Tax extenders bill impacts exempt organizations
Posted On: 2-8-2016 | Posted By: Debbie Mathes, CPA
In late December, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. PATH includes several new provisions affecting tax-exempt organizations. In addition, PATH makes permanent a number of federal tax provisions that are beneficial to certain tax-exempt organizations.
New provisions affecting tax-exempt organizations
Notice of formation requirement for social welfare organizations. The PATH Act includes a new application requirement for 501(c)(4) organizations that was to take effect 180 days after enactment, but an IRS notice delays the requirement to a date to be set forth by temporary regulations.
Previously, organizations intending to operate under Section 501(c)(4) were not required to file an exemption application, but could “self-declare” exempt status or complete Form 1024, Application for Recognition of Exemption Under Section 501(a) in order to receive an IRS determination letter recognizing their exempt status.
PATH repeals the voluntary application process for social welfare organizations and requires them to notify the IRS of their intent to operate under Section 501(c)(4). Organizations seeking social welfare status under Section 501(c)(4) after December 18, 2015, must, within 60 days of forming, provide the IRS with notice of their formation and their intent to operate as a Section 501(c)(4) organization.
The notice must include: (1) the organization’s name, address, and EIN; (2) the date on which and state in which the entity was organized; and (3) a statement explaining the organization’s purposes. There is also a user fee required with the notice. Within 60 days after submission of the notice, the IRS is required to provide a letter of acknowledgment of the registration. This notice does not grant the organization a favorable determination, however. If the organization seeks a favorable determination letter, it still must complete and submit an exemption application using Form 1024.
Additionally, social welfare organizations formed on or before PATH’s enactment date (December 18, 2015) that have never filed a Form 1024 or at least one Form 990-series return or notice are also subject to the new notice requirements, but such organizations are given 180 days from December 18, 2015 (June 15, 2016), to file the notice of registration with the IRS. The notice requirements do not apply to organizations that formally applied for recognition of their tax exempt status on or before December 18, 2015. Any entity that fails to timely file a notice is subject to penalties of $20 per day, up to $5,000.
On January 19th, the IRS issued Notice 2016-09 which has delayed the notification submission for both newly established social welfare organizations as well as for those in existence on December 18, 2015, which were previously required by PATH to give notice by June 15, 2016. The new timeline will be established based upon issuance of temporary regulations that will prescribe the manner in which social welfare organizations must notify the IRS of their intent to operate under section 501(c)(4). The new due date will be at least 60 days from the date temporary regulations are issued. The notice further stated that social welfare organizations should wait to submit information until the regulations are issued.
Gift tax and contributions to civic leagues, labor organizations and business leagues. PATH provides that contributions of money or property made after December 19, 2015, to organizations described in Section 501(c)(4), Section 501(c)(5) or Section 501(c)(6) are not subject to gift tax. This will help to provide greater certainty to donors making contributions to such organizations.
Charitable contributions to agricultural research organizations. PATH provides that certain agricultural research organizations will now be treated much like medical research organizations. As a result, qualifying agricultural research organizations will be considered to be public charities and certain charitable contributions to these entities will qualify for the 50% deduction limitation for donors.
Permanent provisions affecting tax-exempt organizations
PATH also makes permanent a number of federal tax provisions that directly affect tax-exempt organizations.
IRA tax-free distributions for charitable purposes for those age 70 1/2 or older. A taxpayer who is aged 70 1/2 or older may exclude up to $100,000 from gross income for qualified charitable distributions made from an IRA. Spouses can each make their own separate contribution annually. The distribution must be made directly to a charitable recipient that is recognized by the IRS as tax-exempt. Distributions to certain charitable organizations, however, are not excludible from gross income. These include private foundations, Section 509(a)(3) supporting organizations and donor advised funds.
In addition, qualifying taxpayers are allowed to apply these charitable distributions towards their minimum distribution requirements.
PATH now makes this exclusion permanent for distributions made after December 31, 2014.
Certain payments to controlling exempt organizations. PATH makes permanent the favorable tax treatment of certain payments by controlled entities to their controlling exempt organization. The Internal Revenue Code generally treats certain payments (interest, rent, royalties and annuities) paid to tax-exempt organizations from controlled entities as unrelated business taxable income.
With regard to any payments made under binding contracts in effect on August 17, 2006 (or a renewed contract with substantially similar terms), revised Code Section 512(b)(13) applies only to the portion of payments that exceed an arm’s-length price, and in addition to the tax, a 20% penalty applies to this excess. PATH reinstates this rule and makes it permanent for payments received or accrued after December 31, 2014.
PATH also imposes new procedural requirements which offer clarity to certain tax-exempt organizations facing adverse determinations. Specifically, PATH requires the IRS to create and adopt administrative appeal procedures for tax-exempt organizations facing an adverse determination, as well as allowing tax-exempt organizations or organizations seeking tax-exempt status the right to obtain declaratory judgments from a federal court, a right that formerly was only available to 501(c)(3) organizations or applicants. These new remedies will provide greater recourse to organizations that have not received final determination letters from the IRS or whose tax-exempt status has been revoked or denied.
We recommend tax-exempt organizations carefully review the new legislation to ensure compliance with the modifications. Please contact your WK advisor (573) 442-6171 or (573) 635-6196 to discuss.