A taste of what changes to expect for tax-exempt organizations

NONPROFIT NEWS

As the summer wrapped up in August and the world's focus was on the excitement of the summer Olympics in Brazil, we also got a taste of what the IRS and the Department of the Treasury are planning to focus on in the coming year with respect to tax-exempt organizations and were informed of some fairly substantial coming changes to the ways in which nonprofits track and report their financial positions. Of course, tax-exempt private foundations also stayed at the forefront of the news throughout the month as journalists covered various issues relating to The Donald J. Trump Foundation and the Bill, Hillary & Chelsea Clinton Foundation, but we'll save those stories for another time.

IRS Priority Guidance Plan

On Aug. 15, the Department of the Treasury released its 2016-2017 Priority Guidance Plan. The plan, which is a joint statement by the Treasury assistant secretary for tax policy and the commissioner and chief counsel of the IRS, lists the projects that are priorities for the IRS and Treasury for the July 2016 through June 2017 period.

Although the projects listed are ones the offices intend to work on actively throughout the year, the plan does not subject the offices to any deadlines with respect to completing those projects. Past priority guidance plans have included carryover matters from prior plans and this year's plan is no exception.

With respect to tax-exempt organizations specifically, the plan lists 15 projects that are priorities for the offices, the majority of which were included on last year's plan, but have not yet been completely resolved. The new projects listed include regulations and other guidance regarding the new Internal Revenue Code (IRC) Section 506, which requires organizations intending to operate as exempt under IRC Section 501(c)(4) to notify the IRS (as covered in last month's column).

Included in the plan as a new project is also an update to Revenue Ruling 67-390, which addresses an organization's tax-exempt status when it moves to a new state or engages in certain other structural changed. That ruling, which was issued in 1967, states that, when an exempt organization incorporated under the laws of one state reincorporates under the laws of another state, it has formed a new legal entity which must establish its separate exemption by filing an appropriate application, even if there have otherwise been no changes in the organization's purposes or activities. The IRS has since stated in a non-precedential ruling that no new entity is formed and no new application is required when the states involved in a nonprofit's relocation explicitly recognize the nonprofit as the same entity that existed in the previous state. Nonetheless, clarification in the form of an update to the revenue ruling would likely assist in making it easier for nonprofits to relocate within the U.S., and to make other structural changes that could technically be considered as creating a new legal entity.

Updates to the plan will be issued during the coming year to reflect guidance that has been published with respect to the listed projects and to reflect additional projects that have become priorities. I will be sure to include any meaningful developments in this arena in future columns.

Financial Accounting Standards Board Update

On Aug. 18, the Financial Accounting Standards Board (FASB) released its Accounting Standards Update 2016-14. The update is intended to communicate how the FASB Accounting Standards Codification, which is the source of authoritative generally accepted accounting principles (GAAP) the FASB recognizes as applying to nonprofit entities, is being amended and updated.

The update is the result of an ongoing FASB project to improve existing standards for nonprofit's financials statements to provide more useful and less confusing information to donors, grantors, creditors and others. The update discusses modifications to the accounting standards that have been in place for nonprofits for more than 20 years. The major modifications made by the amendments include, among other things:

* Requiring a nonprofit to present only two classes of net assets (net assets with donor restrictions and net assets without donor restrictions) on its financial statements, rather than the three classes currently required (unrestricted, temporarily restricted, and permanently restricted).

* Permitting a nonprofit to report its investment return net of external and direct internal investment expenses, without requiring it to disclose those netted expenses.

* For nonprofits choosing to present the net amount of operating cash flows using the direct method, no longer requiring the presentation or disclosure of the indirect method (reconciliation).

* Requiring nonprofits to provide enhanced disclosures regarding (1) the amounts and purposes of funds that are not subject to donor-imposed restrictions, but are otherwise subject to self-imposed limits through board designation or other similar actions; (2) the composition of net assets with donor restrictions and how those restrictions affect the use of those assets; (3) qualitative and quantitative information regarding how a nonprofit manages its liquid resources to meet its general operating cash needs within one year of the balance sheet date and the availability of such resources; (4) the amounts of expenses by both their natural classification and their functional classification, in one location; (5) the methods used to allocate costs among program and support functions; and (6) any underwater endowment funds, including the nonprofit's policy and any actions taken concerning appropriation from the funds, the aggregate fair value of the funds, the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and the aggregate amount by which the funds are underwater.

The amendments described in the update are effective for annual financial statements issued by nonprofits for fiscal years beginning after Dec. 15, 2017. Nonprofits that are not otherwise familiar with the process of implementing these changes may wish to consult with a knowledgeable accountant.