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A Year in Review and an Outlook on the Horizon for Tax-Exempt Entities

Magdalena M. Czerniawski, CPA
Published Date:
May 1, 2023

The new year brings numerous changes in tax and financial reporting for tax-exempt entities, as well as looming deadlines to recoup payroll taxes paid during the early days of the COVID-19 pandemic. Following is a roundup of the more significant changes discussed recently at the New York State Exempt Organizations Conference.

ERTC Reintroduction

Introduced as part of the  Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, the Employee Retention Tax Credit (ERTC) was subject to several rounds of legislative and administrative updates. Although Congress initially extended ERTC benefits through all of 2021, Congress later terminated the ERTC retroactively for wages paid in Q4 2021 (with minor exceptions). The IRS described the effects of this early termination on the ERTC in Notice 2021-65; nothing has changed since then, despite savvy salespersons selling ERTC “guidance.” However, statutes of limitation are approaching for filing amended Form 941 to claim past credits (April 15, 2024, for any 2020 ERTC claims or April 15, 2025, for any 2021 ERTC claims).

The credit is available to any nonprofit organization (other than governmental entities) that experienced a significant decline in gross receipts or whose operations were completely or partially shut down due to a governmental order during the quarters for which ERTC was in effect.

The IRS’s FAQ on the ERTC provides examples of when a business is considered completely or partially suspended. Much of the IRS guidance in this area is favorable. One area of unfavorable guidance deals with telework; employers who moved to a teleworking environment and could continue to service customers are not considered to be partially or fully suspended.

Once a governmental order expired or no longer resulted in a full or partial shutdown of operations, entitlement to the ERTC “turned off” for the rest of the year unless the organization could meet the decline in gross receipts test.

An organization qualified for the 2020 tax year if it demonstrated at least a 50% decline in receipts for any calendar quarter compared to the same quarter in 2019.

Qualification for the 2021 tax year is different. An organization was required to demonstrate at least a 20% decline in gross receipts for one calendar quarter in 2021 compared to the same quarter in 2019.

A special rule for 2021 provides that if the employer experienced a 20% or more decline in receipts for the immediately preceding quarter compared to the same quarter in 2019, the employer qualifies for the current quarter.

For a tax-exempt organization, five “gross receipts” include, but are not limited to:

  • The gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting those amounts
  • The gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of those amounts
  • Gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption), the net income or loss from which may be required to be reported on Form 990-T
  • The gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale
  • The gross amount received as investment income, such as interest, dividends, rents, and royalties.

There are a few important things to keep in mind. First, the Paycheck Protection Program (PPP) loan forgiveness is excluded in the calculation of gross receipts. For a nonprofit organization, receipts are calculated using the same method of accounting that the organization uses to prepare its annual Form 990.

Lastly, but probably of most importance, is that eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter the employer elected to use in measuring the decline because the IRS is looking into auditing the credits and eligibility.

New 501(c)(3) LLC Guidance

Notice 2021-56 provides standards an LLC must satisfy to receive a determination letter recognizing its 501(c)(3) status. This is something that nonprofits have been more interested in doing in recent years, so this type of new guidance is important. To have an LLC qualify for 501(c)(3) status, similar to a nonprofit corporation, the LLC’s articles of organization and operating agreement must:

  • provide that each member of the LLC either be an exempt organization described in IRC 501(c)(3) and exempt from taxation under 501(a) or be a governmental unit described in IRC 170(c)(1)
  • include a charitable purpose clause limiting its activities
  • include a charitable dissolution clause
  • include the private foundation compliance restrictions if it is a private foundation.

It also must include appropriate provisions to address what happens if one or more of its members ceases to qualify for tax-exempt status. This ensures that this status will be protected once established as a nonprofit.

IRS Priority Guidance Plan

With new funding of $80 billion over the next 10 years, the IRS is in a transformation phase. The agency has set goals to enhance taxpayer service, strengthen compliance activities, expand its workforce and add flexibility to its operations (including expansion of electronic return filing).

The IRS’ Priority Guidance Plan, which is revised annually to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings and revenue procedures, was amended to include the following:

  • proposed regulations relating to qualified nonpersonal use of vehicles
  • regulations under § 457(f) and related guidance on ineligible plans; proposed regulations were published on June 22, 2016
  • regulations on income inclusions and various other issues under § 409A nonqualified deferred compensation; proposed regulations were issued on June 22, 2016
  • guidance revising Rev. Proc. 80-27 regarding group exemption letters; Notice 2020-36 was published on February 19, 2016
  • regulations under IRC § 512 on allocation of expenses in computing UBTI and addressing how changes made to IRC § 172 NOLs by the CARES Act apply for purposes of § 512(a)(6)
  • guidance under § 4941 regarding a private foundation’s investment in a partnership in which disqualified persons are also partners
  • regulations under § 4966 regarding DAFs, including excise taxes on sponsoring organizations and fund management
  • regulations under § 4967 regarding prohibited benefits, including excise taxes on donors, donor advisors, related persons and fund management
  • regulations under § 4958 regarding DAFs and supporting organizations
  • guidance regarding the public support computation with respect to distributions from DAFs
  • regulations under § 6104(c); proposed regulations were published on March 15, 2011
  • regulations designating a high-level Treasury official under § 7611; proposed regulations were published on August 5, 2009.

New IRS Requirements for Exempt Organizations

The IRS has been working to develop much-needed improvements in the taxpayer experience. As such, it has made many forms available and required to be filed electronically. Summarized here are some of the newest requirements:

  • Form 1024 Application for Recognition of Exemption under Exemption IRC 501a or 521 must now be filed online.
  • Form 1024-A Application for Recognition of Exemption under Exemption IRC 501(c)(4) also must be electronically filed.
  • Form 8976 Notice of Intent to Operate Under Section 501(c)(4) needs to be submitted electronically, with a fee of $50, 60 days after formation.
  • New Form 4506-B Request Copy of Exempt Organization Form 1023 or letter can be submitted by mail, fax or email.
  • Form 4506-A Request Copy of Exempt or Political Organization IRS Form has been revised; it may be submitted by mail or fax.

UBTI Deductions

Although the IRS has not addressed the UBTI deductions, it is expected to provide more guidance in the near future. In computing UBTI, deductions are allowed, such as deductions under IRC § 162 for trade or business expenses. The deductions must be for expenses that are directly connected with carrying on the unrelated trade or business – IRC § 512(a)(1). Deductions must be allocated between exempt and nonexempt purposes and must also be allocated between separate trade of business lines after enactment of IRC § 512(a)(7). Therefore, these allocations are increasingly more complex. Not only do they need to be divided between the exempt purpose and UBTI; they also must be divided between the different trades or businesses an organization has. In addition, there is now a requirement for different ordering of net operating losses (NOLs). NOLs generated prior to the enactment of IRC § 512(b)(7) should be deducted first. Then, post-2018 NOLs should be deducted but only against the same trade or business activity they originally generated. Organizations can no longer use losses from one activity to offset income from another. There are specific rules on what can be grouped together.  

NYS Attorney General Update

Form Char 500 is now required to be filed online. Organizations must create an online account and fill out a checklist before they can file. PDF copies of Form 990 and audited financial statements must be attached. Electronic signatures are required, and payments may be made via credit card or e-check; below are links to where those can be done. In addition, it’s important to note a few details. First, the organization has to answer a series of questions determining  whether it will be able to file under different registration categories, such as Article 7A, EPTL, or both. Then, if the organization hired a professional fundraiser or received government grants, those must be listed individually on the form. Unfortunately, the system doesn’t allow any import, so one must be careful to enter the information correctly.

Lastly, the required attachments are important. Outside of the usual Federal Form 990 series or audited financial statements, a copy of Federal Schedule B must be attached. This attachment for public charities must list the amount of each contribution and state where the donor is located, or select a dollar range listed in the electronic system and indicate the gross amount of contributions from New York donors. This is a bit problematic, as most of the mainstream tax software providers don’t currently allow such a combination; therefore, the form has to be manually completed to comply. We have seen quite a few notices coming out in the past few months where organizations didn’t provide the correct copy of Schedule B and must resubmit it within 14 days, and the filing needs to be signed again.

Outside of the NYS AG filing, the NYS Department of State might require additional filing described below.

NYS Department of State Filing

Certain organizations are required to file Financial Reports with the NYS Department of State. Based on a certain activity, an organization might be required to file the Funding Disclosure Report or Financial Disclosure Report; both are described below. Many organizations are receiving letters requesting this additional filing from the NYS Department of State, even though they did not fall within the described guidelines below.

Funding Disclosure Report

A Funding Disclosure Report is required for 501(c)(3) organizations that are required to be registered under NYS Executive Law § 172.

The Funding Disclosure Report is required when:

  • In-kind donations such as human resources, office space or office supplies are made to a 501(c)(4) organization; and
  • The value of the donations exceeds $10,000 for a reporting period (the period beginning January 1 and ending June 30, or beginning July 1 and ending December 31); and
  • The 501(c)(4) organization is required to file a Source of Funding Report with the Commission on Ethics in Lobbying and Government.

The report must be filed 30 days after the close of a reporting period; there is a $25 filing fee.

Financial Disclosure Report

A Financial Disclosure Report is required for 501(c)(4) organizations that are required to be registered under NYS Executive Law § 172.

The Financial Disclosure Report is required when:

  • Expenditures for communications in any form are made to 500 or more members of a general public audience; and
  • The communications refer to and advocate for or against an official, executive or administrative body, or legislative body relating to any legislation, rule, regulation, hearing or decision, or advocates for or against any action by any elected official, executive or administrative body or legislative body; and
  • The value of the expenditures for the covered communications exceeds $10,000 in a calendar year.

The report must be filed 30 days after the close of a reporting period; there is a $25 filing fee.


Magdalena M. Czerniawski, CPA, is the managing director at CBIZ Marks Paneth.