John M. Persil, CPA, CFE PartnerBy John Persil, Partner 

Tax season is in full swing. Yes, that dreaded time of year by many is finally here. Whether it’s identifying which forms need to be filled out and/or searching for the necessary information required, it can be a stressful and time-consuming process for most companies—even for those tax-exempt organizations.

Luckily, by preparing in advance, understanding compliance policies, and working with the right CPA, not-for-profit organizations can ensure that their organizations undergo a successful 990 filing.

Defining an Unrelated Trade or Business Income

Identifying an unrelated trade or business income is an important part of filling out the 990 forms correctly. The IRS defines unrelated business income as the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.

An activity is an unrelated trade or business if all of the following conditions exist. Trade or Business—The organization is conducting a trade or business for the production of income from selling goods or performing services. Regularly Carried on—Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Unrelated to Exempt Purpose—The activity “is not substantially related” to the carrying out of the organization’s exempt purpose.

If all of these conditions are met, they’re generally taxable. However, there are certain activities that are statutorily excluded from taxation. For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose.

Organizations can find a complete list of what the IRS considers an unrelated trade or business, in the IRS Pub 598, entitled, “Tax on Unrelated Business Income of Exempt Organizations.”

Current Developments

Organizations must be aware of a check-writing scam that’s currently targeting nonprofits. Specifically in the Richmond, Va. area, more than 18 organizations have recently reported receiving emails from “Ken McFarlane” or “Kenneth McFarlane” with offers of a five-figure donation, according to an article published by The NonProfit Times. Due to the nature of this scam, The Better Business Bureau Wise Giving Alliance (BBB WGA) is on high alert for big checks followed by emails seeking funds. The BBB WGA warns charities to be on the look out for “fundraisers” placing large orders, and then acting like there’s a mistake (before the check bounces), followed by quickly requesting the money back. The Chief Operating Officer for the BBB WGA, states that this con is nothing new and that it’s important for executives to keep a close eye on donations coming in and to report anything suspicious immediately.

Soliciting Funds

It’s important to point out that many states have laws requiring exempt organizations, which solicit funds from residents within their state for charitable purposes. State statute requirements might be limited to a simple registration or annual periodic financial reports. To determine which states require registration, please visit the website of the National Association of State Charity Officials.

Disclosure Requirements for Tax-Exempt Organizations 

According to the IRS, under the Internal Revenue Code 501(a), and referenced in section 501(c) and 501(d), the law requires that certain tax documents be disclosed and copies of those documents must be provided to persons requesting them even for tax-exempt organizations. Examples of tax-exempt organizations include: charities, schools, labor organizations, business leagues, fraternities, social clubs, veteran’s organizations and voluntary employees’ beneficiary associations. This law also applies to political organizations under section 527(a).

Specifically, tax-exempt organizations must make annual returns and exemption applications filed with the IRS available for public inspection and copying upon request. If requested by the IRS in-person, the documents must be submitted immediately, but if it’s a written request, the organization has up to 30 days to provide copies of the requested documents.

Even though it can be a complex and time-consuming process to gather all of the necessary documentation and to fill out the right 990 forms, it’s critical to your organization’s financial health to avoid any penalties/fines associated with filing your year-end taxes. Having a trusted CPA that understands your unique needs can also help take the workload off of your organization and ensure you’re following the proper procedures to mitigate any potential issues with the IRS.

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