The tax act and exemption application updates

NONPROFIT NEWS

Much of the talk relating to nonprofits and exempt organizations over the past few months has been with respect to anticipated implications of the Tax Cuts and Jobs Act. Below, I very briefly outline some of the major implications for the sector being discussed, as well as some updates to the IRS Priority Guidance Plan in light of the new Act. I also cover some practical updates relating to organizations applying for recognition of federal tax exemption, including revisions to the Form 1023-EZ and Form 1023, and the new Form 1024-A.

Tax Cuts and Jobs Act

As I'm sure everyone is aware by now, the Tax Cuts and Jobs Act that was recently enacted passed through the House, Senate and conference committee, and was sent to Trump for signature, in a matter of weeks. In addition to the breakneck speed with which the act was passed, many of its provisions took effect on Jan. 1 of this year. During the legislative process and since enactment, there have been numerous analyses of the impact the act is likely to have with respect to charitable giving, as well as the procedural changes on matters that directly impact the nonprofit sector. I won't rehash those changes in detail here, but the main points include anticipated reductions in charitable giving in light of the increases in the standard deduction and the excludable amount from the estate and gift taxes; an increase in the deductibility limitation for cash contributions to public charities to 60 percent of the donor's annual adjusted gross income; new unrelated business income tax on the amount of certain fringe benefits provided to employees; elimination of the ability to offset income from one unrelated business activity with losses from another for purposes of determining unrelated business taxable income; the imposition of a new 21 percent excise tax on compensation to the top five most highly compensated employees receiving over $1 million, subject to certain exceptions; and several changes impacting colleges and universities specifically, among others.

In February, the 2017-2018 IRS Priority Guidance Plan was expanded to include additional projects in light of the new tax act. Of relevance to the nonprofit and exempt organizations sector, the additional projects include providing guidance on the computation of unrelated business taxable income from separate trades or businesses under the new silo requirements of IRC Section 512(a)(6) mentioned above. They also include providing guidance on certain issues related to the new 21 percent excise tax on excess compensation under IRC Section 4960. In light of the haste with which the act was passed, additional clarity on these (and other) issues would be more than welcome by nonprofits and the practitioners advising them.

1023-EZ Changes

In early January, the IRS released revised instructions for the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Among the major changes to the instructions was the addition of an instruction for applicants to briefly describe their mission in 255 characters or less, along with three examples of missions that were determined to further 501(c)(3)-consistent purposes and three that were not. The revised instructions now also include additional text explaining the distinction between public charity and private foundation classification for 501(c)(3)s to better assist applicants in filling out the respective line on the application.

A few weeks later, the revised Form 1023-EZ was also released. Consistent with the changes to the instructions, the changes to the Form included the addition of a text box to Part III of the application requesting a description of the applicant's mission or most significant activities. Questions regarding the applicant's annual gross receipts, total assets, and public charity classification were also added to the Form, consistent with questions included in the Form 1023-EZ Eligibility Worksheet that is part of the Instructions, and which applicants must certify they have completed prior to applying with the Form. The revised Form also clarifies that an organization that previously had its exempt status automatically revoked for failure to file annual returns must seek the same foundation classification it had at the time of its automatic revocation in order to use the Form 1023-EZ; if it is seeking a different foundation classification, it must file the long Form 1023. The changes are intended to make it simpler for applicants to determine the correct application to use, and for the IRS to have additional information in reviewing 1023-EZ applications and making correct determinations as to exemption.

Relatedly, IRS Revenue Procedure 2018-5 issued at the end of January provided that, for all Form 1023 applications submitted beginning in 2018, the user fee will now be $600. The previous user fee for the Form 1023 had been either $850 or a reduced $400 fee, depending on the actual or anticipated gross receipts of the applicant. A revised Form 1023 was released on the IRS's website in early January, as were revised instructions to the Form 1023, to reflect a few slight changes, including with respect to the modified user fee. The user fee for the Form 1023-EZ will remain $275.

New Form 1024-A

January also saw the release of a new Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code. The Form is to be used by organizations electing to file for recognition of exemption under IRC Section 501(c)(4). While organizations operating within the meaning of Section 501(c)(4) are permitted to self-declare as tax-exempt (although they must still file the Form 8976, Notice of Intent to Operate Under Section 501(c)(4), with the IRS in a timely manner), many nonetheless choose to file an application with the IRS in order to obtain an official determination of their tax-exempt status. Such organizations were previously permitted to file a Form 1024, Application for Recognition of Exemption Under Section 501(a). However, they now must use the new Form 1024-A.