Looking Ahead: 5 New Changes To NPO Tax Law You Should Know

If you have a nonprofit, you have the option to file as a tax-exempt nonprofit. If you’ve filed for nonprofit in the past, be prepared for some changes in 2020.

In the past few years, the IRS has spent some time updating its data analysis capabilities. 

This year, 2020, they will focus on six major areas. This brings on a few changes to consider if you are filing for nonprofit status.

• Compliance Strategies
• Data-Driven Approaches
• Referrals
• Claims and Other Casework
• Compliance Contacts
• Determinations

Exceptions to Filing For Nonprofit Status

Some nonprofits are not required to file with the IRS. The exceptions are:

• Organizations included in a group return
• Churches, their conventions, and associations of churches
• Organizations that need to file a different return

When to File

Your nonprofit Form 990 needs to be filed by the 15th day of the 5th month after the close of your fiscal year. The sooner you get on organizing your documentation, the less room there will be for error. 

The Further Consolidated Appropriations Act, 2020

Also known as H.R. 1865, Congress has passed this law that will have a significant impact on nonprofits. It includes two major provisions. These are excise tax simplification and benefits repeal. 

Excise Tax Simplification

Previously, the law required private foundations to pay excise tax on their investment income. This was a 2% tax. However, nonprofits did have the opportunity to lower the tax to 1%. This would happen if they made distributions over the minimum amount.

For years, nonprofits have hoped for a more simplified process. The Further Consolidated Appropriations Act, 2020 does just that.

As of this year, the excise tax rate is fixed at a flat 1.39%. This amount won’t change no matter what the distributions are. Nonprofits no longer need to carefully monitor their distributions. There is no more questioning if they qualify for a lesser amount or not. The tax percentage is the same for everyone.

Qualified Transportation Fringe Benefits Repeal

This act gives something else nonprofits have asked for years. It repealed the unrelated income tax on qualified transportation fringe benefits.

Furthermore, the repeal is retroactive back to the date it originated. You could be entitled to a refund. If your nonprofit had to pay this extra tax any time since December 31, 2017, consider filing an amended 990T. 

New Inflation Adjusted Rates

2020 also has some new, inflation-adjusted rates.

Low-Cost Article

A low-cost article is an item typically given as a “thank you” for a donation. The amount that qualifies as a low-cost article is directly tied to inflation. This means, what qualifies changes every year.

For the 2020 tax year, a low-cost article is anything that costs $11.20 or less. This is a ten-cent increase.

Other Insubstantial Benefits

If a donor receives something in return for their payments, he or she can still deduct the donation if:

• The donation was $25 or more and the donor didn’t receive anything that costs more than $5 or the price of a low-cost article.
• The value of the benefits given isn’t more than 2% of the donated amount, or $50, whichever is the lower amount.

Lobbying Expenditure Notice Exemption

Law requires nonprofits to offer members and supporters an estimate of dues nondeductible lobbying payments.

In 1998, the IRS ruled that there are some exemptions. These include social welfare organizations, agricultural, and horticultural organizations. They are exempt if more than 90% of their yearly dues are $75 or less.

This limit has increased for the 2020 year. Now, these organizations are exempt if their annual dues are $119 or less. 

Mileage

Mileage is one area that hasn’t changed for nonprofits. For 2020, you can still deduct 14 cents per mile on a nonprofit vehicle.

Failing to File

If you fail to file your 990 on time, you could see penalties and income tax liability. If you fail to file three years in a row, your tax-exempt status will be revoked. 

The IRS does keep a list of nonprofits with a revoked status for up to three years. If you need an automatic six-month extension, you can request one with a Form 8868. 

You cannot extend a 990-N due date, but you also won’t pay any penalties for submitting it late.

Losing Your Tax-Exempt Status

If you have lost your tax-exempt status, you are no longer eligible to receive any tax-deductible contributions. You might also have to bite the bullet and pay corporate income tax.

Going Digital

The IRS is implementing enhanced digital records on nonprofits for public access. They are also working to develop more secure communications vehicles to reduce any paper files.

Form 1023

Starting in January 2020, IRS Form 1023 will go electronic only. This is the Application for Recognition of Exemption Under Section 501(c).

Fraud

The IRS is also working to reduce tax fraud by enhancing its digital investigation. In 2019, there were 90,000 employee plan determinations. This has given them a reason to streamline investigations. 

The IRS will also look into potential private benefit and inurement in nonprofits. They have collected data that raises red flags in certain areas. This year, they plan to use this data digitally to find cases to look into.

Nonprofits in 2020

If you are filing for nonprofit status in 2020, take note on the changes. You might find that you are owed money thanks to the new law in place. Take note on the minimum numbers when it comes to low-cost articles. Alert donors when they qualify claims on their donations. 

Keep in mind, these changes can affect your nonprofit for the better. Contact us today for more information on how to seamlessly run your nonprofit.