Form 990 Reporting In Depth: Understanding Key Schedules ...media.straffordpub.com/products/form-990-reporting... · 10/10/2013 · Oct. 10, 2013 Brian, YH Advisors [email protected]

Form 990 Reporting In Depth: Understanding Key

Schedules and Forms, Adjusting to 2013 IRS Revisions

THURSDAY, OCTOBER 10, 2013, 1:00-2:50 pm Eastern

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Form 990 Reporting In Depth: Understanding Key Schedules and Forms, Adjusting to 2013 IRS Revisions

Wendy Kohno, 990specialist.com

[email protected]

Oct. 10, 2013

Brian, YH Advisors

[email protected]

John R. Washlick, Buchanan Ingersoll & Rooney

[email protected]

mailto:[email protected]

mailto:[email protected]

Today’s Program

Introduction and Overview

[Wendy Kohno]

Return Preparation Issues

[Wendy Kohno]

Challenging Issues in Preparing Form 990

[Brian Yacker]

Challenging Issues for Healthcare Organizations and Other

Large, Complex Organizations

[John R. Washlick]

Slide 7 – Slide 14




Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

INTRODUCTION AND OVERVIEW


Form 990 Who, What, When, Why

Most organizations exempt from income tax under section 501(a) must file some type of information

return…

Except for…

Certain religious organizations

Certain governmental organizations

Certain political organizations

Foreign organizations with limited gross receipts

Certain organizations that file different kinds of annual returns

Who

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The Form 990 is an information return used by tax-exempt organizations, nonexempt charitable trusts,

and section 527 political organizations to provide the IRS with the required information.

What

Gross Receipts Total Assets Form

Under $50,000 NA 990-N

Less than $200,000 AND

Less than $500,000 990-EZ

Not meeting the above requirements 990

10

File Form 990 by the 15th day of the 5th month after your accounting period ends

When

Year-end Due Date

1st ext - auto

2nd ext – need approval

December May 15th

Aug 15th Nov 15th

March Aug 15th

Nov 15th Feb 15th

June Nov 15th

Feb 15th May 15th

September Feb 15th

May 15th Aug 15th

11

Why

The penalties can be disastrous!

Filing Late a $20/day penalty is assessed against the organization, not to exceed the lesser of $10,000 or 5% of gross receipts Organizations with annual gross receipts exceeding $1 million are subject to a penalty of $100/day up $50,000/return.

Incomplete Return

The above penalties can also be charged for an incomplete return. i.e. failing to complete a required line or a required part of a schedule

Incorrect Return

The above penalties can also be assessed if the return contains incorrect information

Non filing If an organization fails to file an annual return or submit a notice as required for 3 consecutive years, its tax-exempt status is automatically revoked

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Why…contd

You might want to get help in your preparation…

Since the IRS changed the Form 990 in 2008 (1st time in 28 years) to address the increased demand for accountability and transparency, this has made the preparation of the return an enormous task. Although the IRS has updated their website http://www.irs.gov/Charities-&-Non-Profits and posted numerous videos on youtube.com/irsvideos to help you According to their instructions it would take: • 119 hours for recordkeeping • 16 hours to learn the Form 990 • 22 hours to prepare the Form • And 1 hr and 4 min to copy, assemble and send the form

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http://www.irs.gov/Charities-&-Non-Profits







Highlights of the2012 changes

• Remind filers not to include their social security numbers on Form 990 because this is a public document

• Clarify that only hospital organizations should attach a copy of their most recent audited financial statements

• Those organizations that obtained audited financial statements, must now complete Schedule D, parts XI and XII.

• Part VII, Compensation Section A, Column B asks for reporting of average hours per week worked for related organizations, in addition to hours for the filing organization.

• Statement of Revenue – clarifies how to report payment card and third party network transactions reported on Form 1099k

• Functional Expenses – Professional Fees – Other – if the amount on this line exceeds 10% of total functional expenses, must list the type and amount of each expense.

• Professional Fundraising services – includes the preparation of applications for grants or other assistance.

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RETURN PREPARATION ISSUES FOR FORM 990


Part VIII. Statement of Revenue

Cash vs. Non-cash Donations

Generally, report cash and noncash amounts received as voluntary contributions, gifts, grants or other similar amounts from the general public, governmental units, foundations, and other exempt organizations. Contributions are payments for which the donor does not receive value in return. Noncash contributions are property, tangible or intangible, other than money (securities, real estate, works of art, collectibles, household goods, copyrights, donated items that are sold immediately after donation. Noncash contributions do not include volunteer services or donated use of materials, facilities, or equipment. If you received more than $25,000 in non-cash contributions or you received contributions of art or historical treasures, you must file Form M.

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Part VIII. Statement of Revenue, contd.

Cash vs. Non-cash Donations Although GAAP requires the recognition of in-kind services (non cash) and for recording in-kind services would help for budget purposes, for purposes of the Form 990, the value of donated services or use of materials, equipment, or facilities may not be reported. However, you can report the amount of donated service, or use of materials, equipment or facilities in Part III. Statement of Program Service Accomplishments - Revenue Why is this so confusing? Comparability among organizations. The IRS would like to compare similar sized organizations and draw meaningful conclusions. An organization that receives a Form 1099-K reporting a “gross amount” of payment and third party network transactions (paypal, credit card) should report these amounts in the same manner as cash. i.e. Some payments may be contributions and some are sales of inventory items. 17



Line 1a - Federated Campaigns – list contributions received indirectly from the public through solicitation campaigns conducted by federated fundraising agencies (i.e. United Way) Line 1b – Membership Dues – List only those contributions from the public rather than payments received from an affiliated organization. Membership dues can also consist of both contributions, payment for goods and services or for value received.

If part of the membership dues is for goods and services, that portion should be included in line 2, Program Service Revenue. The portion that exceeds the value is a contribution. Also if Membership dues exceed $75, the disclosure rules of quid pro quo apply. (payments made partly as a contribution and partly in consideration of goods and services) Organizations are required to inform donors in writing 1) the amount of the contribution deductible for tax purposes and 2) provide a good faith estimate of the value of goods furnished)

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Line 1c – Fundraising Events – contributions received from fundraising events (in which no value was given in consideration).

i.e. the organization may charge $100 registration fee for a golf tournament where the round of golf is valued at $60, the contribution is $40 i.e. the organization has a gala with $100 ticket price. $30 is the FMV of the dinner, so $70 would be the contribution

Line 1d – Related Organizations – report amounts contributed by related organizations.

19



Line 1e – Government Grants – Enter the amount of contributions in the form of grants or similar payments from local, state, federal as well as U.S. possessions. It does not matter whether it is labeled a Grant or Contract. The determining factor is whether Its primary purpose is to enable the organization to provide a service to, or maintain a facility for, the direct benefit of the public rather than to serve the direct and immediate needs of the governmental unit.

i.e. payments by a governmental unit for the construction or maintenance of library or museum facilities open to the public.

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Part VIII. Line 8a - Fundraising

Line 8a – Gross income from fundraising events, not including the amount of contributions (reported in 1c above and in the description of 8a $_____) If the amount in box 8a and 1c is more than $15,000, then answer yes to Part IV, Line 18 (Did the organization report more than $15,000 of fundraising event gross income and contributions?) and complete Schedule G, part II Fundraising events may include: dinner/dances, door-to-door sales of merchandise, concerts, carnivals, sports events and auctions. Fundraising events DO NOT include: sales or gifts of goods or services of only nominal value, raffles or lotteries in which prizes have only nominal value, solicitation campaigns that generate only contributions. It also does not include events that further the organization’s exempt purpose even if they also raise funds.

21

Part VIII. Line 8a – Fundraising contd.

Line 8b – the cost of any items sold and the expenses that relate directly to the production of the revenue portion of the fundraising activity. In our dinner example, the cost of $30 would go in line 8b, while the indirect fundraising expenses would be put in the functional expenses.

22

Part VIII. Line 8a – Fundraising contd.

i.e. If an organization receives a donation of a home theatre system with a FMV of $5k at the time of donation, sells the system for $7500 at an auction and incurs $500 in costs related to selling the system at auction it should be reported as follows:

Line Amount

Line 1c – contributions from fundraising events $2500

Line 1f – all other contributions $5000

Line 1g – noncash contributions $5000

Line 8a – gross income from fundraising events $5000

Line 8a parenthetical (contributions on line 1c) $2500

Line 8b - direct expenses $5500

Line 8c – Net income from fundraising ($500)

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Schedule G –Gaming

Many exempt organizations operate gaming activities probably to raise funds or socialize and foster fellowship. Whatever the reason, an organization conducting any type of gaming activity (bingo, raffles, scratch-offs, gambling…to name a few) should understand how this can affect it’s tax exempt status. A common misconception is that gaming is a “charitable” activity. It is not. It is a recreational activity and a business. A charity that conducts an insubstantial part of its activities as gaming will not jeopardize its tax status, but may be subject to Unrelated Business Income if it generates revenue, is regularly carried on and is substantial to the organization’s purpose. That being said, there is no hard rule as to what insubstantial means.

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Part III. Statement of Program Service Accomplishments

This is where an exempt organization will tell its story. It’s where you show how you have accomplished your exempt purpose. In line 1, indicate the mission statement adopted by the governing body.

In Lines 4a-4c, describe your 3 largest program services as measured by total expenses incurred. For 501c3s and 501c4s, you must enter the total expenses, total grants allocated and revenues derived from this activity. • Describe the accomplishments by specific measurements, i.e. Clients served, days

of care provided, number of session or events held, publications issued. • Describe the activity’s objective for now and the future Here you may include the amounts of donated services or use of equipment, materials or facilities. 25

Part VI. Governance, Management and Disclosure

This part requests information regarding the organization’s governing body and management, governance policies and disclosure practices. Federal law does not mandate practices, the IRS considers these policies to improve tax compliance and the absence of these may lead to activities inconsistent with the exempt status. FAQ: #6 – Did the organization have members or stockholders? For purposes of the Form 990, members are persons who have the right to participate in the governance OR receive distributions. Members do not include governing body members. #8 – Did the organization contemporaneously document the meetings held or written actions undertaken during the year? The IRS recommends this procedure be adopted. Documented can mean approved minutes, email or similar writings for review and contemporaneous means the later of 1) the next meeting 2) 60 days after the date of the meeting. #11a – Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form? Answer “Yes” ONLY if a complete copy of the Final Form 990 (including schedules) was provided to each voting member of the governing board (paper or electronic) #11b - Describe in Schedule O the process, if any, used by the organization to review this Form 990. REQUIRED Include specifics about who conducted the review, when they conducted it, the extent of such a review. 26

Part VI. Governance, Management and Disclosure..contd

The IRS would like exempt organizations to adopt the following policies: • Conflict of Interest Policy • Whistleblower Policy • Written document and destruction policy Certain federal or state laws provide protection against whistleblower retaliation and prohibit destruction of certain documents. Ie. The Sarbanes-Oxley legislation generally does not pertain to tax-exempt organization, it does impose criminal liability on tax exempt organizations for (1) retaliation against whistleblowers that report federal offenses and (2) for destruction of records with the intent to obstruct a federal investigation.

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Part IX. Statement of Functional Expenses

There are often misconceptions as what is to be included in each line of the Functional Expenses. Here are a few: #5 – Compensation – This will be discussed later on the webinar #9 - Other employee benefits – Enter contributions that are not an incidental part of a pension plan and the cost of other employee benefits. i.e. You would report expenses for employee events such as a picnic or holiday party here. #11g – Other Fees and Services. Change in 2012…if the amount on line 11g exceeds 10% of total program expenses, the organization must list the type and amount of each expense. #13 – Office Expenses – enter amounts for supplies, telephone, fax, postage, delivery services, shipping materials, equipment rental, bank fees and general printing. #14 – Information Technology – enter amounts for information technology i.e. hardware, software, support, maintenance, infrastructure support (web site design and operations, virus protection, firewall maintenance) #16 – Occupancy – enter amounts for the use of office space. i.e. Rent, heat, light, utilities, property insurance, real estate taxes, mortgage interest. #21 – Payments to affiliates – Dues paid by a local organization to its affiliated state or national (parent) organization are reported here.

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Slide Intentionally Left Blank

MOST CHALLENGING ISSUES IN PREPARING FORM 990

Brian Yacker, YH Advisors

Prepared by YH Advisors, The Exempt Org Experts 31

Part V (Statements Regarding Other IRS Filings)

Objectives

o Alerts exempt organization to potential federal tax compliance and filing obligations beyond Form 990

Specific Part V Inquiries

o Line 1a – filing of Form 1099

• IRS focused on the filing of Form 1099 when required

Need to include the amount of Forms 1099 filed by reporting agents

Enhanced penalties for failure to file when required to do so

• IRS focused on worker classification issues

Determine whether enough control exists to be forced to classify a worker as an employee as opposed to as an independent contractor

Behavioral control

Financial control

Type of relationship

Make sure have enough contemporaneous documentation to support classification of independent contractors


Part V (Statements Regarding Other IRS Filings) cont’d

Specific Part V Inquiries (cont’d)

o Line 1b – filing of Form W-2G

• Required to file when conducting gaming events (bingo / raffles / poker nights)

o Line 1c – backup withholding for vendors and prize winners

• Make sure providing Form W-9 to recipients to obtain identification numbers

• See Internal Revenue Service Publication 1281

• 2012 Form 990 Instructions – can leave this line blank if not applicable

o Line 2 – compliance with employment information reporting

• e-filing requirements




o Line 3 – unrelated business income return reporting

• See Internal Revenue Service Publication 598

o Line 4 – foreign bank accounts

• Form TD F 90-22.1 filing requirements (June 30)

Not separately file with Internal Revenue Service; not attach to Form 990

Call IRS at 800-800-2877 if have filing questions

o Line 7 – charitable contributions which the public charity has received

• Quid pro quo contributions (see Internal Revenue Service Publication 1771)

If $75 (total contribution) threshold exceeded, public charity needs to provide donor with written statement disclosing how much of their contribution is deductible

Usually have quid pro quo contributions if conduct a special event

• Form 8282 filings (Lines 7c-7d)

Cross-check Schedule M to ascertain whether Form 8282 should have been filed

Cross-check receipts of Form 8283 from donors




o Line 7 – charitable contributions which the public charity has received (cont’d)

• Form 1098-C re contributions of cars, boats, planes (Line 7h)

Any contribution of a qualified vehicle with claimed value of more than $500 requires donees to furnish contemporaneous written acknowledgement to donor

Date of sale

Sales proceeds (charitable contribution deduction amount for donor)

Box 5 – if public charity intends to use vehicle to further exempt purposes

Issue within 30 days of the sale of the qualified vehicle by the public charity

TIGTA (Taxpayer Inspector General for Tax Administration) report

IRS not doing enough to ensure that donors of motor vehicles are properly following the law so that donors do not take unsubstantiated tax deductions

IRS not always matching 1098-C to the donor’s 1040

2012 Form 990 Instructions – can leave this line blank if not applicable

o Line 8 / Line 9 – donor-advised funds


Part VII (Compensation)

Objectives

o Promote transparency and provide complete picture of total compensation earned by insiders

• Insiders = Directors, Officers, key employees

o Respect privacy and security of individuals

• Not require reporting of any personal addresses of individuals

Definition of Officer

o Top financial official – person with ultimate responsibility for managing organization’s finances

• Probably not include someone with bookkeeping responsibilities

o Top management official – person with ultimate responsibility for implementing decisions of governing body or for supervising the management, administration, operation of organization


Part VII (Compensation) cont’d

Key Employees

o IRS broadened definition of a “key employee”

• One that possesses influence over key activities of the public charity (department head rule)

• Includes persons with overall responsibilities for the organization as a whole, as well as certain persons who manage or have authority to control more than 10% of the organization’s activities, assets, income, expenses, capital expenditures, operating budget, or compensation (“responsibility test”)

o Part VII reporting threshold

• Report key employees who earned in excess of $150,000 of reportable compensation on Part VII

• Top 20 reporting requirement for those who satisfy the responsibility test and the $150,000 reporting threshold

• Other key employee reporting issues

Includes insiders of disregarded entities

Key employee responsibility test may be met at any point during the applicable tax year

If individual is key employee for only part of year, filing organization is still required to report their full-year compensation amount (on a calendar-year basis) on Part VII

Please see the examples in the Form 990 Instructions



Section A

o All current Directors must be listed, even if not compensated

o All former Officers, key employees, and highly compensated employees must be listed if received in excess of $100,000 of reportable compensation from the exempt organization and all related organizations

• Reportable compensation = sum of Box 5 of Form W-2 (Medicare wages) and Box 7 of Form 1099-MISC (Nonemployee compensation)

Reportable compensation includes compensation reported on Form W-2, Box 1 or Box 5, whichever is greater

Only reportable compensation in excess of $10,000 paid by a particular related organizations must be reported

Instructions – report compensation on Part VII, Line 1a, for the calendar year ending within the organization’s fiscal year, including the insider’s compensation even if the fiscal year is utilized to determine which insiders must be listed on Part VII, Line 1a

Reportable compensation includes amounts paid to foreign persons from the filing organization or a related organization which is reportable on Form 1042-S

• Reporting thresholds not indexed for inflation

• Instructions provide for five-year look-back period



Section A (cont’d)

o All former directors must be listed on the compensation table if they received, in their capacity as a former director, in excess of $10,000 of reportable compensation from the exempt organization and all related organizations

o Five highest compensated employees (other than insiders) who received reportable compensation in excess of $100,000 are to be reported

• Should include those persons who are key employees but who need not be listed as key employees because their compensation is less than $150,000

Report as highly compensated employee (and not as key employee) in such an instance

o Persons reportable should be listed in the following order of priority: individual directors, officers, key employees, highest compensated employees, former such persons

o Column (A) does not include space for an address; Column (D) reports compensation reported on Form W-2 and Form 1099-MISC (on a calendar-year basis), Column (F) reports other compensation

• Part VII compensation reported on calendar-year basis; Part IX compensation expense reported on fiscal-year

o Must report related organization hours



Section A (cont’d)

o Other compensation = contributions to benefit plans, deferred compensation (estimates OK)

• Reported in Column (F)

Also reported in Columns (C) and (D) of Schedule J, Part II

• Report health, deferred compensation, and retirement plan benefits as other compensation regardless of amount

Deferred compensation should be reported at the time the services are rendered rather than when vested or paid

• Other benefits (excluding those listed immediately above) generally reported only if they exceed $10,000 in value for the year, per type of compensation

• Nontaxable benefits excluded under

132 of the Internal Revenue Code generally need not be reported



Part VII, Section A, Lines 3 – 5

o Line 3 - must complete Schedule J if the exempt organization listed any former officer, director, key employee, or highest compensated employee on the compensation table

o Line 4 - must complete Schedule J if the exempt organization (and all related entities) paid reportable compensation and other compensation in excess of $150,000 to any individuals listed on the compensation table

• Relevant when individual receives compensation from an unrelated organization for services rendered to the filing organization in capacity as an Officer, Director, or key employee of the filing organization

Report as compensation from the filing organization itself if it has knowledge of the arrangement

See the Form 990 Instructions for Part VII



Part VII, Section A, Lines 3 – 5 (cont’d)

o Line 5 - must complete Schedule J if any person listed on the compensation table received or accrued compensation from any unrelated organization for services rendered to the exempt organization

• IRS is aware that some organizations attempted to structure compensation arrangements through unrelated organizations to circumvent the prior form's reporting of executive compensation paid by the filing organizations and its related organizations

This has been attempted by arranging for compensation to be paid by organizations that do not fit within the definition of a related organization but with which the filing organization has some connection or relationship

Line 5 addresses this potential abuse by requiring the reporting of compensation paid by an unrelated organization to certain persons for services rendered to the filing organization pursuant to an arrangement that the filing organization knows to exist



Section B

o Line 1 - five highest compensated independent contractors who received more than $100,000 of compensation

• Not report compensation which independent contractors receive from related organizations

• Compensation does not include reimbursed expenses

• Completed on calendar year basis similar to Section A

• Still report on Section B even if not issue a Form 1099-MISC to the contractor

o Line 2 - total number of independent contractors (including those reported on Line 1 of Section B) who received more than $100,000 in compensation during the applicable tax year



Schedule A (Public Charity Status and Public Support)

Objectives of Schedule A

o Focuses exclusively on the public charity status of the exempt organization

• Trigger question is Part IV, Line 1

Who Must File Schedule A

o Organizations that file the Form 990 and are exempt under

501(c)(3)

• NOT private foundations

o Need to file Schedule A even if preparing the Form 990-EZ

Purpose of Schedule A

o Requires documentation and support that the filing exempt organization qualifies as a public charity

• Ascertains whether the filing exempt organization actually qualifies as a private foundation and as such, should be filing a Form 990-PF as opposed to a Form 990



Overview of Public Support Test

o Two tests to ascertain whether most exempt organizations are considered to be publicly supported

• Some organizations do not need to satisfy these tests (e.g. churches / hospitals / schools)

o Calculation of public support fraction

• Public support / Total support

o “Public support” definition (numerator)

• Public support is measured utilizing a 5-year computation period

• Generally, amounts received from the general public

Limitations

Any amounts in excess of 2% of the organization’s total support for the 5-year computation period

2% rule not apply to

509(a)(1) public charities or definitional tax-exempt entities, but it does apply to contributions received from

509(a)(2) public charities and charitable support

organizations

2% rule has aggregation and attribution rules



Overview of Public Support Test (cont’d)

o “Total support” definition (denominator)

• Investment income

• Unrelated business income

Reported at net, not gross

• Special event income

Reported at net, not gross

• Program service revenue

For Sec. 509(a)(2) organizations




o NOT “total support”

• Gain or loss from dispositions of capital assets

• Contributions of services or facilities

• Program service revenue

For Sec. 509(a)(1) organizations

• Unusual grants

Unusual grants are disregarded in the public support fraction calculation

Important to consider when the public charity is in danger of failing the public support test

Internally document how determine that particular grants were unusual grants

Attracted because of the organization's publicly supported nature

Unusual and unexpected because of the amount

Large enough to endanger organization's status as normally meeting the applicable support test




o Disqualified persons

• Definition of disqualified persons for purposes of the public support test rules

Substantial contributor - any person who gave an aggregate amount of more than $5,000, if that amount is more than 2% of the total contributions the public charity received from its inception through the end of the year in which that person's contributions were received

Any person who is a substantial contributor at any time generally remains a substantial contributor for all future periods even if later contributions by others push that person's contributions below the 2% threshold

Gifts from the contributor's spouse are treated as gifts from the contributor

Gifts are generally valued at fair market value as of the date the organization received them

Officer, Director, or trustee of the organization or any individual having powers or responsibilities similar to those of Officers, Directors, or trustees

An owner of more than 20% of the voting power of a corporation or profits interest of a partnership that is a substantial contributor to the organization

Family member of a disqualified person

Includes only a person's spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren

Corporation, partnership, trust, or estate in which persons described above own more than 35% of the voting power, profits interest, or beneficial interest



Reason for Public Charity Status (cont’d)

o Definitional

• Church (Box 1) – not required to file Form 990

Church characteristics (see Schedule A of the Form 1023)

Distinct legal existence

Recognized creed and form of worship

Formal code of doctrine

Distinct religious history

Organization of ordained ministers

Literature of its own

Established place of worship

Regular congregations

Regular religious services




o Definitional (cont’d)

• Schools (Box 2) – also complete Schedule E

Primary function is the presentation of formal instruction, which regularly has a faculty, a curriculum, an enrolled body of students, and a place where educational activities are regularly conducted

• Hospitals (Box 3)

Definition of hospital for Schedule A purposes different than for Schedule H purposes

Hospital for Schedule A purposes is an organization whose main purpose is to provide hospital or medical care, but it does not need to be licensed, registered, or similarly recognized by a state as a hospital

Rehabilitation institution or an outpatient clinic may qualify as a hospital if its principal purposes of functions are the providing of hospital or medical care

• Medical Research Organizations (Box 4)

Principal purpose or function is to engage in medical research and that is directly engaged in the continuous active conduct of medical research in conjunction with a hospital




o

509(a)(1) public charity (Sec. 170(b)(1)(A)(vi))

• Schedule A reporting

Part I, Box 7

Also complete Schedule A, Part II

• Must receive at least 33.3% of its total support from contributions from the general public

Alternatively, must satisfy the 10% facts and circumstances test

• Public support test calculation – public support (numerator)

Grants received from governmental entities, other public charities, general public

2% limitation on grants received from the general public (only 2% of such grants will be counted in the numerator, however, the entire such grant will be counted in the denominator)

NOT program service revenue

• Public support test calculation - total support (denominator)

All public support

Investment income (interest / dividends / rents / royalties)

Special event fundraising income / Unrelated business taxable income

NOT program service revenue

NOT capital gains or losses




o

509(a)(2) public charity

• Schedule A reporting

Part I, Box 9

Also complete Schedule A, Part III

• Must receive more than 33.3% of its total support from contributions from the general public and/or from gross receipts from program service activities

Cannot receive more than 33.3% of its total support from gross investment income and unrelated business taxable income

• Public support test calculation – public support (numerator)

Grants received from governmental entities, other public charities, general public

Contributions from disqualified persons eliminated from numerator

Program service revenue

Receipts from others than exceed 1% of total support received over the applicable 5-year period not reported in the numerator

Program service revenue received from agencies or bureaus of governmental entities is limited as set forth immediately below

Gross receipts from the sales of merchandise that are not an unrelated trade or business

For example, sales conducted entirely with volunteer labor




o

509(a)(2) public charity (cont’d)

• Public support test calculation – public support (numerator) cont’d

Include gross receipts from the following activities on Schedule A, Part III, Line 3

Trade or business in which substantially all the work is performed by volunteers (Sec 513(a)(1))

Trade or business carried on by the organization primarily for the convenience of its members, students, patients or employees (Sec 513(a)(2)

Trade or business which involves the selling of goods substantially all of which were donated to the organization (Sec 513(a)(3)

• Public support test calculation – total support (denominator)

All public support

Investment income

Unrelated business taxable income

• Examples

Museums




o Supporting organizations (

509(a)(3) public charities)

• Function actively in a supporting relationship with one or more specifically identified public charities

• Supporting organizations are not required to satisfy the public support test like

509(a)(1) and 509(a)(2) public charities are required to do so

• Supporting organization organizational requirements

Organizational/Operational Test - be organized and operated exclusively for the benefit of, or to perform the functions of, or the carry out the purposes of one or more specifically identified public charities

Supporting organization’s Articles of Incorporation should specifically identify supported organizations

Should only provide support to those specifically identified public charities

See Reg.

1.509(a)-4(e)(1)

Relationship Test - be operated, supervised, or controlled by or in connection with one or more supported organizations

3 different types of charitable support organizations (please see next slide)

Control Test - not be controlled directly or indirectly by any disqualified persons (other than foundation managers)

For example, if the voting power of the disqualified persons in the aggregate exceeds more than 50% of the total voting power of the supporting organization

See Reg.

1.509(a)-4(j)




o Supporting organizations (cont’d)

• Three different types of supporting organizations

Type I - operated, supervised, or controlled by the supported organization

Analogous to parent-subsidiary type relationship

Type II – supervised or controlled in connection with the supported organization

Analogous to brother-sister type relationship

Type III – operated in connection with the supported organization

Insiders of the supporting organization must maintain close and continuous working relationship with insiders of the supported organization

Insiders of the supported organization should have a significant voice in the investment policies, the timing and identifying of grant recipients, and the use of the income and assets of the supporting organization

• Two different types of Type III supporting organizations

Functionally integrated

Responsiveness test / “But for” test / Expenditure test / Assets test

Non-functionally integrated


Schedule C (Political Campaign & Lobbying Activities)

Political Activities Overview

o Prohibited

• Expenditure intended to influence selection and/or election of any candidate for public office

Remuneration to a candidate or prospective candidate for speeches or other services

Travel expenses of a candidate

Expenses of conducting polls, surveys, or preparing papers or other material for use by a candidate

Expenses of advertising, publicity, and fundraising for a candidate

Any other expense that has the primary effect of promoting public recognition or otherwise primarily accruing to the benefit of a candidate

o Not prohibited

• Voter education activities (non-partisan)

• Voter registration drives (get-out-to-vote)

• Endorsements by individuals (and not by the organization)

Individual should not use their public charity e-mail account or public charity letterhead

• Candidate speeches, as long as equal access to all and no indications of support by public charity

o Consequences

• Possible loss of tax-exemption

• Sec. 4955 excise tax



Part I (Political Activities)

o Part IV, Line 3 triggering question

o Need to complete if own partnership which is involved in political activities

o Part I-A, Line 1 – describe direct and indirect political campaign activities on Part IV

• Ideally, should not be undertaking either direct or indirect political campaign activities

See TE/GE Memo to Agents Examining Cases Involving Political Activity on the Internet

Alerts agents to communications on web sites which could be deemed as political activities

o Part I-A, Line 3 - report the amount of volunteer hours related to political activities

• May use any reasonable method to estimate this amount

• Best practice - require volunteers to complete time sheets to track their time

o Part I-B - complete only if liable for excise tax for conducting political activities

o Public charities are not required to complete Part I-C



Part II-A (Lobbying Election)

o Part IV, Line 4 triggering question

o Complete if made lobbying expenditures and also made the

501(h) election

• Filed Form 5768 with the IRS

o See Sec. 6033(b)(8)(A) of the Internal Revenue Code

o Two alternative tests

• Substantial part test

Facts and circumstances

Public charity can lose tax-exempt status if their lobbying is too substantial

Complete Part II-B

• Expenditure test (Sec. 501(h) election)

Safe harbor test (objective / mathematical)

Spend certain amount on lobbying without fear of losing tax exemption

Owe excise tax if fail the test



Part II-A (Lobbying Election) (cont’d)

o Definitions

• Exempt purpose expenditures

Program service expenditures

Lobbying expenditures (see below)

Depreciation / Amortization

Fundraising expenses

• Lobbying expenditures

Attempts to influence legislation

Include allocable overhead and administrative costs paid for purpose of attempting to influence legislation

Direct lobbying communications

Communications with legislative body to influence legislation



Part II-A (Lobbying Election) (cont’d)

o Definitions (cont’d)

• Lobbying expenditures (cont’d)

Grassroots lobbying

Attempts to affect public opinion

Encourage general public to take action re specific legislation

Exceptions

Nonpartisan analysis

Responding to request from governmental body

Educational expenditures



Part II-B (Lobbying – No Election)

o Complete if made lobbying expenditures and not made the

501(h) election

• Part II-B, Line i - requests that a non-electing public charity enter other lobbying activities on Schedule C, Part IV

Part III

o Public charities are not required to complete Part III of Schedule C

• Amongst other things, requires reporting regarding nondeductible dues



Schedule F (Statement of Activities Outside of the US)

Overview of Schedule F

o Activities of the tax-exempt organization outside of the United States

• IRS wants to receive adequate information from exempt organizations regarding their foreign activities

o Aggregate revenue/expenses greater than $10,000 from grantmaking, fundraising, business, and program service activities outside of the US

• Part IV, Line 14b, Line 15, and/or Line 16 trigger questions

o Organizations that conduct fundraising, grantmaking, business, or exempt activities outside the US, or have accounts, offices, employees or other agents outside the country

• General description of activities on Part I

Need to report all foreign expenses, regardless of where those expenditures take place

• Information regarding grants made to foreign organizations or governments (Part II)

• Grants or assistance to foreign individuals (Part III)

Considered to be foreign grant if make to individual residing outside of the U.S. at time of grant

o Utilize same method of accounting to complete Schedule F as utilize for the entire return



Overview of Schedule F (cont’d)

o Schedule F requires reporting on a regional basis (rather than on a country by country basis) and not require reporting of the names of specific grantee organizations

• Issues regarding the personal safety of workers and volunteers involved in unsafe foreign areas

9 regions referenced in the instructions

Central America and the Caribbean

East Asia and the Pacific

Europe

Middle East and North Africa

North America

Russia and the new Independent States

South America

South Asia

Sub-Saharan Africa



Part I

o Complete if respond affirmatively to Part IV, Line 14b and had aggregate revenues or expenses from foreign activities that exceeded $10,000

• Examples of foreign activities

Board member attends or speaks at seminars or conferences outside of the US

o Line 1 and Line 2 - apply to public charities making grants to foreigners

• Requests information similar to the expenditure responsibility requirements of private foundations

o Line 3 - provide detailed information for each foreign activity (on regional basis)

• Column (d) – include grantmaking, fundraising, unrelated business activities, program services

For example, investments, conducting Board meetings, sending agents to speak outside of the United States

• Column (f) – foreign expenditures reported consistently with expenses on financial statements

For example, foreign travel expenditures

Allocations of indirect expenses not necessary if the filing organization does not track them

• Form 990 Instructions

Foreign investments should generally be reported here

$100,000 threshold

Need to examine the filing organization’s interests in foreign financial accounts



Part II

o Completed if respond affirmatively to Part IV, Line 15

• Whether made more than $5,000 of grants or assistance to any foreign organization or entity

o All foreign organizations which received more than $5,000 listed on Part II, Line 1

• If no one foreign organization or entity received $5,000, check the Part II check box noting such

o Line 1 – report detailed info (region, purpose of grant, amount, manner of disbursement, non-cash assistance, method of valuation) regarding the foreign grant recipients

• Grants to foreign governments reportable here, regardless of where the representatives of that government are located



Part III

o Respond affirmatively to Part IV, Line 16 (regarding whether made more than $5,000 of aggregate grants or assistance to foreign individuals)

• Each type of grant or assistance must be listed on Part III if the aggregate amount of all grants and assistance made to individuals located outside of the US exceeded $5,000

• Report much detailed information (type, region, number of recipients, amounts, manner of disbursement, non-cash assistance, method of valuation) regarding the grants and assistance provided to foreign individuals

However, not required to report the names of grantees who are individuals

• Example – assistance to foreign individual includes payment to foreign hospital to cover the medical expenses of such individual

Payments to foreign hospital to provide services to general public reported on Part II



Part IV (Foreign Forms)

o Form 926

• US transferor of property to a foreign corporation

Amount of cash transferred to foreign corporation during past 12 months exceeds $100K

o Form 3520

o Form 5471

• Controlled foreign corporation reporting

o Form 8621

• Shareholder of a passive foreign investment company

o Form 8865

• Report transfers to/from foreign partnerships

o Form 5713

• International boycott report

Part V (Supplemental Information)

o Part I, Line 2 re monitoring of funds

o Report other supplemental information related to accounting methods and estimated number of recipients


Schedule L (Transactions with Insiders)

Overview of Schedule L

o Objectives

• Used to provide information on particular financial transactions or arrangements between the organization and insiders

These are transactions or arrangements that present issues of conflict, independence, or bias directly relevant to the board's decision-making process

• Schedule L disclosures should be considered part of the broader process of preserving impartial decision-making

Relates to transactions between an exempt organization and its current and former insiders (the key decision-makers of the organization)

• Disclosure efforts are based on a reasonable efforts standard for the organization

• Incorporates transactions that involve excess benefits for intermediate sanctions purposes

Loans to or from insiders

Grants or assistance benefiting insiders

Business transactions involving insiders


Schedule L (Transactions with Insiders)

Overview of Schedule L (cont’d)

o Needs to be completed under the following circumstances

• If engaged in an excess benefit transaction with an insider during the applicable tax year

• If became aware in current tax year that engaged in an excess benefit transaction with insider in previous year

• If made a loan to, or received a loan from, an insider or highly compensated employee, and such loan was outstanding at the end of the applicable tax year

• If provided a grant or other assistance to an insider or substantial contributor, or to any person related to an insider or a substantial contributor

• If had a direct business relationship with an insider or with someone related to the insider

o Utilize Schedule L to ascertain whether a voting member on the Board of Directors is independent for purposes of Part VI, Line 1b

o Different definitions of “insider” for different Parts of this Schedule L


Schedule L (Transactions with Insiders) cont’d

Part I

o Excess benefit transactions which the public charity has entered into with insiders

• All excess benefit transactions must be reported, regardless of amount

• Description of the excess benefit transaction must be provided in column (b)

• Whether the excess benefit transaction has been corrected by the public charity must be noted in column (c)

• Information regarding the

4958 excise tax (e.g. whether an insider was reimbursed for payment of the excise tax) must be reported on Line 2 and Line 3

o Part I insider definition

• Disqualified persons as defined in Sec. 4958 of the Internal Revenue Code



Part II

o Loan arrangements with insiders (officers / directors / key employees) and highly compensated employees

• No minimum reporting thresholds

Ordinary course of business exception

Loan = includes salary advances (but not those under an accountable plan) and receivables

• Required information to be reported

Name of insider

Whether debtor or creditor

Purpose of loan

Original principal amount

Balance due

• Whether the loan is in default at year-end must be noted in column (e)

• Whether the loan arrangement was approved by the Board of Directors or a committee must be noted in column (f)

• Whether there is a written loan agreement must be noted in column (g)

o Currently, placing funds on deposit with a bank does not constitute a “loan” for purposes of Part II reporting



Part III

o Provision of grants and assistance to insiders (including substantial contributors)

• Part IV, Line 27 triggering question

• No minimum reporting thresholds

• For example, providing a scholarship to the child of the Executive Director of the public charity

• Make sure not to report names of the individual recipients

o Reporting exceptions

• Grants to insiders as member of charitable class if the grant or assistance is provided on similar terms to other members of the charitable class

• Compensation payment to insiders for services rendered NOT reported here

o Part III insider definition

• Directors / Officers / Key employees

• Grant Selection Committee members

• Substantial contributors (contributed at least $5,000 to organization during year and is required to be reported by name on Schedule B)

Identity of the substantial contributor not reported on Schedule L so that such information is not made public



Part IV

o Direct business relationships between the public charity and an insider

• Part IV, Line 28 triggering question

Different consideration of a “business relationship” than Part VI, Line 2

Here, need to report transactions between the exempt organization and the insider

On Part VI, need to report transactions between insiders

• Examples of business transactions

Contracts of sale / Leases and licenses / Performance of services / Joint ventures

Board member of the exempt organization is President of bank where exempt organization has account, earns interest, pays bank fees

• Insider definition

Current officers, directors, (regardless of compensation) and key employees

Former officers, key employees, highest compensated employees if receiving more than $100,000

Former directors if receiving more than $10,000

5 highest paid employees (excess of $100,000)

• Reporting based on payments made during year, regardless of when transaction entered into



Part IV (cont’d)

o Direct business relationships between the public charity and an insider (cont’d)

• Individual and aggregate transaction thresholds

All payments from single transaction with insider during year exceed greater of $10K or 1% total revenues

All payments from multiple transactions with insider during year exceed $100K

Organization paid compensation greater than $10K to family member of certain insiders

• Description of the business transaction must be reported in column (d)

• Whether the business transaction with the insider resulted in a sharing of the public charity's revenues must be noted in column (e)

o Reasonable efforts to obtain information

• Tax-exempt organization is not required to provide information about a business transaction with an insider if it is unable to secure the information regarding insider status after making a reasonable effort to obtain it

Could utilize annual Conflict of Interest Questionnaire to satisfy the reasonable efforts requirement


CHALLENGING ISSUES FOR HEALTHCARE ORGANIZATIONS

John R. Washlick, Buchanan Ingersoll & Rooney

www.bipc.com

John R. Washlick, Esquire

Buchanan Ingersoll & Rooney PC

Philadelphia, PA

Princeton, NJ

215.205.1293

[email protected]

Strafford Publications

Challenging Aspects of Form 990

CHALLENGING ISSUES FOR

HEALTHCARE ORGANIZATIONS Thursday, October 10, 2013

79

Governance Issues

BEST PRACTICES

Independence

Conflicts of Interest

Reasonable Compensation

Transparency

Accountability

Documentation

80

SECTIONAL ANALYSIS

Part VI: Statements Regarding Governance, Management, and Financial Reporting Advancing good governance principles,

accountability, and transparency

Section A – Governing Body and Management

L1 - Number of voting members and independent member

L2 - Duality of interest relationships

L3 - Delegation of control of org. to mgt. company

L8 - Board Minutes;

L11 - Review of Form 990 by Board – Describe Board review process on Schedule O

81

SECTIONAL ANALYSIS

Part VII: Compensation and Other

Financial Arrangements with Officers,

Directors, Trustees, Key Employees,

Highly Compensated Employees and

Independent Contractors

Section A – Current and Former Officers,

Trustees, Directors, Key Employees and

Highest Comp. Employees

– More extensive; see Glossary for definitions

82

INDEPENDENCE

Board Composition

Back to Basics – Rev. Rule 69-545

Definition – Glossary

– Not officer or employee or relative

– Did not receive > $10,000 as IC

– Member (or family member) not involved in a transaction with

organization

– OK to be donor

– OK to be member of charitable class

Independent Audit Committee

Financial Expert

83

CONFLICTS OF INTEREST

Adopt Policy – Part VI, Section B

Define Scope of “Interested Persons”

Investigate Conflicts

Resolve

Periodically Update

Document

Schedule L – “Transaction with Interested

Persons”

84

Who is a Disqualified Person?

Intermediate Sanction Rules - § 4958

Disqualified Persons/Key Employees

Excess Benefit Transactions

Foundation Managers

Rebuttable Presumption

No Conflict

Comparative Data

Documentation

Consequence

85

REASONABLE COMPENSATION

Form 990

Part IV, LN 25a (Excess Benefit Transactions)

Part VII

Schedule J

Adopt Reputable Presumption Policy (Part

VI, Section B)

86

SECTIONAL ANALYSIS

Glossary, Definitions of Note

Audit Committee

Conflicts of interest policy

Control

Disqualified Person

Key Employee

Independent Member of Governing Body

87

SECTIONAL ANALYSIS

Glossary, Definitions of Note (cont’d)

Excess Benefit Transaction

Excess Benefit Transaction, Donor Advised

Funds

Excess Benefit Transaction, Supporting

Organization

Document Retention and Destruction Policy

Officer

Related Organization

Whistleblower policy

88

TRANSPARENCY

Core Form 990 – Part VI

Section C

– List States Form 990 File (LN 17)

– Public Inspection (LN 18)

– Describe on Schedule O whether governing

documents, conflict of interest policy and F/S are

made available to public (LN 19)

89

Schedule H: Hospital

Part I: Charity Care/Community Benefit – L1 – Charity Care Policy

– L5 – Budget for charity care

– L6 – Community Benefit Report

– L7 – Community Benefits at cost

Part II: Community Building Activities

Part III: Bad Debt, Medicare and Collection Practices (optional 2008)

– L1 – Compliance with HFMA Stat. No. 15

– L9a – Written debt collection policy

90

Schedule H: Hospital (cont’d)

Part IV: Management Companies and Joint

Ventures

– Good cross-check for known Joint Ventures and

fraud & abuse compliance

– Relevant also to Tax Exempt Bond Compliance;

private use limitations.

(See IRS Publication 4077, Tax Exempt Bonds

Compliance Guide, available at www.irs.gov)

91

Schedule H: Hospital (cont’d)

Part V: Facility Information

Part VI: Supplemental Information

– Community/Health Care Needs Assessment – see

CHA Community Benefit Reporting Model

– Patient Assistance Eligibility Procedures

– Describe the “community” served

– Community building activities related to promotion

of health in community – Community Benefit

92

Schedule K: Supplemental Information on Tax Exempt

Bonds

Scope: Bonds issued subsequent to 2002

See IRS Tax Exempt Bond Compliance

Check Questionnaire

Suggested Areas for Compliance Review and

Process Development

– Policies

– Education

– Documentation of Private Use

93

Schedule K: Supplemental Information on Tax Exempt

Bonds

Schedule K: Supplemental Information on

Tax Exempt Bonds (cont’d)

Form 13907 – Tax-exempt Bond Financings

Compliance Check Questionnaire –

Information regarding post-issuance bond

compliance and record retention

94

Schedule L: Transactions with Interested Persons

(To/From Officers, Directors, Key Employees and

Disqualified Persons)

Relevant to Conflicts of Interest

Relevant to compliance with SOX; Intermediate

Sanction Rules and where physicians involved, the

Federal Fraud & Abuse Rules.

Loans from 509(a)(3) Supporting Organization to

Disqualified Persons and other 509(a)(3) organization

are per se excess benefit transactions

95

Schedule O: Supplemental Information

Important “catch all” schedule to permit

organizations to accurately reflect/qualify

information reported elsewhere on 990,

i.e.,

Part III re: Program Service

Accomplishment

Part VI re: Governance, Management and

Disclosure

Documents

Form 990 Reporting In Depth: Understanding Key Schedules ...media.straffordpub.com/products/form-990-reporting... · 10/10/2013 · Oct. 10, 2013 Brian, YH Advisors [email protected]