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Nonprofit Advisor Spring 2015 Windes Nonprofit Advisor The Windes Nonprofit Advisor is a periodic technical publication focusing on the tax, regulatory, and accounting issues that nonprofit organizations
Nonprofit Advisor Spring 2015 Windes Nonprofit Advisor The Windes Nonprofit Advisor is a periodic technical publication focusing on the tax, regulatory, and accounting issues that nonprofit organizations routinely confront. On the tax side, the Windes Nonprofit Group ( Group ) possesses experience in preparing and reviewing Forms 990, 990-T, 990-PF, and state tax-exempt forms, in addition to having experience in the preparation and filing of both federal and state tax exemption applications for public charities, private foundations, and other exempt organizations. Additionally, the Group can assist in providing valuable guidance (governance / reasonable compensation documentation / public support test / special events / lobbying / transactions with related parties) to nonprofit organizations. On the audit side, the Windes Nonprofit Group prepares audited financial statements and ERISA audits for over 80 nonprofit organizations. For retirement plans, Windes has experts on staff for 403(b) plan administration and compliance, including plan document issues, Form 5500 preparation and filing, non-discrimination testing and government compliance programs. The Windes Nonprofit Group is composed of the following individuals who are dedicated to providing nonprofit organizations with high-level tax, regulatory and accounting consulting, tax compliance services, and financial statement audit and assurance services: Ron Kulek, CPA Lance Adams, CPA Tom Huey, CPA Richard Green, CPC, APA Donita Joseph, CPA, MBT Amy Vaughn, JD, CPA, LLM Ryan Fischer, JD Cherie Romar Audit Partner Audit Partner Audit Senior Manager Employee Benefit Services Partner Tax Partner Tax Senior Manager Tax Manager Tax Staff Please do not hesitate to contact any member of the Windes Nonprofit Group toll free at 844.4WINDES ( ) or via at 1 Recent IRS Activity Regarding Nonprofits The IRS will continue to look for ways to use a data-driven, decision-making approach to assess risk of noncompliance. The Form 990 contains a wealth of information. In a recent Tax-Exempt and Government Entities Program Letter, the IRS stated, We will integrate data into our daily work to better understand and meet customer needs, improve program delivery, identify and mitigate potential operational and compliance risks, and enhance the transparency of our decision-making process. This is buttressed by comments of IRS officials at a recent nonprofit seminar regarding having a wealth of data and looking at many avenues available for using the data to enhance compliance. Given the breadth of information required on Form 990, it is not surprising that the IRS would look first to this form to identify risk. Schedules and questions regarding governance, transactions with interested parties, and various revenue streams should be paid particular attention to present a complete and accurate return, as well as mitigate potential red flags. Furthermore, the IRS can learn much about an organization s activities via the organization s website and social media. In fact, the IRS denied recognition of exemption to one organization in 2014, taking into consideration remarks made by the founder in social media. Information in the media inconsistent with your organization s operations reported to the IRS may draw scrutiny. Looking into this year, the IRS will maintain several compliance check projects. These projects include the examination of organizations with high amounts of foreign grant expenditures, church tax inquiries, compliance checks of entities filing Form 990-N, analysis of organizations that have self-declared themselves tax-exempt without seeking a determination from the IRS, and examinations of charitable spending, compensation transparency, political activity, and unrelated business income within exempt organizations. The IRS authorized the reorganization of its Tax Exempt and Government Entities Division (TE/GE). The technical responsibility for preparing revenue rulings, revenue procedures, and certain other forms of published guidance, and issuing technical advice and certain letter rulings, will be shifted from the TE/GE to the IRS Office of Chief Counsel in January. This decision followed changes in management at TE/GE after the controversial handling of requests for tax-exempt status from 501(c)(4) organizations. The TE/GE will retain the authority to issue determination letters, including requests for recognition of tax-exempt status and determinations regarding the other miscellaneous determinations. We expect this shift to be procedural and have little impact on rulings in general. If you have questions regarding your organization s activities in connection with any of the topics discussed above, please contact Ryan Fischer at or by phone at 844.4WINDES ( ). Ryan Fischer, JD Senior Manager 2 Business Leagues and Social Clubs: Do Not Jeopardize your Exempt Status The IRS released a number of rulings in 2014 affecting business leagues and social clubs. While these types of nonprofits play by a different set of rules from public charities, there are ample ways in which a business league or social club can lose its tax-exempt status or generate taxable income. Business leagues Business leagues are recognized as exempt from federal income tax under Section 501(c)(6) of the Code. Business leagues include chambers of commerce, boards of trade, and similar organizations. They are an association of persons having a common business interest, the purpose of which is to promote the common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. They are membership organizations and their activities must be directed to the improvement of business conditions of one or more lines of business and not perform particular services for individual persons. Common activities that may threaten business leagues exempt status are 1) the extent of involvement of members, and 2) commercial endeavors whether the league directly competes with a for-profit line of business or otherwise provides particular services for the benefit of members. A business league must have a meaningful extent of membership support. The IRS may look to the members voices in the operations, as it did in a recent application. i In that ruling, the IRS found that the organization was controlled by one individual and there was no indication that other members had a voice in the organization. In another ruling, the IRS stated that an organization failed to achieve exemption because its nonvoting membership was not involved at a meaningful level. ii Support is generally in the form of dues from members, but there are exceptions. Nonmember support should be analyzed for both a focus on exempt status as well as potential unrelated business taxable income. As demonstrated in a recent ruling, support in the form of ticket sales to the general public may be related to an organization s exempt purpose. A business league was organized to promote the enjoyment and involvement in a certain sport and to contribute to the sport s growth by holding various tournaments throughout the year. The IRS compared the facts to an example in the Treasury Regulations, iii whereby income derived from admission charges to performances before audiences, when such performances contribute importantly to the accomplishment of the organization's exempt purposes, does not constitute gross income from unrelated trade or business. Providing services to members can be fatal to a business league s exempt status. For example, the IRS recently found that an organization having real estate professionals as members did not qualify for exemption where the organization s activities primarily consisted of contracting on its members behalf to provide unlimited access and use of the MLS, a national listing service. iv Services by a group of physicians to negotiate managed care contracts, facilitate group purchasing discounts, and conduct a centralized credentialing process were not activities directed to the improvement of business conditions of one or more lines of 3 Business Leagues and Social Clubs - Don t Jeopardize your Exempt Status (continued) business, but rather the performance of particular services for individual persons. v In another ruling, the IRS held an organization did qualify as exempt because it marketed branded products and performed particular services for its members. There, the organizers intended to create a globally competitive software platform. Irrespective of the industry benefit, the IRS stated that the organization engaged in a regular business ordinarily carried on for profit and was marketing a branded product. vi Finally, two rulings were released in 2014, denying exemptions to professional clubs where members exchange referrals because they benefit the individual members rather than a line of business. vii Social Clubs Social clubs, like business leagues, are membership organizations primarily supported by funds paid by their members for social, recreational, or other non-profitable purposes. They are recognized as exempt under Section 501(c)(7). Social clubs are an exempt classification, not necessarily as an intention of the federal government to promote a particular activity, but so as not to punish individuals who choose to pool their resources for social or recreational activities they may otherwise partake alone. A social club must meet a gross receipts test in order to maintain its exemption. In order to meet the gross receipts test, an organization can receive up to thirty-five percent (35%) of its gross receipts, including investment income, from sources outside its membership without losing its tax-exempt status. Within this 35% amount, not more than fifteen percent (15%) of the gross receipts should be derived from the use of a social club's facilities or services by non-members. In a recent case, the IRS found that an organization had exceeded the 15% gross receipts standard for non-member income on a continuous basis for at least three years, and there was no one single or unusual event that caused the club to exceed the 15% threshold. viii The same result occurred where a club received funding from the public via a swap meet and car show to finance activities for the pleasure and recreation of its members. ix The organization also advertised the swap meet to the public, which the IRS considered prima facie evidence of engaging in business and of not being operated exclusively for pleasure, recreational or social purposes. The IRS regards commingling in person as a requirement for a social club to obtain exempt status. In a recent ruling, the IRS found that an internet-only organization with public access, e.g., unlimited membership, did not constitute a limited membership and did not provide for the requisite commingling to constitute a material part of its activities. x Furthermore, the members did not exercise control or have a voice in management of the club. The same reasoning was applied in the IRS denial of exemption to an on-line sorority. xi If you have questions regarding your organization s activities in connection with any of the topics discussed above, please contact Ryan Fischer at or by phone at 844.4WINDES ( ). i PLR ii PLR iii Treas. Reg. Sec (d)(4)(i) iv PLR v PLR vi PLR vii PLRs and viii PLR ix PLR x PLR xi PLR Ryan Fischer, JD Senior Manager 4 New Uniform Grant Guidance: The Super Circular The Code of Federal Regulations (the Code) is a codification of the general and permanent rules published in the Federal Register by the executive departments and agencies of the federal government. The Code is divided into 50 titles that represent broad areas subject to federal regulation. Each title is divided into chapters, and each chapter is further divided into parts covering specific regulatory areas. Title 2 of the Code of Federal Regulations, Grants and Agreements, is referred to as the new Uniform Grant Guidance, or Super Circular. The overall goals of the new Uniform Grant Guidance are to increase the efficiency and effectiveness of federal programs, eliminate unnecessary and duplicative requirements, focus in on areas that emphasize achieving better outcomes at a lower cost, focus on elimination of improper payments, fraud, waste and abuse, and streamline eight Office of Management and Budget (OMB) Circulars into one document including Circular A-133 and the various Cost Principles. Organizations receiving federal grants and awards need to be aware of the Uniform Grant Guidance due to many significant changes in compliance requirements. Superseded Circulars The following OMB Circulars are superseded by the Uniform Grant Guidance: A-21, Cost Principles for Educational Institutions A-87, Cost Principles for State, Local, and Indian Tribal Governments A-89, Federal Domestic Assistance Program Information A-102, Awards and Cooperative Agreements with State and Local Governments A-110, Uniform Administrative Requirements for Awards and Other Agreements with Institutions for Higher Education, Hospitals, and Other Nonprofit Organizations A-122, Cost Principles for Non-Profit Organizations A-133, Audits of States, Local Governments and Non-Profit Organizations Sections of A-50, Audit Follow-up, related to Single Audits Significant Changes In consolidating the various circulars into one document, key changes were made in the areas of internal control, procurement, performance reporting, subrecipient monitoring, effort reporting, methods for collection, transmission and storage of information, and indirect costs. Organizations receiving federal grants and awards need to review their current policies and procedures to ensure they comply with the new Uniform Grant Guidance requirements. 5 New Uniform Grant Guidance - The Super Circular (continued) A summary of the key changes in the areas of internal control, procurement, subrecipient monitoring and methods for collection, transmission, and storage of information follows: Internal Control Must establish and maintain effective internal control over the federal award that provides reasonable assurance that the entity is managing the federal award in compliance with federal statutes, regulations, and the terms and conditions of the award. Internal controls should be in compliance with Standards for Internal Control in the Federal Government (the Green Book ) issued by the Comptroller General of the United States and the Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Must comply, evaluate and monitor compliance with federal statutes, regulations and the terms and conditions of the federal awards. Must take prompt action when instances of noncompliance are identified, including noncompliance identified in audit findings. Must take reasonable measures to safeguard protected personally identifiable information and other information the federal awarding agency or pass-through entity designates as sensitive. Procurement Must maintain oversight to ensure that contractors perform in accordance with the terms, conditions, and specifications of their contracts or purchase orders. Must maintain written standards of conduct covering conflicts of interest and governing the performance of its employees engaged in the selection, award and administration of contracts. Must maintain written standards of conduct covering organizational conflict of interest. Must avoid acquisition of unnecessary or duplicative items. Encourage use of excess or surplus property. Encourage inter-entity agreements for common or shared goods and services. Must maintain records sufficient to detail history of procurement. All procurement transactions must be conducted in a manner that provides full and open competition consistent with this section of the Super Circular. Must have written procedures for procurement. 6 New Uniform Grant Guidance - The Super Circular (continued) Must use one or more of the following methods of procurement: 1. Micro-purchases 2. Use of small purchases threshold 3. Formal sealed bid 4. Competitive proposals 5. Non-competitive proposals (very limited) Subrecipient Monitoring Largely unchanged Contractor replaces vendor Must evaluate each subrecipient s risk of noncompliance Monitoring plan dependent upon assessment of risk May use fixed amount recipient awards up to simplified acquisition threshold ($150,000) with approval from federal awarding agency. The prime must issue to the subrecipient a management decision within six months of the A-133 report submission to the Federal Clearing House for findings that relate to the federal award made to the subrecipient. The Cognizant Agency will issue a management decision for findings that impact multiple federal agencies. Methods for collection, transmission and storage of information Federal awarding agencies and non-federal entities should, whenever practicable, collect, transmit, and store federal award-related information in open and machine readable formats. Federal awarding agencies or pass-through entities must always provide or accept paper versions of federal award-related information to and from the non-federal entity upon request When original records are electronic and cannot be altered, there is no need to create and retain paper copies. When original records are paper, electronic versions may be substituted through the use of duplication or other forms of electronic media provided that they are subject to periodic quality control reviews, provide reasonable safeguards against alteration, and remain readable. 7 New Uniform Grant Guidance - The Super Circular (continued) The Uniform Guidance also contains changes for effort reporting and audit requirements. Entities will need to implement the new administrative requirements and cost principles for all new federal awards made after December 26, 2014, and to additional funding to existing awards made after that date. For more information or questions, please contact Ron Kulek at or toll free at 844.4WINDES ( ). Ron Kulek, CPA Partner 403(b) Plans: IRS Checklist In an effort to assist nonprofit plan sponsors with the proper operation of their tax-qualified retirement programs, the IRS has provided a checklist of plan requirements. A similar checklist was provided for 401(k) plans, which is yet another indication that the IRS intends to regulate 403(b) plans the same as their for-profit counterparts. The IRS notes that this brief checklist is not intended as a substitute for a full annual plan review. While the checklist is only a sampling of the questions that will need to be answered in an IRS examination, these are among the first ones that will be asked. It is always less expensive to correct problems on a volunteer basis rather than when required following an audit. If unsure of any questions, or if the answer to any of the ten questions on the checklist is no, you should immediately contact us for clarification and the necessary correction of any plan issues. View the 403(b) Plan Checklist: For more information or questions, please contact Richard Green at or by phone at 844.4WINDES ( ). Richard Green, CPC, APA Partner 8 Windes is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes to deliver exceptional client service in each engagement. Since 1926, we have gone beyond traditional services to provide proactive solutions and the highest level of capabilities and experience. The Windes team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clien
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