Affordable Housing Developers May Benefit from Opportunity Zone Tax Break

A new tax break for individuals and entities who develop property in Opportunity Zones can also benefit affordable housing developers. The Opportunity Zones include 9000 census tracts around the country including some in Rochester and surrounding areas throughout upstate New York. Tax breaks for investors include deferred tax on capital gains from the sale of land, buildings, businesses or stock. In addition, those capital gains can be reduced or eliminated, depending on how long they hold Opportunity Zone projects. When Opportunity Zone projects are held for 10 years or more, tax on the capital gain is eliminated. Most Affordable Housing projects are held for longer than that. The new regulations also confirm that either partnerships or their partners can qualify for deferral and reduced taxation of their capital gains by investing in these projects. When making improvements to existing facilities, those improvements need to be “substantial”. The new regulations clarify that only the cost of the building (not the land) will be considered when determining whether an improvement is “substantial”. Affordable Housing projects generally take longer than commercial projects. The new regulations will allow tax benefits for projects that go on for approximately 2 ½ years, as long as the project is substantially the same as the what investors provided to qualify their project. This makes these new incentives appropriate for Affordable Housing projects.

Federal Micro Purchase Limit Has Been Increased

If your organization receives federal funding and is subject to federal procurement standards, you should already have a policy in place. Those policies generally identify the different rules for different purchasing thresholds including micro purchases, simplified acquisitions and larger purchases. The micro purchase threshold was initially increased from $3500-$10,000 for all entities dealing with the Department of Defense. After the Office of Management and Budget increased the thresholds for transactions involving the National Defense Authorization Act, they issued a memo, OMB Memo M-18-18, which increased the simplified acquisition threshold for all nonfederal entities dealing with all federal agencies. Procurement responsibilities for the simplified acquisition threshold are the least restrictive. When the aggregate amount does not exceed the micro purchase threshold (now $10,000), nonfederal entities (that’s you!) must distribute micro purchases among qualified suppliers if practical. Micro purchases can be made without soliciting competitive quotations if you consider the price reasonable.

Affordable Housing-Paying for Your Section 168(h) Election

When a nonprofit is involved in an affordable housing or similar project with a for profit investor, the nonprofit generally uses a taxable for profit subsidiary to hold the property. The benefit of this is that the property can be depreciated over 27 ½ years rather than 40 years, which means a better tax results for the investor, and translates to a higher price for the tax credits.
However, to get this treatment the taxable subsidiary must make an election under Internal Revenue Code section 168(h)(6)(F)(ii). The effect of this election is that
dividends or interest, paid from the taxable subsidiary to the nonprofit parent, are taxable as Unrelated Business Income.
This requirement only exists when not all tax attributes between the project and its owners (share of income and loss, distributions, equity) are the same. But, that usually is the case for these joint venture projects
Additionally, any gain from disposition of an interest in the taxable subsidiary is also taxable as Unrelated Business Income to the nonprofit.
Techniques for reducing tax on dividends, interest or dispositions include, first repaying all loans and developer fees to the nonprofit sponsor. Additionally, the entity holding the project (usually a limited partnership) can make payments directly to the nonprofit as reimbursement for expenses. However, the nonprofit needs to document that these expenses are costs the nonprofit has incurred in behalf of the project.
Examples of allowable costs include payroll and related taxes, and benefits, as well as indirect costs that are necessary for providing services to the project. Indirect costs ​ typically include items such as occupancy, insurance, general accounting, and administration.

Changes in Your Legal Form

If a charity changes its incorporation from one state to another or makes a similar significant change to its legal entity, but no changes to its operations, it generally had to apply for exempt status much like a new organization. IRS made that process significantly easier with the new procedure known as Revenue Procedure 2018-15.
The Revenue Procedure allows an organization to migrate its nonprofit status to the new legal entity when there are no significant changes in the organization’s operations.
We had a chance to try the new procedure recently for an organization that had a flaw in its original incorporation document. The organization needed to form a new corporation with a slightly different name. We were successful in getting exempt status transitioned to the new organization without a new application for exemption.
Check the Revenue Procedure online or contact us for information about how this procedure works and when it applies.

Charter School Audits-What to Expect From a New York State Comptroller Audit

Charter schools are always subject to scrutiny because they draw money from public schools in the district.
Their charters are re-assessed every five years, and they are subject to annual financial statement audits, and compliance audits if they use more than $750,000 in federal funds, as well as agreed-upon procedures audits under some circumstances, including an initial assessment of internal controls, within 120 days of when their charters are issued.
In addition, outside New York City, the New York State Comptroller randomly audits charter schools. Those audits are based on the New York State Department of Education “Charter School Audit Guide”. Heveron & Company partner Jeanne Beutner, CPA provided some input into the development of that audit guide, so consider contacting Jeanne if you have questions about the audit guide.
Knowing the issues that came up in these audits can help you assess your operations and avoid similar deficiencies.
According to a CPA Journal article authored by Marie Blouin, PhD, CPA and Ronald Huefner, PhD, CPA, 54 charter schools have been audited over the past six years. The article confirms that procurement, payroll and other payments, as well as information technology procedures were common concerns, but contracts with sponsoring organizations, conflicts of interest, space issues and residency and billing issues were most common.

Concerns with respect to sponsoring organizations included:

    • lack of evidence of board review and approval of contracts,
    • lack of evidence of review of payments to sponsoring organizations,​
    • inadequate detail about services that were actually being performed, which led to a question about whether the school may be making duplicate payments for the same service,
    • lack of documentation that services were actually received,
    • payments based on revenue when that wasn’t a reasonable basis for services performed, and
    • lack of evidence that the that the board perform sufficient oversight for budgeting and finance.

Specific conflicts of interest noted in these audits included:

  • in two cases there were loans from board members to the school. Such loans are prohibited,
  • a board member was a partner in a law firm that provided services to the school, and
  • a board member was an investor in a company that leased a building to the school. 10 of the 54 audits contained recommendations regarding residency and billing. This is always a challenging issue especially when students move during the school year.
  • In one audit a student moved three times during the year and the school had no proof of residency. As a result one district refused to pay a bill,
  • in another case, a charter school with students from five districts was initially denied $300,000 of funding related to 120 students. Most of this ultimately got resolved but not without significant additional effort. The message here is that you need to have a strong ongoing process to determine what school district students belong to and to stay up-to-date with relocations.

 

New IRS Search Engine for Eligible Charities

A client board member recently asked why their nonprofit could not be found in Publication 78. Publication 78 was the official listing of charities eligible to receive contributions, and it started out as a hard copy document that made its way to PDF, but times have changed and IRS is now maintaining its entire database electronically.
The Revenue Procedure that announced the new databases confirms what purposes they can be used for.
The new IRS tool called Tax-Exempt Organization Search or TEOS is the next generation of IRS Exempt Organization Select Check, and in addition to checking on the organization’s exempt status, you will be able to look at images of forms 990, 990-EZ, 990-PF, and 990-T starting with the 990 forms filed in 2018.
IRS favorable determination letters will start to become available on this site. Eventually determination letters issued since January 2014 will be available.
IRS claims that the new search tool is easier to use, is more user-friendly, and easier to search on smart phones and tablets.
Like the predecessor tool, you will also be able to look at organizations that have had their exempt status revoked for failure to file, and look for organizations that have filed form 990N.

Nonprofits Check Your Website … IRS Will

It wasn’t that many years ago that IRS seemed confused about what to do about nonprofit websites. Could links to for-profits be Unrelated Business Income? Can charities lobby or carry on political activity with links or messages on their website?
Now IRS considers your website and your social media postings a tool to check your activity and your compliance.

They will check these if your organization has been selected for audit. They will also check these for organizations that are applying for exempt status, or for a change in their status.
It’s very likely they will look at these if they are considering an audit of your organization based on inconsistencies identified in your form 990, or based on referrals from other agencies or from individuals.
The message is clear. Be sure your website and social media is up to date and properly describes your activities, and that those activities are consistent with your mission. Also be careful of any links or endorsements that might indicate Unrelated Business Income, political or lobbying activity.
It wasn’t that many years ago that IRS seemed confused about what to do about nonprofit websites. Could links to for-profits be Unrelated Business Income? Can charities lobby or carry on political activity with links or messages on their website?
Now IRS considers your website and your social media postings a tool to check your activity and your compliance.​
They will check these if your organization has been selected for audit. They will also check these for organizations that are applying for exempt status, or for a change in their status.
It’s very likely they will look at these if they are considering an audit of your organization based on inconsistencies identified in your form 990, or based on referrals from other agencies or from individuals.
The message is clear. Be sure your website and social media is up to date and properly describes your activities, and that those activities are consistent with your mission. Also be careful of any links or endorsements that might indicate Unrelated Business Income, political or lobbying activity.

The Other Public Support Test – the 10% Facts and Circumstances Test

This test is all about whether a charity is or is not publicly supported. Charities that do not meet a specific exception (like churches and schools) must have broad public support, which is based on mathematical tests.
Success in attracting large donors or developing a substantial fund to sustain the organization may create a situation where the organization is unable to meet the public support tests. The result of this is that the organization will be reclassified as a private foundation. Assuming they carry on a program they will be classified as a private operating foundation.
The impact of a change to private operating foundation status includes some excise taxes, which are generally modest, but also a risk of the loss of some funding. Private foundations cannot contribute to other private foundations, and many grantmakers have policies against supporting private foundations, even if they are private operating foundations.
The most common public support tests use the current year and prior four years’ averages to determine whether you meet the mathematical tests to be publicly supported by contributions, or by a combination of contributions and related activities. Organizations that fail those mathematical tests can use the 10% facts and circumstances test. This only requires that the organization “normally“ have at least 10% broad public support, but they must also have an ongoing program to attract public or governmental support. Additionally their governing board must represent the
public interest rather than personal or private interests, and their programs must be designed for the benefit of the general public.
When this method is used to demonstrate public support, IRS will also look at whether the organization has a well-defined program for accomplishing its charitable work and at whether members of the public having special knowledge or expertise, public officials, or community leaders participate in or sponsor any of the organization’s programs.
Monitor your public support percentage by reviewing your form 990, Schedule A each year. Look at the public support percentage for the current year and for the prior year noting the trend.
Contact us if you would like more detailed information on all of the public support tests including the 10% facts and circumstances test.

Workplace for Good: Facebook’s Free Enterprise Collaboration Tool for Nonprofits

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INSIDE THIS ISSUE:

  • Changes in Your Legal Form
  • New Financial Reporting Implementation Guide (view checklist)
  • The Charities Bureau Moved!
  • New Publications and Updates from IRS
  • The De Minimis Indirect Cost Rate: Not All It’s Cracked Up to Be
  • Affordable Housing: Paying or Your Section 168(h) Election
  • The Other Public Support Test: the 10% Facts and Circumstances Test
  • WebStar Winner

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The 10% De Minimis Indirect Cost Rate-Not All It’s Cracked up to Be

Several nonprofit organizations that receive federal funds and carry on multiple programs elect the 10% de minimus indirect cost rate for reimbursement because of the complexity of applying for an indirect cost rate. However, indirect costs are usually more than 10% and often significantly more, which means that an organization will need to find other resources to pay for indirect costs that are not covered.
Also, 10% doesn’t mean 10% of all of your direct costs. The 10% rate only applies to what the federal government calls “Modified Total Direct Costs”. These are payroll and
payroll overhead, materials and supplies, direct services, travel, and up to the first $25,000 of each sub award.
The 10% does not apply equipment purchases, capital expenditures, rental, tuitions, scholarships or fellowships in any patient care, or participant support. Nonprofits selecting the 10% de minimis reimbursement also need to have proper controls to be sure that no items that should be categorized as indirect are included with their direct costs.
It is helpful to structure your general ledger so that it is easy to identify direct and indirect costs and also because they are subject to limitation (such as subawards). Doing this will
make your true indirect costs clearer and may prompt you to request an indirect cost rate that all federal programs should reimburse for.
Contact us if you would like some help or guidance with these calculations or with
applying for an indirect cost rate.