Louis E. Michelson, A Professional Corporation

Providing Legal and Tax Advisory Services to Nonprofit Organizations

LA Law Library MCLE Class: Tax Planning for New Businesses

August 11th, 2016 · advantages and disadvantages, formation, liability, New Businesses, sales of interests, Tax Planning, transferability

LA Law Library MCLE Class: Tax Planning for New Businesses

On Tuesday, August 30, 2016, I will be presenting a MCLE class “Business & Tax Fundamentals: Tax Planning for New Businesses:” 12:00 p.m. – 2:00 pm Pacific Time at the LA Law Library, 301 West First Street, Los Angeles, CA 90012. This teleconference will cover the following topics:

● Legal and Business Considerations: formation, liability, transferability, continuity of life
● Business tax basics: formation, distributions, taxation, sale of interests, filing requirements
● Advantages and disadvantages of different business entities

Registration fees: FREE – sponsored by the Friends of the Los Angeles County Law Library through the generous support of Pacific Western Bank. For registration, please see the following link

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IRS Issues Deferred Compensation Regulations

July 21st, 2016 · 409A, 457(b), 457(f), deferred compensation, Proposed Regulations

The IRS issued Proposed Treasury Regulations under Internal Revenue Code Section 457 regarding deferred compensation plans on June 22, 2016 which can be viewed at the following link.  At the same time, the IRS also released new Proposed Treasury Regulations under Internal Revenue Code Section 409A which can be viewed at the following link.

 

For those who have limited familiarity with this area the following glossary may help:

 

  • “Eligible employers” includes tax-exempt non-profit and governmental employers.

 

  • “Section 457(b) plan” – one type of deferred compensation plan that may be offered by eligible employers where employees are limited in the amount of compensation that may be deferred each year. In this type of plan, deferred compensation is taxed when paid or made available to the employee.

 

  • “Section 457(f) plan” – another type of deferred compensation plan that may be offered by eligible employers where employees are not limited in the amount of compensation that may be deferred each year. This type of plan is sometimes referred to as an “ineligible plan.”   In this type of plan, deferred compensation is taxable to the employee when it becomes vested.  Vesting occurs when the compensation is no longer subject to a “substantial risk of forfeiture” (more on this concept below).

 

  • “Section 409A” applies to compensation that workers earn in one year, but that is paid in a future year. This is referred to as nonqualified deferred compensation. This is different from deferred compensation in the form of elective deferrals to qualified plans (such as a 401(k) plan) or to a 403(b) or 457(b) plan.  See the following link for more information regarding Section 409A.

 

The Proposed Regulations are very lengthy, detailed and complex and this e-bulletin does not even scratch the surface of the new Regulations.  Nonetheless, one example may be instructive.

 

One eagerly awaited guidance in the new Proposed Regulations is the IRS definition of “substantial risk of forfeiture” that specifically applies to Section 457(f).  The Regulations define a substantial risk of forfeiture as follows:

 

An amount of compensation is subject to a substantial risk of forfeiture only if entitlement to the amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the compensation if the possibility of forfeiture is substantial.

 

This definition mostly tracks the definition from the Section 409A.  But in at least one area, non-compete agreements, the new Proposed Regulations definition is different from the Section 409A definition.   Under the Proposed Regulations, compensation contingent upon compliance with a non-compete covenant will be considered subject to a substantial risk of forfeiture if the following three conditions are satisfied:

 

  • The covenant not to compete is pursuant to a written agreement that is enforceable under applicable law.

 

  • The employer must consistently make reasonable efforts to verify compliance with all of the noncompetition agreements to which it is a party.

 

  • When the agreement is entered into, the facts and circumstances show that the employer has a substantial and bona fide interest in preventing the employee from performing the services and that the employee has a bona fide interest in, and ability to, engage in the prohibited services.

 

Before the proposed regulations are adopted as final regulations, consideration will be given to any written or electronic comments that are submitted timely to the IRS.  A public hearing has been scheduled for October 18, 2016.  Comments and requests for a public hearing on the Regulations must be received by September 20, 2016.  If one is interested, one can send submissions to:

 

CC:PA:LPD:PR (REG-123854-12)

Room 5203

Internal Revenue Service

P.O. Box 7604

Ben Franklin Station, Washington, DC 20044.

 

Alternatively, submissions may be hand delivered Monday through Friday, between the hours of 8 a.m. and 4 p.m. to:

 

CC:PA:LPD:PR (REG-123854-12)

Courier’s Desk

Internal Revenue Service

1111 Constitution Avenue NW.

Washington, DC 20224

 

Submissions may be sent electronically via the Federal Rulemaking Portal at www.regulations.gov (IRS REG-123854-12).

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New Electronic Registration Form for 501(c)(4) Social Welfare Organizations

July 18th, 2016 · Form 8976, Notification, Section 501(c)(4) Organization

Legislation enacted at the end of 2015 added Internal Revenue Code Section 506, which requires an organization to notify the IRS of its intent to operate as a Section 501(c)(4) organization. The IRS has developed a new form, Form 8976, that organizations should use to provide this notification.

 

Who is required to file?  This notification requirement only applies to organizations intending to operate under Section 501(c)(4) (“social welfare organizations”). Organizations operating under any other 501(c) section, should not file this notice.  A social welfare organization must notify the IRS that it is operating as a Section 501(c)(4) organization within 60 days of its formation.  An organization that fails to submit a completed Form 8976 by the due date must pay a penalty of $20 for each day during which such failure continues, up to a maximum penalty of $5,000.

 

Which social welfare organizations are not required to file the notification?  The final and temporary regulations provide that a social welfare organization is not required to submit the notification if it applied for a Determination Letter that recognizes the organization as described in section 501(c)(4) (using Form 1024) or filed a Form 990 (or, if eligible, Form 990-EZ or Form 990-N) after December 18, 2015, but on or before July 8, 2016. For organizations that do not qualify for this relief, the temporary regulations also provide a transition rule that extends the due date of the notification until September 6, 2016.

 

How to File Form 8976.

  • Form 8976 may only be completed and submitted electronically. There is no paper form.
  • This is a one-time notification.
  • One must use the Form 8976 Electronic Notice Registration System.
  • A user fee of $50 must be submitted to Pay.gov to complete the notification.
  • One does not need special software to submit a notification; however, one needs to have an email address to activate a login ID and password.

 

Acknowledgement by IRS.

 

If a complete and accurate notification is submitted to the IRS, one can expect to receive an acknowledgement from the IRS within 60 days of submitting the notification.  Submission of the Form 8976 does not constitute a request for a Determination Letter that recognizes the social welfare organization as a section 501(c)(4) organization.  Also a social welfare organization must file applicable annual information returns or notices separate from and without regard to its submission of Form 8976.

 

For more information see the following links to a page on the IRS website, Rev. Proc. 2016-41 and the IRS Regulations.

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Reduced User Fee for Form 1023-EZ Effective July 1, 2016

June 17th, 2016 · Form 1023-EZ

Good news ahead for small charitable organizations that will be filing the electronic application for tax-exemption, Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.  A user fee is required by the IRS to process the Form 1023-EZ application, which user fee had been previously set at $400 for each application.  Good news:  the user fee for Form 1023-EZ is being reduced to $275 effective July 1, 2016.

The reduced user fee was announced by the IRS in Revenue Procedure 2016-32.  Please see the following link to this Revenue Procedure.   Please note that the IRS does not give an explanation for the reduced user fee in the Revenue Procedure.

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How Do You Know a “Church” is a “Church” for Tax Purposes?

May 16th, 2016 · church, exempt status

Frequently Asked Questions.

Do churches register with the federal and state government?  How do you know if a church is recognized as a “church” for federal income tax purposes and for state income tax purposes?  By the way, the term “church” is not limited to Christian churches, but also applies to other religions, so there are Jewish churches, Buddhist churches etc.

Federal Income Tax Purposes

Churches are not required to apply for recognition of tax exemption with the IRS.  However, if nonprofit wants to be recognized as a church for federal income tax purposes, the church would complete and submit an application to the IRS.  The IRS would then issue a determination letter which recognizes their tax exempt status under Internal Revenue Code 501(c)(3).   If IRS recognizes the organization as a church, the IRS determination letter will specify that organization has public charity status” under 170(b)(1)(A)(i) which means that the organization is classified as a church as well as being recognized as tax-exempt under IRC 501(c)(3).  This IRS determination letter is THE critical document that indicates that the organization is recognized as a church for federal income tax purposes.

State Income Tax Purposes (CA)

To determine whether the nonprofit is a church for California income tax purposes, the church must (it is not discretionary) fill out and submit an application to the Franchise Tax Board.  If the FTB recognizes that the organization is a church, FTB then issues a determination letter which recognizes the tax exempt status under Revenue and Taxation Code Section 23701d, which is the California equivalent of Internal Revenue Code 501(c)(3).  The FTB determination letter also has a caption at the beginning of the letter which specifies the “purpose” of the organization.   If the organization is recognized as a church, the FTB will indicated that the “purpose” is “church”.  The FTB determination letter is THE critical document that indicates that the organization is recognized as a church for California income tax purposes.

 

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Legislative Alert Assembly Bill 2855 Charitable Solicitations: Financial Disclosures

April 8th, 2016 · AB 2855, charitable solicitations, financial disclosures, Form 990

AB 2855 is a bill that adds Section 17510.86 to the California Business and Professions Code which will impose financial disclosure requirements on nonprofits and significant enforcement provisions. The bill has (a) requirements related to a charity’s web site and (b) a required disclosure statement.

Web Site Requirements.

This bill would require an Internet web site produced by, or on behalf of, a charity to contain a “financial disclosures Internet Web page” that includes a disclosure of the charity’s administrative overhead expenses. The overhead expenses to be disclosed are: “the sum total of the salaries, other compensation, and employee benefits of the charity’s executive director and board of directors and all of the charity’s other administrative overhead expenses, as reported on the charity’s most recent Internal Revenue Service Form 990 filing.”

The charity’s web site would also be required to have a copy of the charity’s most recent Internal Revenue Service Form 990 filing.

AB 2855 further requires that each web page on the charity’s web site to contain a direct link to that financial disclosures web page. AB 2855 specifies that the direct link must contain the phrase “Click here to read a full disclosure of the finances, including the salaries and expenses, of this organization.” The bill specifies that the direct link must “be placed in the top right corner of each Internet Web page in at least 14-point, bold, sans serif type font, and shall be clear and conspicuous, as defined in Section 17601.”

Required Disclosure Statement.

AB 2855 would require an Internet web site produced by, or on behalf of, a charity to contain a disclosure statement. This statement must indicate “the percentage of the charity’s funding that is spent on the sum total of the salaries, other compensation, and employee benefits of the charity’s executive director and board of directors and all of the charity’s other administrative overhead expenses, as reported on the charity’s most recent Internal Revenue Service Form 990 filing.” The bill specifies that the “disclosure statement must be printed on the first page of the document in at least 14-point, bold, sans serif type font and shall be clear and conspicuous, as defined in Section 17601.”

Enforcement Provisions.

AB 2855 would authorize the Attorney General to enforce these requirements by directing the Franchise Tax Board to suspend or revoke a violating charity’s tax-exempt status, by suspending or revoking the registration of a violating charity, or by taking any other enforcement action pursuant to the Attorney General’s existing powers and duties, as specified. The bill provides that the Franchise Tax Board shall reinstate the exemption only upon subsequent notification by the Attorney General that the charity is in compliance with the Business and Professions Code Section 17510.86.

This bill has been criticized because it places duplicative and unnecessary requirements on nonprofits. For instance, IRS Form 990 is already public and readily available document. Tax-exempt organizations must make annual returns and exemption applications filed with the IRS available for public inspection and copying upon request. In addition, the IRS makes these documents available.

Criticism of AB 2855.

This bill has also been criticized because the additional burden on the state. For example, the California Attorney General’s office already maintains a Registry of Charitable Trusts which administers the statutory registration program. All charitable trustees and fundraising professionals are required to register and file annual financial disclosure reports with the Registry. In addition, nonprofit organizations that conduct raffles for charitable purposes are required to register and file an annual financial report. The Registry Search Tool on the Attorney General Charities web site allows a registrant’s public filings to be viewed and downloaded from the Registry database. These public filings include a copy of the annual informational return (Forms 990, 990-PF, and 990-EZ) filed with the Registry, as well as registration forms and documents that organizations are required to file with AG’s office.

It has been observed that overhead expenses are not necessarily a negative. For example, overhead includes necessary costs that charities incur including utilities, insurance, legal compliance and health care benefits. And while a high overhead percentage could theoretically be cause for concern, it is also that case that organizations like food pantries often have high overhead percentages merely by virtue of their high reliance on volunteers.

This bill is referred to the House Committee on Privacy and Consumer Protection and an April 12 hearing date has been set. For the text of the bill please see the following link

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Preserving the Charitable Deduction Traps for the Unwary: Appraisals Instructional Video

March 9th, 2016 · charitable contributions, Charitable deduction

This instructional video covers the following topics:

● Property donations

● Substantiation and qualified appraisal

● Appraisal summary

● Disallowed deduction cases

● IRS review and penalties

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Preserving the Charitable Deduction Traps for the Unwary: Substantiation and Acknowledgment Rules Instructional Video

March 9th, 2016 · charitable contributions, Charitable deduction

This instructional video covers the following topics:

● Substantiation and acknowledgment rules

● Contemporaneous – example

● Written acknowledgment

● Substantiation – amount and type of property

● Good faith estimate – examples

● Property donations

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Preserving the Charitable Deduction Traps for the Unwary: Identity of the Donee and Tax-Exempt Status Instructional Video

March 9th, 2016 · charitable contributions, Charitable deduction

This instructional video covers the following topics:

● Who is the Donee?

● Verification of Exempt Status

● Automatic revocation

● Donor Due Diligence

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Preserving the Charitable Contribution Deduction; Traps For the Unwary — Limits on Deductions Instructional Video

March 9th, 2016 · charitable contributions, Charitable deduction

Preserving the Charitable Deduction Traps for the Unwary: Limits on Deductions.
This instructional video covers the following topics:

● Factors that limit charitable contributions deductions

● 50% limitation

● Special 30% limitation; and 30% limitation

● 20% limitation

● Carryover of Charitable Contributions

● An example which applies these limitations

 

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