2022 Tax News for Nonprofit Organizations

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat podcast.

HOST: Today, we are going to talk about topical developments and updates regarding Not-for-Profit (NFP) organizations. We have discussed this before, but many tax professionals and financial people serve on boards of tax-exempt organizations without fully appreciating the tax rules involved.

HOST: Joining us is Amanda Adams, our Managing Director and leader of the firm’s tax services for Not-for-Profit organizations. How are you doing today, Amanda?

AMANDA ADAMS: Great, thanks Brooks.

HOST: Where are you located today?

AMANDA ADAMS: I am in Atlanta, Georgia. It is very cold today, with temperatures in the 30s, so it is not exactly "Hotlanta" right now.

HOST: I am supposed to be there on Monday, so I hope it warms up a bit. Joining me as always is Sarah McGregor from Greenville. How is life treating you, Sarah?

SARAH MCGREGOR: Life is good here. It is nice to have shorter fall days and excellent peak leaf weather coming soon.

HOST: Are you going to any football games?

SARAH MCGREGOR: I am not going to any games this fall, but I am excited that it is finally football season. My weekends are taken up watching football.

HOST: There have been some great SEC football games this year.

SARAH MCGREGOR: There certainly have. While not all have involved South Carolina, some of the games have been very exciting.

HOST: Let’s dive in. The Inflation Reduction Act (IRA) of 2022 includes provisions that bring clean energy tax credits and incentives to Not-for-Profit organizations.

HOST: Following up on our college football banter, we will also discuss Name, Image, and Likeness (NIL) student athletes. We will also touch on a few other standard items.

HOST: Amanda, regarding the Inflation Reduction Act (IRA), there are significant tax credits available. How will these benefit a tax-exempt entity that does not pay taxes?

AMANDA ADAMS: In the past, exempt organizations often did not benefit from these credits unless they had Unrelated Business Income Tax (UBIT) to offset. Sometimes they partnered with for-profit entities that would work with them on a project and potentially charge them less because they would benefit from the credits.

AMANDA ADAMS: Under this new act, these credits are refundable. Exempt organizations can receive a tax refund even when they do not owe tax, which is a great benefit for these projects.

HOST: I believe the credits are also transferable, so they can sell the credit to someone else. This makes them valuable to a tax-exempt organization in a way they were not before.

HOST: We also cannot forget the Employee Retention Credit (ERC). We continue to find more Not-for-Profit entities that can take advantage of that against payroll taxes.

HOST: Another portion of the Inflation Reduction Act (IRA) involves new funding for the IRS to close the tax gap. Amanda, what impact do you see this having on Not-for-Profit organizations?

AMANDA ADAMS: One of the main challenges for the IRS is its antiquated technology. I hope they spend the majority of this budget upgrading their systems.

AMANDA ADAMS: Exempt organizations have had trouble lately with information not being updated properly across various divisions of the IRS. If these systems work correctly, organizations should see fewer improper notices.

AMANDA ADAMS: Hopefully, we will also see more skilled professionals answering the phones to help with questions. It is hard to say if this will lead to more examinations, but the IRS is focusing on using data to track interactions between High-Net-Worth Individuals and private foundations.

HOST: Looking at examinations from 2021, can you tell us about the results and what the IRS was looking for?

AMANDA ADAMS: The examination rate for exempt organizations is still low, at about 0.17%. There were approximately 3,300 cases closed during that fiscal year, with fewer than 100 proposed revocations of exempt status.

AMANDA ADAMS: They primarily looked at filing requirements and whether organizations were filing the correct Form 990. They also scrutinized Unrelated Business Income (UBI) reported on Form 990-T.

AMANDA ADAMS: Specific strategies included looking at hospital organizations where unrelated business expenses greatly exceeded income. They also reviewed social clubs to ensure they were not reducing taxable investment income with losses from non-member activities.

AMANDA ADAMS: Finally, they are looking at private benefit and inurement, as well as organizations that converted from for-profit to Not-for-Profit status to ensure they are still operating correctly.

HOST: Form 1023-EZ has been in the news lately. What is going on with that, Amanda?

AMANDA ADAMS: Form 1023-EZ was created a few years ago to help the IRS with a backlog of 90,000 annual exemption applications. It was designed for very small organizations with revenue under $50,000.

AMANDA ADAMS: Unlike the full Form 1023, the EZ version requires very little information and no organizing documents. However, people have taken advantage of this system to create sham charities.

AMANDA ADAMS: The IRS is under fire because while the process is fast, it is resulting in organizations receiving exempt status that should not have it.

HOST: Now for a topic I am excited about: college sports and Name, Image, and Likeness (NIL). Every sports fan knows the topic, but many donors are interested as well.

HOST: Cherry Bekaert does a lot of work with universities and higher education foundations. What are you seeing regarding NIL, Amanda?

AMANDA ADAMS: Some institutions are on the forefront and moving forward with the times, while others are waiting to see the consequences.

AMANDA ADAMS: Institutions must consider that their exempt status is based on educational purposes and the promotion of amateur sports. Compensating athletes raises questions about whether these are still educational purposes or if the athletes are now professionals.

AMANDA ADAMS: We will have to wait and see. There have been exceptions for institutions in the past, such as the qualified sponsorship rules that prevented certain payments from being treated as Unrelated Business Income (UBI).

HOST: Can a foundation actually make an NIL payment directly, or must it come from an outside corporation?

SARAH MCGREGOR: Most institutions are setting up separate organizations to handle NIL funding. This keeps it separate from existing athletic foundations and protects the university's exempt status.

AMANDA ADAMS: Yes, some are set up as separate Not-for-Profits, while others are taxable joint ventures or partnerships. In some cases, the university does not participate at all.

HOST: A big takeaway is that if you are in this space, looking at your entire structure is a prudent step. I am curious how the IRS will handle exemption status for separate NIL entities.

HOST: Amanda, as you prepare for the November 15 deadline, what are you seeing regarding alternative investments?

AMANDA ADAMS: There is a misconception that alternative investments are not a problem for tax-exempt organizations. Unfortunately, that is not the case.

AMANDA ADAMS: Nonprofits are still subject to tax on Unrelated Business Income (UBI). If an alternative investment is structured as a partnership, the character of the activities flows through to the investor.

AMANDA ADAMS: This can trigger UBI from business operations or debt-financed property. Many organizations are unaware of this because the disclosures are buried in K-1s that they might not even download from portals.

AMANDA ADAMS: Additionally, indirect investments in foreign entities can create onerous foreign filing requirements. Penalties for missing these international reports can be severe.

HOST: Looking forward, there are a couple of pieces of legislation that have been introduced. Sarah, do you want to talk about those?

AMANDA ADAMS: The Universal Giving Pandemic Response and Recovery Act hopes to extend the universal charitable deduction for non-itemizers through 2022. This is important because the Tax Cuts and Jobs Act (TCJA) significantly reduced the number of taxpayers who itemize.

AMANDA ADAMS: The other is the Not-for-Profit Sector Strength and Partnership Act of 2022. This aims to increase communication between the Not-for-Profit sector and government agencies to improve data collection and awareness of how laws affect the sector.

HOST: Amanda, do you have any final comments or observations?

AMANDA ADAMS: Make sure you are up to date on your Form 990 filing requirements. We often see cases where a treasurer claimed to handle filings, but the organization’s exempt status was revoked for non-filing.

HOST: Remind us of the due dates for a calendar-year tax-exempt organization.

AMANDA ADAMS: The original due date is May 15, and an automatic six-month extension makes the final due date November 15.

SARAH MCGREGOR: I am glad the Inflation Reduction Act (IRA) considers how Not-for-Profit organizations and government agencies can benefit from energy credits. They can be a strong advocate for moving these initiatives forward.

HOST: Excellent point. We have good tax incentives in the Not-for-Profit space, including energy credits, the Employee Retention Credit (ERC), and Section 179D.

HOST: That concludes our discussion. Thank you for listening. As a disclaimer, we are not providing tax advice; please consult with your tax advisor, hopefully at Cherry Bekaert.

HOST: Specifically, reach out to Amanda Adams at cbh.com for Not-for-Profit tax issues. Check our website at cbh.com for the latest guidance. Please like, share, and subscribe.

HOST: Thank you, Amanda, and thank you to our listeners. Let’s call it a day and go forth in peace.