|Uncertain Tax Positions and Tax Exempt Organizations?|
By Patrick W. Melvin, CPA, Principal, Desmond & Ahern, Ltd
It is not too early to begin thinking about new 2010 accounting and tax standards -- pursuant to Topic 740 of Financial Accounting Standards Board (FASB) Accounting Standards Codification, not-for-profit entities will have to implement an analysis of uncertain tax issues and to include certain related disclosures with its financial statements, to be in compliance with generally accepted accounting standards. The original FASB pronouncement is commonly referred to as FIN 48. The definition of the term ‘tax position’ includes, although not limited, to the following:
1. A decision not to file a tax return
For many not-for-profit organizations all five of the above criteria may apply. Items one and two may affect those organizations with a presence, or Nexus, in more than one state or jurisdiction. Items three, four and five are closely intertwined.
An entity is generally granted income tax exemption through an application process with the Internal Revenue Service. The entity in the application process discloses and represents that the organization will operate in a certain fashion; that the organization’s mission and purposes adhere to certain provisions of Internal Revenue Code (IRC) Section 501. Its mission and purposes are generally stipulated in its bylaws and in a separate mission statement. The organization, to maintain its income tax exemption, must provide programs and activities that are consistent with its mission and purpose. Those activities, and the ongoing revenue generated, that are not related to its exempt purposes, is considered unrelated. Unrelated Business Income (UBI), less appropriate expenses, is subject to income tax.
The ramifications of Topic 740 are that management and governance of not-for-profit organizations need to evaluate the organization’s operations in light of its original tax exempt application and its current mission and purpose. Often the current mission and purpose have evolved from the original approval of the organization’s income tax exemption. As purposes change, and bylaws are amended, those changes should have been (should be) evaluated in terms of the entity’s tax exempt purpose. The IRS should always be notified of such changes when filing the annual information return, Form 990.
As part of the evaluation of the organization’s operations and conformity to its exempt purpose, all activities deemed unrelated need to be identified. UBI is generally not a bad thing. UBI is taxable however, necessitating the preparation and filing of an income tax return Form 990T. Expenses related to this income are allowed as deductions.
By not operating in compliance with the organization’s exempt purpose and /or not segregating and reporting unrelated business activities on Form 990T, the organization not only risks the assessment of tax, penalties and interest, but also revocation of its income tax exemption. In addition, the IRS requires that the uncertain tax positions that create an estimated liability pursuant to FIN 48 be noted in Schedule D of Form 990.
In addition to evaluating the organization’s operations, an evaluation of the jurisdictions in which the organization operates and has a presence is recommended as well. There can be penalties for not filing in the appropriate states. This also includes payroll filings. There is probably greater exposure for failure to file in multiple states for organizations exempt pursuant to IRC 501(c)(3) that are soliciting for tax deductible donations.
The requirements of FASB Topic 740 and the compliance requirements of not-for-profit organizations with the IRS and with states are complicated. This article is meant as brief overview. We strongly recommend that you contact your organization’s financial professionals and legal counsel to discuss the accounting, operational and filing needs in light of Topic 740.
Patrick W. Melvin, CPA is a principal with Desmond & Ahern, Ltd. Located in Chicago, IL.