on setting the compensation of its key staff leaders, perhaps we wouldn’t hear that refrain as often. So board members, please do your part by embracing your role as defenders of the nonprofit sector’s right to pay its employees reasonably and fairly. Help us change the conversation from, "What compensation is excessive?" to "What compensation levels will help our organization build its capacity by hiring and retaining terrific staff?"

First, know the process for reviewing the annual compensation of the executive director. Second, be aware of the downside of NOT engaging in an annual compensation review. (Bad press, lack of donor confidence, and potentially IRS penalties….need we say more?)

Background: Under federal law, a charity may not pay more than "reasonable" compensation for services rendered. Although the Internal Revenue Code does not require charities to follow a particular process for determining the appropriate level of salary and benefits, it is clear that compensation for board members, officers, key employees (and others in a position to exercise substantial influence over the affairs of the nonprofit) should be determined by persons who are informed about what comparable nonprofits pay their employees, and who have no financial interest themselves in approving the compensation. (Source: IRS, Governance and Related Topics - 501(c)(3) Organizations 3-4 (2008)). These are the general guidelines offered by the IRS – but the IRS Form 990 offers specifics.

The IRS Form 990 asks nonprofits about the three-step process used to approve the compensation of the executive director/CEO (and certain other key employees): Did the process for determining compensation of the following persons include a (1) review and approval by independent persons, (2) comparability data, and (3) contemporaneous substantiation of the deliberation and decision?(See Section VI, Part B, line 15, of the Form 990.) Nonprofits that follow this three-step process are generally able to take advantage of what the IRS refers to as a "rebuttable presumption" that the compensation is reasonable, thereby protecting the nonprofit and the board members from sanctions that can be imposed by the IRS if it finds that the compensation was not reasonable.

Visit the National Council’s website for more information on how to measure comparability of compensation, and visit the IRS website for background on what can happen if a board fails to demonstrate it followed this 3-step rebuttable presumption process [hint: intermediate sanctions].

Demonstrating that your nonprofit has approved the compensation of the executive director/CEO in a thoughtful, deliberative process is a basic fiduciary responsibility of every nonprofit board. Here are some pointers:

• The process of reviewing executive compensation should recur whenever there is an adjustment to the executive director/CEO’s compensation.

• Having a written policy can help keep the process on track. ( See sample policy).

• The "executive compensation review" should be conducted by persons who are "independent" (not paid by the nonprofit). Many nonprofits use a sub-committee, such as a "compensation committee" made up of board members and volunteers, or the executive committee, to conduct the initial review and then make a recommendation to the full board.

• Having the full board approve the compensation of the executive director/CEO is consistent with being a transparent and accountable organization.

• Documentation of what the board’s decision was based on (such as comparability data) and of the fact that the board carefully deliberated and approved the CEO’s compensation is critical. Minutes of the meeting should include enough details so that if the board’s decision is questioned, the process the board used to determine that compensation is "reasonable" will be clear.

• "Compensation" means both salary and benefits, so if an executive director receives a salary but also other fringe benefits such as insurance, or a car or housing allowance, all those elements must be totaled together to determine the annual compensation.

There are many more resources on the National Council’s website, including a sample Policy for Review of Executive Compensation and a link to a virtual seminar on this topic presented at a symposium at Columbia Law School for state charity regulators by legal experts on executive compensation for tax-exempt organizations.

Read about additional governance policies that your nonprofit’s board should be aware of.

Spending Cuts, Filing Information, and More from Nonprofit Advocacy Matters

Cuts, Cuts and more Cuts
The National Council of Nonprofits reported in their newsletter, "Nonprofit Advocacy Matters", that Spending cuts were the consistent theme throughout Washington last week as the President, during his State of the Union address Tuesday night, called for a five-year freeze in non-defense discretionary spending. Also on Tuesday, the House adopted a resolution capping spending for the current fiscal year at or below the levels provided in fiscal 2008. This limit is expected to produce budget cuts this year of $55 billion to $60 billion. In addition, the recommendations of the Republican Study Committee to cut $2.5 trillion in spending over the next 10 years were incorporated in the proposed Spending Reduction Act. Among many items, that bill would block spending for the Corporation for Public Broadcasting, the National Endowment for the Arts, National Endowment for the Humanities, and for national service programs. The legislation is not expected to be brought up in the House, but it does provide a roadmap for the areas that are being targeted for reductions in the future.

Federal Regulations and Job Creation
Federal regulations are frequently criticized for frustrating job creation, and the President and House Republicans are taking steps to identify key problem areas. On January 18, President Obama signed an executive order on Improving Regulation and Regulatory Review calling for "a government wide review" of federal rules and regulations to remove those "that stifle job creation and make our economy less competitive." The order was accompanied by an op-ed by the President published in the Wall Street Journal. In the House, Oversight and Government Reform Chairman Darrell Issa (R-CA) has created a website asking employers to identify government regulations and practices that either help or inhibit job creation. The website asks for responses to the questions: "Where does Washington help, and where does it hurt?" The National Council wants to know your ideas about particular rules or regulations that need improving.

Form 1099 Filing Requirements
There is strong momentum for repeal of the new tax-reporting requirement in the health care law that, starting in 2012, will require nonprofits and for-profit businesses to report aggregate payments to vendors in excess of $600 for goods and other property. A bill introduced last week by Sen. Mike Johanns (R-NE), S.18, has bipartisan support and is paid for by rescinding prior appropriations. A second proposal introduced by Finance Committee Chairman Max Baucus (D-MT) and Majority Leader Harry Reid (D-NV), S.72, has no offsets. A House bill, H.R.4, has broad bipartisan support. President Obama expressed support for repeal of the requirement during his State of the Union address.

Nonprofit Resources Regarding the Oct. 15 Deadline

Time is running out for small nonprofits facing loss of tax-exempt status because they have not filed Form 990-N or Form 990-EZ for three consecutive years. The deadline for the IRS's one-time filing relief program is October 15, 2010. After that, nonprofits that are required to file a 990 and whose filings are at least three years in arrears will automatically lose their exemptions. To regain tax-exempt status, they will have to apply to the IRS all over again, a process that can take several months and requires payment of fees. To help you make sense of the rules and regulations surrounding this program, GuideStar is offering you a few resources:

• GuideStar Resource Center: includes articles and links to keep you updated in this ongoing process.
• IRS Communications Toolkit: includes facts outlining the situation, a list of organizations IRS records show are at risk, a YouTube video, and a widget for posting on Web sites.
• Guide Star Charity Check: includes information on exemption status of organizations and is updated as more information from the IRS becomes available.
  

IRS Announces One-Time Relief Program for Small Tax-Exempt Organizations

The IRS recently announced a program that will give small tax-exempt organizations, which have been delinquent in filing annual information returns, another chance to comply with the law and avoid losing their tax-exempt status. The one-time relief program provides small tax-exempt organizations until October 15, 2010 to comply with the annual filing requirements. While this program provides relief to small organizations, which are eligible to file either Form 990-N or Form 990-EZ, it is not available to larger public charities, which are required to file Form 990, or to private foundations, which must file Form 990-PF.

Click here to read the full article on nixonpeabody.com.

FREE Webinars Offered on IRS Filing Requirements for Charitable Nonprofits

The NY Council of Nonprofits' national partner, the National Council of Nonprofits, is offering two FREE webinars for you and your board members!

Get Ready, Get Set, Go! IRS Filing Requirements for Charitable Nonprofits
Two national webinars: February 23 and March 23, 2010

Register Now

Are you prepared for this year's tax filing deadline? Did you know that tax-exempt organizations could have their status revoked for not filing the annual Form 990? The National Council of Nonprofits will host two free webinars presented by the IRS for nonprofit organizations to learn about the resources available and answer questions about filing your IRS Form 990.

These webinars will include:

• Critical steps to take now in order to protect and preserve your tax exemption.
• Review of the filing requirements for nonprofit, tax-exempt organizations, and the consequences of not filing (or filing an incomplete) Form 990-series return. Tax-exempt organizations now stand to lose their tax-exempt status if they do not file the Form 990, 990-EZ, or 990-N (e-postcard) for three consecutive years-these revocations will begin in 2010).

"Learn from the Experts: What Forms Must Nonprofit, Tax-Exempt Organizations File to Meet IRS Requirements and Preserve Tax Exempt Status?"

Tuesday, February 23
3:30 pm - 4:30 pm Eastern

• What forms are tax-exempt organizations required to file with the IRS annually?
• What information is required to be reported on the forms?
• Why your organization may need to file NOW, so that it won't lose its tax-exempt status
• How to file complete, accurate returns to avoid IRS penalties.

There is no charge for nonprofit organizations or their board members for these webinars. Advance registration is required by February 22, 2010.


"Hear from the IRS: What The IRS Has Learned After One Year With the Redesigned Form 990"

Tuesday, March 23
3:30 pm - 4:30pm Eastern

• What trends has the IRS observed in the first season of redesigned Form 990 filing?
• What mistakes are most commonly being made by nonprofits on the redesigned Form 990?
• What can a nonprofit do to streamline the filing process?
• What are the answers to frequently asked questions about completing the 990?

There is no charge for nonprofit organizations or their board members for these webinars. Advance registration is required by March 22, 2010.

IRS Says Number of Charities and Foundations Hit 1.2 Million

The Chronicle of Philanthropy reported that the number of charities and private foundations registered with the Internal Revenue Service has increased by more than 5 percent in each of the past two years, and now has reached a total of almost 1.2 million (as of 2008). This finding is according to figures released by the tax agency, which also found that the number of groups classified under Section 501(c)(3) of the Internal Revenue Code rose from 2007 to 2008 by 58,548, or 5.2 percent — one of the highest percentage increases in recent years. Read more here.