As nonprofits prepare for the upcoming 2022 filing season, there are a number of planning, key reporting, and risk considerations to keep top of mind. Understanding some of the key risks and how to mitigate them through proper planning and consultation are of the utmost importance to help nonprofits avoid missteps and continue to focus on their missions.
1. Investments
Having the funds to carry out your mission is top priority. Investments are a good source of passive income. As investments become more sophisticated, there are additional items to consider. Alternative investments typically lead to more filing requirements to take into consideration when looking at your return on investment. The cost of filing these additional forms and paying potential unrelated business income (UBI) taxes should be included in the analysis.
Investments in domestic partnerships and S corporations can potentially trigger UBI, resulting in tax due to both the IRS and various states. Foreign form filing requirements also can be triggered by alternative investments. The number of forms required each year can vary. It also is important to make sure the investment entities are aware of the organization’s tax-exempt status and, therefore, foreign tax withholding may not be required.
2. Post-COVID Issues
There are many items to consider in a post-COVID environment. When an employee is working remotely and moves to a different state, payroll tax withholding may apply. Also, when employees change states, state nexus should be considered, which may result in additional state income tax filing requirements. We recommend having the employee sign an agreement that they will notify the employer if they move.
Donors moving can cause issues with charitable registration requirements. States can penalize an organization for solicitating in the state without being registered to do so. As a rule of thumb, any state where donors are being solicited requires charitable registration. There are some exceptions and reporting thresholds; however, comparing the organization’s donor addresses to each state’s charitable solicitation requirements is a good exercise to do each year.
3. Unrelated Business Income
Most nonprofits have already filed a couple of tax returns under the UBI siloing rules. Organizations with UBI need to start watching for their pre-2018 net operating losses (NOL) to expire. For NOLs generated after that date, the NOL deduction changes from 100% to 80% of taxable income. As nonprofits begin to use the pre-2018 NOLs, consideration should be given to possible tax due as taxable income can only be reduced by 80%.
4. Excise Taxes
Nonprofit organizations that paid employees’ compensation of more than $1 million a year could pay an excise tax (21%) for any excess compensation exceeding $1 million. Some nonprofit organizations have been caught off guard with additional excise taxes and filing requirements for excess parachute payments and deferred compensation. Excess parachute payments also are taxed when an employee separates from the organization and the payment exceeds three times their average annual compensation. Nonprofit organizations should review upcoming compensation levels and vesting schedules of deferred compensation plans to appropriately plan for any additional reporting requirements.
5. Emerging Issues
Nonprofit organizations should analyze whether the organization qualifies for the Employee Retention Credit (ERC). ERC is a fully refundable tax credit that nonprofits could qualify for due to a shutdown from a government order or a drop in gross receipts. The credit is available for most of 2020 and the first three quarters of 2021. Beginning in 2023, the opportunity to claim the credit will become more limited as the statute of limitations on amending Form 941s will begin to expire.
In 2022, the Accelerating Charitable Efforts (ACE) Act was introduced in the House of Representatives. The proposed ACE Act would provide limits on how long contributions can stay in a donor-advised fund (DAF), give advantages to community foundations with DAFs under $1 million, and could create problems for publicly supported organizations. Nonprofit organizations should analyze how this proposed change could affect the public support percentage.
The Inflation Reduction Act of 2022 included a provision for energy-efficient commercial building deduction (179D), which encourages commercial building owners to install energy-efficient systems. The provision expanded the eligibility to nonprofit organizations that have historically not been able to receive this benefit.
As nonprofits prepare for the upcoming filing season, keeping these tax items top of mind can help increase overall compliance and reduce risk. If you have any questions or need assistance, please contact a professional at FORVIS or submit the Contact Us form below.