Louis E. Michelson, A Professional Corporation

Providing Legal and Tax Advisory Services to Nonprofit Organizations

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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Multistate Registration Filing Portal for Nonprofit Organizations: Request for Information

February 19th, 2016 · Charity, Multistate Registration, Request for Information, Single Portal Initiative, state compliance

California is part of a pilot project to simplify registration burdens on nonprofits.  The Multistate Registration and Filing Portal, Inc., a Delaware nonprofit corporation (MRFP), working with the National Association of State Charities Officials (NASCO), and the National Association of Attorneys General (NAAG) are in the process of developing an online system that will allow nonprofit organizations and their professional fundraisers to comply with all states’ registration and annual filing requirements through a single online portal (“The Single Portal Initiative”).

A single Internet portal for charity registration and renewal has been something the nonprofit sector and professional fundraisers have requested for years.  The Single Portal will simplify the registration burden on nonprofits, make all non-confidential information available to the public in an open data format and improve the overall quality of data available.

The Single Portal system, once it is operational, should:

  • Allow charitable organizations and their professional fundraisers to register and file annual renewals and reports with multiple state charity offices through a single process.
  • Allow population of registration fields with data from electronically filed IRS 990 and 990EZ Tax Returns for tax exempt entities (Forms 990), and allow receipt of electronically filed 990s in machine-readable form from IRS, the user, or other sources.
  • Allow registration service providers to transmit data for multiple registrant/clients electronically.
  • Allow private foundations to file a copy of their IRS Form 990-PF with their state attorney general in machine-readable electronic form, if available, or as a PDF.
  • Make the non-confidential collected registration data public in an open data format. Confidential data and Personally Identifiable Information must be inaccessible to unauthorized users.
  • Allow users to attach supporting documents as necessary.
  • Provide analytic tools for charity regulators to identify outliers that will enable improved response by regulators to potential fraud prevention, negligence or poor governance practices that may lead to loss or waste of charitable assets.
  • Use a transaction-based funding model.
  • Accept payment of state registration fees from applicants and allocate them to the appropriate state(s).

On February 17, 2016 MRFP issued a Request for Information (RFI) seeking input from vendors, government officials, technology and public policy professionals and anyone with knowledge of platforms, processes, tools and/or methods to simplify the completion and submission of forms, including the submissions of relevant data and to allow charitable organizations and their professional fundraisers to comply with all states’ registration and annual filing requirements through a unified “one-stop” solution.  MRFP stated that the project goal is to maximize efficiency, customer convenience, data transparency, and information sharing by enabling compliance with the registration and reporting requirements of any state, or any combination of multiple states, via a single online software product, without duplication of data entry.

The one-stop solution should be focused on a user-friendly design. The Beta testing process should include iterative development based on feedback from regulators, and from charities and their professional fundraisers and advisors to further system development.

A copy of the RFI can be downloaded at the following link. The RFI will remain open until April 1, 2016.

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IRS Withdraws Proposed Gift Substantiation Regulations

January 27th, 2016 · charitable contributions, Proposed Regulations, tax returns

A donor who claims a charitable contribution deduction for any contribution of $250 or more requires that the donor obtain substantiation in the form of a contemporaneous written acknowledgment from the charity.  Under an exception to this requirement (Internal Revenue Code Section 170(f)(8)(D)), a contemporaneous written acknowledgment is not required if the charity/donee organization files a return with the IRS in accordance with IRS regulations (“donee reporting”).

The Treasury Department and the Internal Revenue Service published proposed regulations in September, 2015 for donee reporting that would have allowed, but not required, charities to file a new, separate information return with the IRS (in addition to the Form 990) by February 28 every year to substantiate contributions of more than $250 in value.  The proposed regulations would create another alternative, and would not replace, the existing substantiation rules for contributions of $250 or more.

The new form would include donor names, addresses, and taxpayer identification numbers for all gifts over $250.  In addition to collecting donor information and filing the additional form, participating charities would also be required to provide each donor a copy of the report that contains his or her personal information.

The IRS on January 7, 2016 announced the withdrawal of the proposed regulations.  Nearly 38,000 comments on the proposed rules were submitted to the IRS.  The comments raised concerns for risk to donor privacy, including charities’ ability to safely collect and protect donor data.  Other comments focused on potential decrease in charitable giving and the significant administrative burdens on charities because of the proposed rules.

A copy of the withdrawal notice published in the Federal Register can be found at the following link.

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Extended Due Date for Notification by Social Welfare Organizations of Intent to Operate

January 20th, 2016 · Federal Income Taxes, Uncategorized

Social welfare organization must provide a notification to the IRS of their intent to operate.  This notification requirement is found in new Section 506, which was added to Internal Revenue Code by the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”) which was enacted on December 18, 2015.

Under the PATH Act:

  • New social welfare organizations are required to notify the IRS no later than 60 days after the organizations are established.
  • For certain existing social welfare organizations, the notification is due no later than June 15, 2016.

The IRS issued Notice 2016-09 on January 19, 2016 which extended the notification requirement because the Treasury Department and the IRS intend to issue temporary regulations prescribing the manner in which social welfare organizations must notify the IRS of their intent to operate.

Under Notice 2016-09:

  • Social welfare organizations are now required to notify the IRS at least 60 days from the date that the temporary regulations are issued.
  • Social welfare organizations should wait to submit information until the regulations are issued.
  • No penalties under section 6652(c)(4) will apply to a 501(c)(4) organization that provides the section 506 notification by the due date provided in the regulations.
  • The IRS is required to acknowledge receipt of the section 506 notification, but this receipt is not a determination by the IRS that the organization qualifies for section 501(c)(4) status.
  • Organizations that seek IRS recognition of tax-exempt status under section 501(c)(4) should continue to use IRS Form 1024. The filing of Form 1024 (which is optional) does not relieve an organization of its section 506 filing requirement.
  • The full text of Notice 2016-19 is found at the following link.

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Streamlined Administrative Dissolution Process for Nonprofit Corporations

November 9th, 2015 · Dissolution, Inactive nonprofit corporation, State and Local Taxes, state compliance, State Exemption

Beginning January 1, 2016, inactive nonprofit corporations, which are eligible for administrative dissolution under the recently enacted law under AB 557, can be automatically or voluntarily dissolved.

There is a significant problem with non-profit corporations filing incorporation papers with the Secretary of State, and then failing to launch or continue operations and remain up to date and filing and tax requirements. These inactive non-profits never go through the formal dissolution process and become a hindrance to the state. The Secretary of State (SOS), Franchise Tax Board (FTB), and Attorney General are responsible for regulating nonprofit corporations and spend a significant amount of resources and time attempting to register, tax, and audit nonprofits that no longer exist. The SOS and FTB estimate that there are close to 60,000 nonprofits currently in their systems that would be eligible for the administrative dissolution process established under AB 557.

AB 557 creates a streamlined administrative dissolution process for nonprofits that have been suspended for at least 48 continuous months after proper notice has been served.

There are three new ways a nonprofit corporation can be dissolved:

o Automatic dissolution – FTB may automatically administratively dissolve a corporation that is suspended or forfeited for a period of more than 48 continuous months and is no longer in business. AB 557 allows the FTB to waive delinquent taxes, penalties and interest under specified conditions. Due to the anticipated high number of nonprofit organizations that may meet the requirements, it is anticipated that it will take time for FTB to complete the automatic process.

o Short form dissolution – The California Secretary of State will allow a short form dissolution for eligible nonprofit corporations that file for dissolution within 24 months from the date the articles of incorporation were filed.

o Voluntary dissolution – The FTB will be developing a form that practitioners and/or nonprofit corporations can complete and submit to FTB to voluntarily request the administrative dissolution of nonprofit organizations that may be eligible. The FTB indicates that this form should be ready in early 2016.

For the text of AB 557, including Legislative Counsel’s Digest, see the following link.

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Obtaining Recognition of Tax-Exempt Status

October 22nd, 2015 · Form 1023, Process for Obtaining Recognition of Tax Exemption, State Exemption, Streamlined Application, tax exemption

Nonprofit organizations are not automatically recognized as tax-exempt.  This raises all sorts of questions:  What types of tax-exemption are there?  Do charitable organizations, tax-exempt under IRC 501(c)(3) need to abide by certain rules or criteria?   Are there different criteria for other tax-exempt organizations?  How does a nonprofit apply for recognition of tax-exemption from federal income tax?  Can you use the streamline application for federal exemption?  How do you apply for exemption in California?

The webinar below addresses the following topics:

  • Available Tax Exemptions
  • Criteria for 501(c)(3) Organizations
  • Criteria for Other Exempt Organizations
  • Process of Obtaining Recognition of Tax-Exemption – Form 1023
  • Form 1023-EZ, Streamlined Application
  • Securing State Exemption

For a free webinar on this topic please see below.

 

For more information contact:

Louis E. Michelson,
A Professional Corporation
10811 Washington Boulevard, Suite 258
Culver City, CA 90232
(310) 843-0700

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