july 17, 2014 - batts morrison wales & lee, p.a. · 2014-07-16 · keeping watch for nonprofits...

Keeping Watch for Nonprofits across the United States. Offices – Orlando • Atlanta • Charlotte • Cost Mesa • Fort Lauderdale

Federal Tax Briefing for Churches

July 17, 2014

Michael E. Batts, CPA Managing Partner

801 N.Orange Ave., Suite 800

Orlando, Florida 32801 Phone: 800.960.0803 • 407.770.6000

Facsimile: 407.770.6005 E-mail: [email protected] Web: www.nonprofitcpa.com

http://bit.ly/NACBABMWL The link above is an exclusive webpage created for this National Association of Church Business Administration workshop. At this link, you will find a digital copy of this outline, which includes embedded links to additional information and articles on the topics presented.

Federal Tax Briefing for Churches

Presented by Michael E. Batts, CPA

Copyright ©2014, BATTS MORRISON WALES & LEE, P.A., All rights reserved. 1

1. What was, and isn’t, but may still be.

a. Exclusion for Direct Charitable IRA Distribution

The direct charitable IRA distribution exclusion allows qualified distributions from an IRA to be excluded from the taxable income of a donor. Such treatment is favorable to certain donors since distributions from a regular IRA are ordinarily taxable and the donor’s ability to deduct a charitable contribution may be limited based on his or her specific circumstances. Additionally, such treatment permits the donor to have a lower adjusted gross income, which may be beneficial for other reasons.

The exclusion expired on December 31, 2013.

It is widely expected that Congress will renew the exclusion – we can hope that it will not be a repeat of early 2013. The exclusion previously expired on December 31, 2011, and Congress failed to renew it during all of 2012. On January 2, 2013, the president signed into law legislation retroactively renewing it for 2012, and allowed a window until January 31, 2013 during which donors could avail themselves of it for 2012.

Congress is considering legislation that would make this exclusion permanent. In fact, the full House of Representatives is scheduled to vote today, Thursday July 17, on HR 4719, a bill that would:

Make the direct charitable IRA distribution exclusion permanent;

Allow individual taxpayers to make charitable contributions up until April 15 and deduct them in the prior year (applicable first for the calendar year 2014 – i.e., contributions could be made up until April 15, 2015 and be deducted in 2014); and

Establish a single excise tax rate of 1% for the net investment income of private foundations.

How the exclusion works

Nonprofit organizations wishing to attract such gifts need to be aware of the following special conditions and restrictions that apply under the law:

The donor must be 70½ or older on the date of the transfer;

The transfer must be made directly by the IRA’s trustee to the donee organization;

The donor may not receive any goods or services in exchange for the gift (or any part of the gift);

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http://www.irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs-for-2012-and-2013


The donee organization must generally be a U.S.-based 501(c)(3) organization and may not be a supporting organization, a donor-advised fund, or a nonoperating private foundation;

The exclusion is limited to $100,000 per year per taxpayer ($200,000 for a married couple filing jointly);

If an IRA from which a distribution is made includes both deductible and nondeductible payins, the deductible payins are considered to be used first; and

The donor must obtain a proper charitable contribution acknowledgment prior to filing his or her tax return for the year of the distribution.

Let’s take a closer look at a few of the stipulations listed above.

Direct transfer required. The donor must have the IRA custodian or trustee make the transfer directly from the IRA account to the donee organization. The donor may not take a distribution personally and then contribute it to the charity without triggering taxation of the distribution. This is a very important requirement for which nonprofit organizations should watch when encouraging such gifts from donors.

Only certain types of 501(c)(3) organizations are qualified recipients. Another subtle provision in the law that may be easily missed is the stipulation that the donee organization may not be a supporting organization, a donor-advised fund, or a private nonoperating foundation. While most nonprofit executives would know whether their organization maintains donor-advised funds or is a private foundation, many leaders may not know if their organization is a supporting organization. A supporting organization (described in Section 509(a)(3) of the Internal Revenue Code) is a type of 501(c)(3) organization that, by its nature, exists to support one or more other nonprofit organizations. A classic example of a supporting organization is a fundraising foundation that supports a specific ―parent‖ nonprofit organization, such as a church, a school, a college, or a museum. Supporting organizations are not qualified recipients of direct charitable IRA distributions.

Donor must receive proper acknowledgment of contribution. In order for a direct charitable IRA transfer to be excludible from a donor’s taxable income, the transfer must meet the requirements that would otherwise apply for a deductible charitable contribution. (Note, however, that with a qualified direct charitable IRA transfer, the donor does not actually get a charitable deduction; he or she gets to exclude the distribution from taxable income instead.) The ordinary rules for charitable contributions require a donor to obtain a proper acknowledgment from the donee organization for individual gifts of $250 or more. The donor must have the acknowledgment before filing his or her tax return for the year of the gifts. Accordingly, a donor must have a proper acknowledgment for a direct charitable IRA distribution before filing his or her tax return for the year of the distribution. The acknowledgment should indicate the name and address of the donee organization, the name of the donor, the specific dates and amounts of the gifts, and a statement that no goods or services were provided in exchange for the gifts. (Note that receipt by the donor of any goods or services that would reduce the deductible amount of an ordinary charitable contribution will disqualify a direct charitable IRA distribution.) While not specifically stated in the law, and subject to possible future federal regulations that may state otherwise, our firm recommends that the donee organization acknowledge and specifically identify any gifts that are direct IRA distributions separately from regular charitable contributions.

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2. What is, but is very problematic

a. Political campaign intervention prohibition for churches and other 501(c)(3) organizations

The Commission on Accountability and Policy for Religious Organizations

Washington, Aug. 14, 2013 — A national commission, with input of leaders from every major faith group in America and other prominent nonprofit groups, has issued a 60-page report offering Congress and the Treasury Department new proposals for bringing clarity to current IRS restrictions on political expression by nonprofit organizations.

After issuing a report to Sen. Charles Grassley (R-Iowa) on national tax policy for religious and other nonprofit organizations in December, the Commission on Accountability and Policy for Religious Organizations (―Commission‖), chaired by BMWL’s managing partner, Michael Batts, turned its attention to a Grassley request to address the prohibition against political campaign participation for nonprofits exempt under Section 501(c)(3) of the Internal Revenue Code.

The Commission strongly concluded three things:

Members of the clergy should be able to say whatever they believe is appropriate in the context of their religious services or their other regular religious activities without fear of IRS reprisal—even when such communication includes content related to political candidates.

Such communications would be permissible provided that the organization does not expend incremental funds in making them. In other words, as long as the organization’s costs would be the same with or without a political communication, the communication would be permissible.

Secular 501(c)(3) organizations should have comparable latitude when engaging in their regular, exempt-purpose activities and communications.

Current IRS policy of not permitting tax-deductible funds to be disbursed for political purposes should be preserved.

In January 2011, Sen. Grassley asked the Evangelical Council for Financial Accountability (ECFA) to coordinate a national effort to provide input on accountability, tax policy, and electioneering and political expression for nonprofit organizations in general, and religious groups in particular. ECFA then created the Commission (www.religiouspolicycommission.org), including panels of legal experts, religious sector representatives and nonprofit sector representatives.

In the new report to Sen. Grassley, Commission Chairman Michael Batts writes, ―It is both disturbing and chilling that the federal government regulates the speech of religious organizations….The prohibition against participation or intervention in a political campaign included in Section 501(c)(3) of the Internal Revenue Code…is the only law of its type on the books…the only law that allows the IRS to evaluate the content of a sermon delivered by a member of the clergy…the only law that could cause a church to lose its federal tax exemption based on the words spoken by its leaders in a worship service.”

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http://www.religiouspolicycommission.org/


The Commission maintains the electioneering prohibition for nonprofit organizations, as currently applied and administered, ―lacks clarity, integrity, respect and consistency—and that something needs to change.‖ Current application of the law, the Commission believes, is untenable for several reasons:

Guidelines are often vague, causing uncertainty as to what is permissible—and as a result, religious and nonprofit leaders often avoid speaking out on issues in permissible ways, due to fear of government reprisal. The vagueness of current guidelines also makes it difficult for the IRS to administer the law.

IRS enforcement actions have been inconsistent or selective—there are ample cases of prohibited political activity being ignored by the IRS.

For some faith communities, engagement in political communications is inextricably steeped in their history and culture. For example, a 2012 Pew Research Center study reveals black Protestant churchgoers are eight times as likely to hear about political candidates at church as their white mainline counterparts.

The Commission is composed of 14 members and 66 panel members representing every major faith group in America, prominent attorneys with expertise in exempt organization and constitutional law, and other prominent leaders from across the U.S. nonprofit sector.

The Commission’s report includes 14 examples of how its proposals would affect the rules for political communications by churches and other 501(c)(3) organizations. A full copy of the report is available at www.religiouspolicycommission.org.

Source:

Commission on Accountability and Policy for Religious Organizations

How the current 501(c)(4) controversy relates to this issue

On December 23, 2013, the IRS proposed Regulations on the topic of 501(c)(4) organizations and political activity. The IRS requested comments on the Proposed Regulations and expressed a particular interest in how the principles involved might apply to other exempt organizations (such as 501(c)(3)s).

The IRS received more than 150,000 comments on the Proposed Regulations – more than had ever been submitted for any proposed regulation in IRS history.

ECFA addressed some key points, including the following:

For example, the new definition of ―candidate-related political activity‖ would include ―communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.‖ The Treasury and the IRS make clear that identification of a candidate can occur through speaking out on social or moral issues, if these issues can also be tied to a particular candidate.

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Therefore, under the proposed guidance, addressing a moral or social issue (which could be connected to a candidate) at the height of an election cycle constitutes prohibited candidate-related political activity. Effectively, this has the result of silencing issue advocacy, especially if applied to 501(c)(3) organizations that could lose their tax-exempt status for even one violation (whether intentional or not) of the political activity rules. Further, the question of whether a particular communication on a social or moral issue can be tied to a particular candidate within the proscribed timeline creates another vague, “facts and circumstances” - like test, which the Treasury and the IRS seek to avoid in developing clearer guidance.

Another example of how the “candidate-related political activity” test unnecessarily goes too far in restricting the freedoms of tax-exempt organizations is the proposed ban on hosting events too close in time to an election at which a candidate appears as part of the program. Historically, organizations have used these types of events to educate their constituencies and the public on where candidates stand on the issues.

For instance, in 2008, Saddleback Church (Lake Forest, CA) hosted the “Civil Forum on National Leadership,” inviting then-presidential candidates Barack Obama and John McCain to appear at the church and answer questions on issues of importance to voters in the religious community. This very popular non-partisan forum—bringing the candidates together on the same platform for the first time in the 2008 presidential race—was not designed to promote either candidate. Its purpose was to help make people aware of where the candidates stood on issues involving moral and religious concerns.

Imagine also how such a test would apply to colleges or universities, many of which are 501(c)(3) tax-exempt organizations. Would colleges and universities not be able to hold educational debates with respect to candidates or campaigns within the 60-day or 30-day windows?

Or perhaps more significantly, consider the Commission on Presidential Debates— the organization that facilitates the national presidential debates held for the educational benefit of the entire voting populace of the United States to aid voters in making better-informed voting decisions. The Commission on Presidential Debates is a 501(c)(3) public charity. The proposed guidance, if applied to 501(c)(3) organizations, would seem to prohibit the Commission on Presidential Debates from conducting their primary activity—a staple of American existence.

Under the recently issued proposed guidance, even neutral and non-partisan activity of this nature (if held within certain dates of an election cycle) would be unnecessarily prohibited just for the sake of clarity in the law.

This approach is unacceptable. The freedom of tax-exempt organizations to engage in public discourse on issues of interest and importance to their missions must not be cast aside simply for the sake of the ease of administration of the law for the government. Further, such an approach would seem to create massive practical and constitutional concerns.

Federal Tax B

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The Bright Lines Project

Secular group led by attorney Greg Colvin. Addressing issues such as:

1. Safe harbors for nonpartisan election-related programs.

2. The universal application of any new definition of political intervention, to all actors, nonprofit, for-profit, religious, secular, etc., under the tax law.

3. A more relaxed test for speech distant in time from an election.

4. A more relaxed test for speech reaching a limited number of people.

5. A safe harbor for personal, oral expression of views within meetings.

6. Secondary, but important, definitions, e.g. what is a candidate.

7. Per se manifestations of political intervention.

8. Expression of views on moral policy issues during elections, but without reference to candidates, elections, or voting.

9. Candidate appearances at organizational events.

10. How leaders can express political positions without attribution to their organizations.

11. Political use of facilities and other resources.

12. Internal membership communications.

13. Avoiding political exploitation of the nonprofit sector by candidate campaigns.

14. Design of a protocol for "facts and circumstances" situations not resolved by bright line definitions.

b. The IRS still doesn’t know what a ―high-level Treasury official‖ is

Federal tax law permits the IRS to initiate a church inquiry or examination so long as certain criteria are carefully met. The criteria for a church tax inquiry include a requirement that a ―high-level Treasury official‖ must determine, based on written evidence, that the church is not exempt, that it has a liability for unrelated business income tax, or that it has otherwise engaged in taxable activities.

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Subsequent to a national restructuring of its operations, the IRS designated a particular official as its ―high-level Treasury official‖ with authority to make the required determination. However, a federal court ruled in 2009 that the official designated by the IRS did not meet the statutory definition of a high-level Treasury official. The IRS has not yet rectified the issue and reports indicate that the IRS has ceased inquiries and examinations of churches until the matter is resolved. The IRS claims to be nearing completion of new regulations addressing the matter.

3. What the future may hold…proposed comprehensive tax reform

Comprehensive Tax Reform Proposal Would Significantly Impact Nonprofit Organizations If Adopted

On February 26, 2014, Ways and Means Committee Chairman Dave Camp (R-MI) released the ―Tax Reform Act of 2014‖ — almost 1,000 pages of proposed legislation including provisions that, if enacted, present a landslide of changes that would profoundly affect tax-exempt organizations and charitable giving.

This proposal arrives after three years, during which the Committee held more than 30 hearings on tax reform and formed 11 separate bipartisan groups in order to develop proposed legislation that, according to some, is capable of ―fixing‖ the tax code by diminishing its size and complexity.

Following is a summary of some of the more significant elements of the proposed legislation that could impact the nonprofit sector:

Charitable Giving

The proposal includes the following provisions related to charitable giving:

Imposing a 2 percent Adjusted Gross Income (AGI) floor on deductible charitable contributions (in other words, a donor would be permitted to deduct charitable contributions only to the extent that his/her contributions in a given year exceed 2 percent of the donor’s Adjusted Gross Income for the year);

Limiting the deduction of most appreciated property to the donor’s adjusted basis in the property (very few exceptions would apply – one would be for publicly traded stock);

Allowing donors to deduct charitable gifts made up until April 15th on the prior year’s tax return;

A reduction in the overall cap on the deduction limit for contributions to churches, schools, and other public charities for individuals from 50 percent of AGI to 40 percent of AGI (and also changes to the deduction limit for contributions to private foundations); and

Repeal of the ―Pease‖ limitation on overall itemized deductions.

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These proposed changes to the charitable giving incentive have the potential to significantly affect charitable giving levels in the United States – most especially in the area of noncash gifts. Some of the largest charitable gifts made are in the form of real estate, business interests, or other noncash assets.

Implications for Colleges and Universities and other Private Institutions

Some of the proposals appear to be aimed specifically at colleges and universities. For example, the proposal would repeal the rule that provides a charitable deduction of 80 percent of the amount paid for the right to purchase tickets for college athletic events.

Another provision for private colleges and universities is an excise tax based on these institutions’ investment income. If enacted, it would be similar to a rule that taxes the investment income of private foundations. Under the provision, private colleges and universities would be subject to a 1 percent excise tax on net investment income. The provision would only apply to schools with investment assets valued at $100,000 or more per full-time student at the close of the preceding tax year.

Unrelated Trade or Business Provisions

Over the past couple of years, both Congress and the IRS have grown increasingly concerned about organizations using perpetual losses from certain activities to offset income from one or more separate unrelated activities. The issue is, in fact, significant: the IRS’s recent College and University Compliance Program Final Report examined 34 schools and found that more than $170 million of losses had been disallowed. At a Congressional hearing discussing the report, representatives wanted to know if the underreporting of UBI is widespread. And, in fact, the IRS is currently conducting a program now to address organizations that reported significant gross revenue from unrelated business activities but paid no UBI tax.

In response to these developments, instead of having to monitor losses and determine the motives of every activity, the proposal would require that the unrelated business taxable income of each activity be computed separately, and that the loss from one unrelated business activity could not be used to offset the income from another unrelated trade or business activity. Any unused loss would be subject to the general rules for net operating losses (NOLs) (i.e., such losses may be carried back two years and carried forward 20 years).

Other unrelated business taxable income (UBTI) provisions would treat name and logo royalties as UBTI. Under this provision, any sale or licensing by a tax-exempt organization of its name or logo (including any related trademark or copyright) would be treated as a per se unrelated trade or business, and royalties paid with respect to such licenses would be subject to UBTI. Many nonprofits that have affinity credit cards or license their name for apparel could be impacted. Again, these provisions could impact colleges and universities significantly. Also, new rules are proposed on sponsorship payments and research.

Executive Compensation

Another area that Congress and the IRS have been focusing on is compensation of exempt organization executives. One of the provisions of the proposal would impose a 25 percent excise tax on compensation paid in excess of $1 million by exempt organizations to their five highest paid employees. The excise tax would be assessed on the organization.

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Intermediate Sanctions

Currently, if a 501(c)(3) public charity or a 501(c)(4) organization pays excessive compensation (more than fair market value) to an individual who can substantially influence the organization (i.e., a disqualified person, or ―DP‖), the DP is subject to a 25 percent excise tax on the excess amount. If the ―excess benefit‖ is not corrected, which means paying back the excess with interest, the individual then faces a 200 percent penalty tax. When these taxes are imposed, any manager who knowingly participated in the transaction may be subject to a 10 percent excise tax as well. However, the manager may avoid the excise tax if they rely on advice provided by an appropriate professional, such as legal counsel; certified public accountants, or accounting firms with expertise regarding the relevant tax law matters; and qualified independent valuation experts who hold themselves out to the public as appraisers or compensation consultants

A tax-exempt organization can currently establish a rebuttable presumption of reasonableness with respect to compensation arrangements and property transfers if certain requirements are met. Establishing the rebuttable presumption shifts the burden to the IRS to prove that the compensation is not reasonable.

The proposed legislation would significantly change these rules:

Intermediate Sanctions would apply to IRC 501(c)(5) (unions) and 501(c)(6) (chambers of commerce and trade associations) organizations;

A 10 percent tax would be imposed on the tax-exempt organization when the excess benefit excise tax is imposed on a DP;

Board members and other ―organization managers‖ could not rely on the professional advice safe harbor;

The rebuttable presumption protection would be eliminated;

In setting compensation and addressing related party transactions, board members and other ―organization managers‖ would be required to apply ―minimum due diligence‖ (generally, the steps that create the rebuttable presumption protection under current law) in order to demonstrate that they did not knowingly approve a compensation arrangement or related party transaction that is ultimately deemed excessive or unreasonable; and

The proposal would expand the definition of disqualified persons to include athletic coaches and investment advisors (again, colleges and universities would be impacted).

Private Foundations

The proposal would eliminate the two-tier excise tax on the net investment income of private foundations and consolidate the tax into a single one-percent rate.

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Prospects for Passage

The provisions of the proposed legislation described above that relate to the nonprofit sector represent only a small part of the overall draft legislation, which is aimed at ―comprehensive tax reform.‖ The proposed legislation contains a vast array of significant provisions that would affect virtually every major area of federal income tax law. Given the fact that 2014 is a Congressional election year, most political observers doubt that such legislation will receive much consideration this year. Additionally, the primary author of the proposal, Congressman Dave Camp, who chairs the House Ways and Means Committee (the main tax-writing committee in the House), recently announced his planned retirement from Congress at the end of this year (he will not seek re-election). Accordingly, serious consideration of this legislative proposal will not likely occur until either late 2014 (post-election) or 2015. The outcome of the 2014 elections will certainly have an impact on the prospects for such legislation.

Although the proposal is only a draft, it is significant that its development included input from a bipartisan group and from the public. Also, the fact that the Joint Committee on Taxation ―scored‖ the provisions, indicating whether a particular provision will raise revenue, lose revenue, or is revenue-neutral, means that the draft has additional momentum. Nonprofit leaders should monitor the process closely and understand the possible ramifications of the proposal’s many provisions.

4. Recent Developments

a. FBAR and FATCA

FBAR

FBAR Reports Detailing Foreign Financial Accounts Must Be Filed Electronically for 2013 and Subsequent Years

U.S. citizens, residents, and domestic entities that have a financial interest in or signature authority over one or more foreign financial accounts with total balances exceeding $10,000 during any part of a calendar year must generally file a Form FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is filed separately from a person’s tax return and is generally due on June 30th of the year following the calendar year covered by the FBAR.

Helpful IRS and FinCen (Financial Crimes Enforcement Network) Links:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

http://sdtmut.fincen.treas.gov/NoRegFBARFiler.html

Effective for FBARs covering 2013 – Electronic filing of FBARs is mandatory.

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http://sdtmut.fincen.treas.gov/NoRegFBARFiler.html


FATCA

A relatively new reporting provision that, among other things, is applicable to individual taxpayers, was enacted in early 2010 called the ―Foreign Account Tax Compliance Act‖ (FATCA). Under the new provision, any individual who, during the tax year, holds any ―interests‖ in ―specified foreign financial assets‖ whose aggregate value meets certain thresholds (generally, $50,000, but certain exceptions and nuances apply) must attach to his or her income tax return for that tax year certain identifying information about the ―specified foreign financial assets.‖

Form 8938 is used for this purpose. Filed with personal income tax return. The new

FATCA reporting requirement is in addition to the FBAR requirement.

The new FATCA reporting requirement was effective beginning in calendar year 2011 (i.e., Forms 1040 filed in 2012).

A ―specified foreign financial asset‖ includes any depository, custodial, or other financial account maintained by a foreign financial institution and any of the following assets which are not held in an account maintained by a financial institution: (1) any stock or security issued by a person other than a U.S. person, (2) any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person, and (3) any interest in a foreign entity. Beneficiaries of trusts holding ―specified foreign financial assets‖ may be required to disclose their interest in such trust with their tax return if the value of their interest in the trust, together with the value of their other specified foreign financial assets, exceeds the $50,000 aggregate value threshold.

Failure to furnish this information carries with it an initial $10,000 penalty, plus an additional $10,000 penalty for each additional 30-day period during which the failure continues after notification from the IRS. The penalty is capped at $50,000.

The new reporting provision also applies to any domestic entity formed or availed of for purposes of holding, directly or indirectly, ―specified foreign financial assets‖ in the same manner as if the entity were an individual, although the reporting requirements for entities other than individuals are not yet effective. Proposed Regulations to be effective at a future date will establish when certain domestic entities with foreign financial assets are required to begin reporting. (Notice 2013-10)

This provision represents a very significant change for those individuals who have interests in foreign financial assets.

More information is available on the IRS website at:

http://www.irs.gov/Businesses/Corporations/FATCA-Information-for-Individuals

IRS Comparison of FBAR and FATCA requirements:

http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

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http://www.irs.gov/irb/2013-08_IRB/ar06.html

http://www.irs.gov/Businesses/Corporations/FATCA-Information-for-Individuals

http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements


b. Worker Classification Audits – The Next Big Thing in Light of Healthcare Reform

Large employers – attempting to avoid the employer mandate penalty for specific workers by treating them as independent contractors

Employers on the edge of becoming large – attempting to avoid classification as a large employer by treating workers as independent contractors

Note – misclassified workers will have a strong incentive to report their misclassification to the IRS. They may file Form SS-8 to have the IRS rule on their classification and Form 8919 to claim that the employer did not withhold taxes.

Multiple-entity employers – attempting to avoid classification as a large employer through the use of multiple entities

The stakes are VERY high, and the IRS will be zeroing in on this issue with force.

Avoiding significant liability under the IRS Settlement Program

On September 21, 2011, the IRS announced a new program to permit employers to voluntarily reclassify workers as employees for federal employment tax purposes in cases where the employer is concerned that workers have been improperly treated as independent contractors. The ―Voluntary Classification Settlement Program‖ (VCSP) provides significant relief from federal employment taxes for eligible employers that agree to treat workers as employees prospectively.

Generally, in order to qualify for participation in the VCSP, an employer:

Must have consistently treated the workers as nonemployees;

Must have filled Forms 1099 for such workers as required for the three preceding calendar years;

Must not have any dispute with the IRS as to whether the workers are nonemployees or employees for federal employment tax purposes

Must not be under an employment tax audit by the IRS; and

Must treat the workers as employees for all subsequent years.

If an employer chooses to participate in the VCSP and the IRS agrees to allow it, then the employer:

Must pay 10% of the employment tax liability that may have been due on compensation paid to the potentially misclassified workers for the most recently completed tax year using special rules;

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Will not be liable for any interest and penalties on the liability; and

Will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years.

If an employer wishes to participate in the VCSP, an application must be submitted using Form 8952 at least 60 days before the date that the employer would begin classifying these workers as employees. For example, if the employer wishes to begin classifying these workers as employees on January 1, 2015, then the application would need to be filed on or before November 2, 2014.

This program presents a very favorable opportunity to correct worker misclassification.

Participation in this program could be very beneficial and cost-effective for employers that may have been improperly treating workers as independent contractors. The opportunity to avoid an audit of past worker classification liabilities and settle them for 10 cents on the dollar with no penalties or interest is truly remarkable. BMWL strongly urges its clients with concerns about past worker classification liabilities to carefully consider applying for settlement under the VCSP.

Additional information about the program is available in Announcement 2012-45 and on the IRS website:

Voluntary Classification Settlement Program (VCSP)

With New Health Care Laws, Expect Tough Enforcement of Worker Classification

c. The Atheists Keep Suing!

i. So far, they are losing

ii. Court threw out case in Kentucky where atheists challenged church and clergy tax accommodations

iii. Housing allowance case is still proceeding, after Wisconsin judge ruled the clergy housing allowance exclusion unconstitutional. Case is on appeal.

[Practical implications of ultimately losing – churches would pay clergy more to offset their economic loss. Losses will range from very little for lower-income clergy to 40+% for some highly-compensated clergy. On average, it will likely cost the churches about 25-35% of the current housing allowances in order to make clergy whole. (This takes into consideration the need to cover taxes on additional pay.)

Link – Five ―takeaways‖ from the Wisconsin court ruling by Richard Hammar

The IRS has not indicated how long the VCSP will be available. Fed

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http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Voluntary-Classification-Settlement-Program

http://www.nonprofitcpa.com/with-new-health-care-laws-expect-tough-enforcement-of-worker-classification/

http://blog.managingyourchurch.com/2013/11/five_takeways_from_fridays_hou_1.html


iv. Another federal case is pending related to church accommodations, such as exemption from filing Forms 1023 and 990.

v. The Freedom from Religion Foundation has also sued the IRS for failing to enforce the prohibition against political campaign intervention by churches.

d. Small Employer Health Insurance Tax Credit Changed for 2014

The health care reform act adopted in early 2010 provides for a new tax credit that applies for 2010 and subsequent years for smaller businesses and tax-exempt organizations that pay certain health insurance premium costs for employees. For eligible organizations, the credit is ―refundable,‖ meaning that even if an organization has no taxable income, it may receive a refund for the credit.

The credit was intended to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. But, for years after 2010, employers must pay a ―uniform percentage‖ of the employee premiums (not less than 50%). The rules for applying the uniform percentage requirement are very complex (far too complex for a credit intended to help small employers). And, the IRS website guidance does not accentuate the uniform percentage requirement that is in the law. It causes one to wonder if the IRS has decided not to enforce that requirement.

For 2010 through 2013, the maximum credit is 35% of premiums paid during the year by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations.

In 2014, an ―enhanced‖ version of the credit is available… increases to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible employers that are tax-exempt organizations, but it will apply only if the employer acquires the coverage through new special exchanges. The IRS has not yet published detailed guidance on the enhanced version of the credit.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.

The maximum credit goes to smaller employers — those with 10 or fewer FTEs — paying annual average wages of $25,000 or less.

Special note for churches and religious organizations: Guidance issued by the IRS states that in calculating average employee wages, the wages of a minister are excluded from the calculation (because the minister’s wages are not FICA wages). However, if the minister is an employee for income tax purposes, the minister may be counted in determining the number of employees to be included in the calculation. As a result of these provisions, an organization employing ministers could have average employee wages that are significantly lower than the organization might think would be the case at first glance.

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Tax-exempt employers claim the credit by filing Form 990-T and including Form 8941, which should be filed after carefully reading the instructions. Again, a nonprofit organization that qualifies for the credit is entitled to receive it even if it does not have an income tax liability and even if it does not ordinarily file Form 990-T. Form 990-T is due the 15th day of the 5th month after an organization’s tax year ends (for organizations whose fiscal year is the calendar year, the due date is May 15).

The Small Business Health Care Tax Credit – GuideStone® Financial Resources Summary

e. 2014 Deadline for Amending FSA Plan Documents

i. $2,500 per year salary deferral limit

ii. New $500 year-to-year carryover option

New Health FSA Contribution Limits

New limits apply beginning in 2013 for employee salary reduction contributions to Health Flexible Spending Arrangements (Health FSAs). Previously not limited by law, employee salary reduction contributions to a Health FSA are limited to $2,500 annually per employee beginning in 2013. Employers that offer flexible benefit plans commonly referred to as ―cafeteria plans‖ or ―Section 125 plans‖ that include Health FSAs need to address the law’s new limit and, in all likelihood, will need to amend their plan documents to reflect the new limit. Plan amendments for this provision must be made by December 31, 2014.

IRS Modifies ―Use-It-or-Lose-It‖ Rule for FSAs

Carryover Option Available for 2013 Plans and Beyond

The Internal Revenue Service recently issued a notice modifying the longstanding ―use-it-or-lose-it‖ rule for health flexible spending arrangements (FSAs). The new guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.

For nearly 30 years, employees eligible for health FSAs have been subject to the use-it-or-lose-it rule, meaning that any account balances remaining unused at the end of the year are forfeited.

In 2005, the IRS announced that employers could amend their health FSA plans to allow for a ―grace period‖ of 2 ½ months after year-end. In other words, if an employer amends its plan to permit it, an employee who is unable to use the full amount contributed to the FSA during the year may carry over the unused balance for up to 2 ½ months after the end of the plan year. For a calendar-year plan, for example, if an employee had an unused FSA balance as of December 31, 2013, the employee would have until March 15, 2014 to use the balance (assuming the employer’s plan allows for such a grace period). Any amount unused after the grace period is forfeited.

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http://www.guidestoneinsurance.org/~/media/Insurance/HealthcareReform/SmallBusinessTaxCreditGuidelines.ashx

http://gallery.mailchimp.com/507220b78aba9515e42e04305/files/n_13_71.pdf



The new guidance issued by the IRS now permits employers to allow employees to carry over up to $500 of the unused amounts left in their health FSAs for use any time in the next plan year (without the 2 ½-month time limit).

In addition, the existing option for employers to allow employees a 2 ½-month grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period: it can have one or the other or neither.

To utilize the new carryover option permitted under the new IRS notice, a health FSA plan must be amended to include the carryover provision. The amendment must be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of that plan year, provided that the plan operates in accordance with the guidance under the new IRS notice and informs participants of the carryover provision.

To provide some transition relief, the notice states that a plan may be amended to adopt the carryover provision for a plan year that begins in 2013 at any time on or before the last day of the plan year that begins in 2014. Accordingly, for calendar-year plans, employers may adopt the required plan amendment no later than December 31, 2014, and the amendment may be retroactive to 2013. Employers who amend their plans retroactively in 2014 must have informed their employees of the carryover provision prior to the end of 2013.

An employer wishing to amend its plan should do so under the advice of its plan administrator and/or benefits counsel.

f. No more tax-free payment or reimbursement of employee individual health policy premiums

Effective for plan years beginning after 2013, employers may no longer pay or reimburse employees for individual health insurance policy premiums on a pre-tax basis.

For many years, employers have been permitted to reimburse employees for or directly pay the cost of individual health insurance policy premiums and exclude such amounts from the employee’s gross income. However, recent Internal Revenue Service (―IRS‖) guidance described below effectively eliminates these ―employer payment plans‖ after 2013.1

IRS Notice 2013-54, which was issued in September 2013, essentially prohibits the use of employer payment plans regardless of whether the individual insurance policy would be purchased through a Health Care Exchange or outside of a Health Care Exchange. The notice is effective for plan years beginning on or after January 1, 2014.

Notice 2013-54 provides that employer payment plans are group health plans subject to the market reform provisions of the Affordable Care Act (―ACA‖), including the prohibition on annual limits and the requirement to provide certain preventive care services with no cost sharing. The notice confirms that because employer payment plans are considered to impose an annual limit of the cost of the individual insurance policy purchased through the arrangement and do not provide preventive services without cost sharing in all instances, such plans will, by design, violate the requirements of the ACA. According to the IRS, employer payment plans cannot be integrated with

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http://nonprofitcpa.us2.list-manage.com/track/click?u=507220b78aba9515e42e04305&id=67d3cefcff&e=17ee05441f


the individual insurance policies purchased under the plans in order to satisfy these requirements. That means that employer payment plans will violate the requirements of the ACA even if the employees covered under the plan purchase individual insurance policies that comply with the ACA.

An employer is still allowed to establish an arrangement under which an employee may choose between cash or an after-tax amount to be applied toward health coverage. The employer is just not permitted to provide reimbursement on a pre-tax basis. In addition, the notice would permit an employer to establish a payroll practice of forwarding post-tax employee wages to an insurance company at the direction of the employee, as long as the requirements described in the notice are satisfied.

Accordingly, for plan years beginning on or after January 1, 2014, employers will need to either eliminate employer payment plans or modify such arrangements to reimburse employees for health coverage on an after-tax basis.

1 It does not appear that the guidance would prohibit employers from establishing employer payment plans that reimburse premiums for HIPAA-excepted coverage, such as limited-scope dental or vision coverage.

This content regarding Notice 2013-54 was prepared for BMWL by attorneys Danny Miller and Allison McGrath Gardner of Conner & Winters, LLP.

g. Status of W-2 health coverage reporting requirements

The Affordable Care Act adopted in 2010 requires employers to report the cost of coverage under an employer-sponsored group health plan on Forms W-2 issued to employees. As a result of complaints and concerns expressed by employers, implementation of the law was deferred to 2012, and for 2012 and following years, it only applies to larger employers (for now). Employers (including nonprofits) that filed 250 or more Forms W-2 for the prior year (e.g., 2013) are required to report on the following year’s (e.g., 2014’s) W-2s of their employees certain information about the cost of group health care coverage sponsored or provided by the employer. The information is required to be reported for the employee’s information purposes only, and the requirement to report the information does not mean that the benefits are taxable.

According to the IRS, ―The purpose of the reporting requirement is to provide employees useful and comparable consumer information on the cost of their health care coverage.‖

ERISA-exempt self-insured church plans are excluded for now (regardless of size).

The reporting requirement does not apply to smaller organizations until the IRS issues additional guidance. The IRS has stated that such guidance will be issued with at least six months’ advance notice.

The IRS recently updated its guidance for applying the new reporting requirement on its website, adding more clarity and information.

http://www.irs.gov/uac/Employer-Provided-Health-Coverage-Informational-Reporting-Requirements:-Questions-and-Answers

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h. New PCORI fees for HRAs

New Fee Applies to Employers with Self-Insured Health Plans, Including Some HRAs (PCORI Fees)

Much of the focus regarding compliance with the Affordable Care Act (ACA) has been on the requirement that employers with 50 or more full-time employees (including full-time equivalents) offer health insurance coverage to their full-time employees or pay a penalty – a requirement for which the effective date has been postponed until January 1, 2015. Another provision affects certain employers that offer self-insured health and welfare plans (including certain health reimbursement arrangements (HRAs)), and if applicable, it should have been addressed by July 31, 2013 for organizations whose plan years ended in late 2012.

ACA created the Patient-Centered Outcomes Research Institute (PCORI), a private, nonprofit corporation, to conduct research and evaluate health outcomes, clinical effectiveness, risks, and benefits of medical treatments, etc. ACA requires PCORI to be funded, in part, by a fee collected from health plan providers. For fully insured plans, the fee will be paid by the health insurance issuer (the insurance company). For self-insured plans, the plan sponsor (employer) is required to pay the fee.

What types of plans are covered?

The guidance for applying the PCORI fees is new and not very ―user-friendly‖ – especially as it relates to common employer-sponsored self-insured plans. The limited official guidance that exists supports the view that the most common example for most employers of a self-insured health plan to which the PCORI fee may apply is a health reimbursement arrangement (HRA) – a plan under which the employer reimburses or pays certain health care expenses from its own assets. The guidance indicates that the fee does not apply to most flexible spending accounts (FSAs) or to Health Savings Accounts (HSAs), and it does not apply to stand-alone vision and dental plans.

In some cases, it may be necessary to consult special benefits counsel to make a determination of whether the fees apply. Given the fact that the fee is rather low-cost item for most self-insured plans sponsored by nonprofit employers, and filing is relatively simple, some organizations simply opt to pay the fee with respect to plans for which applicability is uncertain. The costs and effort required to make a determination where applicability is uncertain may far outweigh the cost of simply paying the fee.

Form for reporting and due date

For self-insured plans to which the fee applies, the PCORI fee is reported on Form 720, which is to be filed by the plan sponsor (employer) by July 31 of the calendar year immediately following the last day of the plan year. The fee applies to plan years ending after September 30, 2012 and before October 1, 2019. For applicable self-insured plans with plan years ending after September 30, 2012 and before January 1, 2013, Form 720 was due July 31, 2013. Even though Form 720 is designed to accommodate quarterly filings, the PCORI fees are only due annually, and no estimated payments (advance payments) are required.

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Calculating the fee

The amount of the PCORI fee applicable for plan years ending on or after October 1, 2012, and before October 1, 2013, is $1 multiplied by the ―average number of lives covered under the plan for the plan year‖ (the fee will be increased to $2 the following year and adjusted thereafter based on increases in the projected per capita amount of National Health Expenditures).

The individuals taken into account in determining the ―average number of lives covered under the plan for the plan year‖ include employees, spouses, and dependents that are covered under the plan. However, a special rule applies with respect to covered HRAs and FSAs if the employer does not sponsor other types of self-insured plans. If that is the case, an employer may treat the HRA or FSA as covering only one life per participant, and is not required to count spouses and dependents. As stated above, the fee will not apply to most FSAs.

The average number of lives covered under the plan is determined annually after the end of the plan year under one of three methods provided in the Regulations. The three allowed methods are:

The actual count method;

The snapshot method; and

The Form 5500 method.

A simplified summary of the three methods is provided below. More specific details regarding the calculation methods are provided in the Regulations.

Actual count method

Under the actual count method, the employer adds the actual number of covered persons on each day of the plan year and divides by the number of days in the plan year.

Snapshot method

Under the snapshot method, the taxpayer picks a day or days from each calendar quarter and adds the actual number of covered persons on each of those days, then divides by the number of days selected as the snapshot.

Form 5500 method (for plans that file the Form 5500)

Under the Form 5500 method, the taxpayer uses the number of participants (not including spouses and dependents) reported on the Form 5500, Annual Return/Report of Employee Benefit Plan filed for that plan year provided it is filed no later than the due date for the PCORI fee. If the plan offers coverage for the employee only (i.e., self-only coverage), the number is the beginning-of-the-year participant count plus the end-of-the-year participant count, divided by two. If the plan offers dependent coverage, the number is the beginning-of-the-year participant count plus the end-of-the-year participant count (not divided by two).

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The IRS has published information on its website with guidance related to the PCORI fees.

http://www.irs.gov/uac/Newsroom/Patient-Centered-Outcomes-Research-Institute-Fee

New Fee Applies to Employers with Self-Insured Health Plans Including Some HRAs

i. The Truth about the ―Pease Limitation‖

How the ―Pease‖ Limitation Really Works

Reduction of itemized deductions for higher-income taxpayers

Provision named after the late Congressman Don Pease from Ohio, who invented it

It is essentially an increase in the income tax rate for higher-income taxpayers (Urban Institute-Tax Policy Center).

Some writers and financial professionals have misinterpreted and misinformed their constituents about the effects of the Pease limitation.

It is not a disincentive for increased charitable giving.

For MFJ taxpayers with AGI over $300,000 ($250,000 for single taxpayers), most itemized deductions are reduced by 3% of the excess of AGI over the base amount.

[Medical expenses are excluded.] (But cannot reduce itemized deductions by more than 80%)

Example

Bill and Linda Thomas have adjusted gross income of $350,000 for 2013. They gave $40,000 to charity, had $15,000 in mortgage interest, and paid real estate taxes of $5,000. Total itemized deductions = $60,000.

Since their AGI exceeds the MFJ base of $300,000 by $50,000, their itemized deductions are reduced by 3% of the excess, or $1,500. (Note that the $1,500 is nowhere near 80% of their itemized deductions.)

The $1,500 reduction is a function of their income, not their deductions.

Their itemized deductions would be reduced by $1,500 if their charitable contributions were zero or $100,000.

Only in highly extraordinary cases (very high AGI and very low itemized deductions) will a taxpayer not get the full tax benefit of increased charitable giving due to the Pease limitation.

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http://www.irs.gov/uac/Newsroom/Patient-Centered-Outcomes-Research-Institute-Fee

http://www.nonprofitcpa.com/new-fee-applies-to-employers-with-self-insured-health-plans-including-some-hras-july-15-2013/


j. New IRS Form 1023 Exemption Application for Very Small Nonprofits

The following is a press release issued by the Internal Revenue Service on July 1, 2014 regarding the new Form 1023-EZ.

WASHINGTON — The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

―This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,‖ said IRS Commissioner John Koskinen. ―The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.‖

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

―Previously, all of these groups went through the same lengthy application process — regardless of size,‖ Koskinen said. ―It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.‖

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.

Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today’s announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.

―We believe that many small organizations will be able to complete this form without creating major compliance risks,‖ Koskinen said. ―Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.‖

The new EZ form must be filed online. The instructions include an eligibility checklist that organizations must complete before filing the form.

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.

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