Regulatory reform rarely happens in sweeping changes. Most of the time regulatory updates are incremental, which makes monitoring the little notices from Congress or the IRS important for organizations of all sizes. Taken together, the little things can have a significant impact on your organization’s operations.
Private Foundations and Program-Related Investments
The IRS published additional guidance for not-for-profit private foundations in April 2016 that provides clarity on investments the Service would consider to be program-related.
Private foundations cannot make investments that would threaten their ability to fulfill their tax-exempt mission. If they do, they could risk their tax-exempt status. Investments made for exempt purpose programs are not considered the type of spending that would jeopardize the mission. Investments are considered to be program-related if:
- The primary purpose is to further the accomplishment of the foundation’s tax-exempt purpose;
- The purpose of the investment is not the production of income or the appreciation of property; and/or
- The influencing of legislation or taking part in political campaigns on behalf of candidates is not a purpose.
Private foundations had nine examples to help clarify the program-related investments in the previous guidance, but the examples focused primarily on domestic investments benefitting low-income populations in urban areas. In practice, private foundations make program-related investments to address a much broader range of scenarios, so the IRS created additional examples of permitted investments to be included in the guidance.
Approved final regulations include a broader range of program-related investments, such as investments made overseas, permitted loans and capital lending and investments in subsidiaries.
One example involves a scenario in which a private foundation has a mission to assist low-income populations with healthcare concerns. The foundation could make a program-related investment in the subsidiary of a pharmaceutical company to assist in the development of a needed vaccine. For the investment to be considered program-related, the subsidiary would be required to sell the vaccine at affordable prices to the poor but may sell it at market rate to others.
The additional examples are designed for private foundations to assess whether investment opportunities would be considered program-related by the IRS. Private foundations should review the new regulations carefully and consider their effect on their strategic planning.
Taxpayer Protection Act of 2016- Warning Notices Wanted Before Revoking 501(c)(3) Statuses
The Senate Finance Committee approved the Taxpayer Protection Act of 2016, which has an important tax-related provision affecting nonprofits. The bill is not final. It still needs to go through the House of Representatives and be signed by the president before becoming law, but not-for-profits should be aware of the provision.
Not-for-profit organizations maintain their IRC Section 501(c)(3) tax-exempt status as long as they continue to operate for the charitable purposes that have been approved by the IRS. One of the most common ways for an organization to lose its tax exempt status is to not file its Form 990-series return for three consecutive years. When organizations fail to file three years in a row, the organization loses its tax-exemption.
At that point, not-for-profits must reapply for their tax-exempt status and explain why they failed to file the Form 990-series return. If the IRS accepts the reason, the not-for-profit’s status will be restored back to the date it lost its status, that is, there will be no gap between the not-for-profit losing and regaining its tax-exempt status.
The proposed change would require the IRS to provide a notice to organizations that fail to file their Form 990-series returns for two or more consecutive years no later than 270 days after the second failure to file. The notice would remind organizations that they are in danger of losing their tax exempt status.
In creating the notice, the IRS would also create a rule that organizations eligible to receive the notice could have their tax-exempt status reinstated if they can demonstrate that they never received the IRS notice warning them they were in danger of losing their tax-exempt status and they file an annual return or notice for the current year. If approved, the change would be effective for notices and returns due after December 31, 2015.
Staying informed about proposed and final regulatory changes is essential to long-term planning for not-for-profit organizations. We monitor this environment closely and will provide updated information when it comes available. For comments, questions or concerns about the changes that could affect your organization, please contact us.
Amy O’Loughlin is a Senior Tax Manager and member of the Not-For-Profit Practice. She is located in the CBIZ Phoenix office. She can be reached at email@example.com or 602.650.6233.
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