Category Archives: Tax Exempt Organization

Application of CARES Act to Tax-Exempt Organizations

The CARES Act provides enhanced financial support for businesses and other eligible entities suffering from the continuing COVID-19 pandemic.  While much of the CARES Act provides relief to for-profit businesses (see our previous post), there are specific provisions for nonprofits and tax-exempt organizations (collectively “TEOs”) which help support the operations and fundraising needs of TEOs during the COVID-19 pandemic and recovery.

Operations support for TEOs

Small Business Loan Program.  The CARES Act created a new business loan program known as the “Paycheck Protection Program.”  In addition to certain other businesses, the Paycheck Protection Program is available to TEOs described in either 501(c)(3) (public charities) or 501(c)(19) (veterans organizations).  TEOs falling within these categories are eligible for loans under the Paycheck Protection Program, subject to other eligibility criteria, while TEOs not falling within these categories are excluded from the benefits of the Paycheck Protection Program.  TEOs interested in the Paycheck Protection Program should see our previous posts on this subject.

Economic Injury Disaster Loans.  The CARES Act specifically includes the COVID-19 pandemic as a disaster for which most TEOs could obtain disaster assistance loans under the SBA’s 7(b)(2) program.  Qualifying small TEOs may receive a $10,000 advance if the TEO’s number of employees or annual receipts qualify.  The advance under this program is not required to be repaid.

Emergency Relief and Taxpayer Protections.  The CARES Act allocates $500 billion for loans, loan guarantees, and other investments to eligible businesses including TEOs with between 500 and 10,000 employees.  The emergency relief loans are subject to a favorable interest rate (no higher than 2% per annum) and no principal or interest is due during the first six months.

Employee Retention Credit and Delay of Payroll Taxes.  TEOs are eligible for the dollar-for-dollar employee retention credit against payroll tax liability.  The amount of the credit is equal to 50% of the first $10,000 in wages per employee.  TEOs who qualify may delay the employer’s share of payroll taxes through the end of 2020.  The delayed payroll taxes are repaid in two installments, with the first due by December 31, 2021 and the second due by December 31, 2022.

Fundraising support for TEOs

In addition, as we previously discussed, the CARES Act allows a partial above the line deduction of up to $300 of cash contributions to charitable organizations and churches, whether the taxpayer itemizes deductions or not, suspends the 50% of adjusted gross income limitation for charitable deductions by individuals, and increases the 10% limitation for corporations to 25% of taxable income and increases the limitation on deductions for contributions of food inventory from 15 % to 25%.

Attorney Susan B. Hecker contributed to this post. 

IRS Continues Push to Prohibit Tax-Exempt Bond Financing for Developer-Controlled CDDs and Similar Political Subdivisions

Real estate developers routinely use tax-exempt bond financing for infrastructure improvements for new communities. That may change soon. IRS perceives abuse in the process, and has proposed regulations making such bonds taxable if the developer controls the issuing governmental body.

Using enabling statutes under state law, a developer can initiate creation of a governmental body with the power to issue bonds secured by the developer’s land.  Although other types exist, Community Development Districts (often called “CDDs”) are the most common governmental body formed this way in Florida.

Such governmental bodies have historically qualified to issue municipal bonds exempt from federal income tax.  Because investors demand a lower absolute interest rate from tax exempt bonds than taxable bonds, these structures allow developers to enjoy a lower financing cost than would otherwise be the case.

The governing officials for such bodies usually are elected through a voting process weighted based on land ownership. In the early phases of development, the developer owns most or all of the land, and therefore controls the governmental body. When the neighborhood is closer to completion–and end-users have purchased lots and other developed property–the developer loses control, and the new property owners oversee the governmental body.

The problem with the IRS proposed regulations is that the developer always controls the governmental body when making the initial infrastructure improvements–such as roads and utility infrastructure–for a community. At that time, there is no community in which end users can buy lots, homes, or other property.  By prohibiting developer control, the proposed regulations could eliminate–or severely restrict–this form of financing.

The IRS is considering  taxpayer comments suggesting an exemption from the new rules for early-stage developments under developer control. This may provide a middle ground that limits abuse, but permits legitimate infrastructure improvements by governmental bodies that are reasonably expected to eventually be controlled by a widely disbursed group of end-user owners. As usual, the devil is in the details. For example, it may be difficult to fit larger, multi-phase communities within such rules. Unfortunately, with these proposed regulations, the IRS has put the burden on taxpayers, rather than itself, to design a workable framework. Comments are due to IRS by May 23.

Here is a link to the proposed regulations:

 E. John Wagner, II

IRS Confirms Advantages to Domesticating Instead of Merging when Relocating a Foundation

When families with foundations relocate to Florida, they oftentimes want to relocate their foundations too. There are several different structures for accomplishing the relocation (i.e., change in state of domicile) of a foundation or other non-profit corporation. For a variety of reasons, the best structure is oftentimes a domestication, which is also sometimes referred to as a “conversion” in jurisdictions outside Florida.

In a recent ruling, the Internal Revenue Service confirmed some of the advantages to using a state law conversion, especially when compared to a merger. The ruling concludes that a non-profit corporation that changes its domicile from one state to another by undergoing a state law conversion does not need to file a new application for tax exemption (Form 1023) and can keep the same taxpayer identification number. These benefits would be obtained in Florida by undergoing a domestication. The ruling also confirmed that this treatment would not apply if a non-profit corporation changed its domicile by forming a new non-profit corporation in the new state, and merging the non-profit corporation from the old state into the new non-profit corporation. In the case of a merger, the old non-profit corporation would cease to exist, and the new non-profit corporation would have to obtain a new taxpayer identification number and seek tax-exempt status by filing a new application (Form 1023).

A link to the ruling is here:

Michael J. Wilson

Florida Charities Subject to New Conflict of Interest and Financial Reporting Obligations

Amendments made during the 2014 Legislative Session to the Florida Solicitation of Contributions Act (the “Act”), and which became effective July 1, 2014, increase the oversight and regulation of charitable organization, sponsors, professional fundraising consultants, and professional solicitors.  The Act generally regulates certain persons and organizations conducting solicitation activities.  Among the many changes to the Act are:

  1. Conflict of Interest.  Charities subject to the Act are now required to adopt a conflict of interest policy for transactions between the charity and certain related parties, such as directors, officers, and trustees of the charity.  These persons must annually certify that they are in compliance with the conflict of interest policy, and a copy of such annual certification must be submitted to the Department of Agriculture and Consumer Affairs (the “DACA”) along with the charity’s annual registration statement provided to the DACA.
  2. Annual Financial Statements and Reports.  Charities subject to the Act previously could elect to include audited financial statements with their annual DACA registration statement.  However, the new law now requires most charitable organizations to file a tax return and financial statements.
  3. Supplemental Information.  Charities with more than $1 million in total revenue and that spent less than 25% of their total annual functional expenses on program services costs must file supplemental information with DACA regarding the funding of administrative functions, including salary and travel expense information, identifying the name and sum paid to all employees, consultants, and service providers in excess of $100,000, and reporting transactions between the charity and officers, directors, and trustees (including immediate family members and related entities).

An article on the recent amendments to the Act can be found here:
Amemdments to Chartible Solicitations Act 2014

Michael J. Wilson