Nonprofit Notes
Summer 2018

By Rhonda G. Williams, CPA
Barraclough & Associates, P.C.
Certified Public Accountants & Consultants

Tax Cuts and Jobs Act, Part II
Charitable Contributions

The last newsletter covered the tax law’s effect on nonprofit organizations that had unrelated business income. This quarter’s newsletter takes a look at contributions, the lifeblood of most 501(c)(3) organizations.

The tax law giveth and the tax law taketh away. The new law affected charitable contributions in two big ways:
(1) The limitation for cash contributions by individuals to public charities and private operating foundations was increased from 50% of adjusted gross income (AGI) to 60% of adjusted gross income. For those individuals whose deduction was often limited, this was a welcome change. However,
(2) Since the standard deduction was almost doubled, many individuals who itemized their deductions in the past may no longer find it beneficial to do so. While some taxpayers will continue to make contributions to charity, some may scale back when they no longer “need” the tax deduction.

One tax-planning method is the bunching of itemized deductions. Taxpayers whose itemized deductions are less than the standard deduction may be able to exceed it if they shift some of their itemized deductions from one year to another. For example, an individual who gives $10,000 a year to charity and has total itemized deductions below the standard deduction may be able to itemize if donations are $20,000. However, he/she may not be financially able to donate $20,000 a year. By donating $20,000 one year and skipping the next, the taxpayer can donate the same amount of money over the two-year period while retaining the tax deduction. In the off years, the taxpayer can claim the standard deduction. This method may make it more difficult for charities to plan their yearly budgets, but at least they will not lose the income altogether.

The QCD (qualified charitable distribution) rules have not changed, but they are complicated. An individual who makes a direct rollover from an IRA to a qualified charity has a tax benefit to the extent that the reduction in the AGI affects his/her tax bracket and any calculations that are dependent on the AGI. A QCD can be made ONLY to a public charity or private operating foundation. A rollover to a private foundation, supporting organization, or donor advised fund is not a QCD. Also, the QCD must be a direct rollover. If the funds pass through the taxpayer’s hands, the contribution is not a QCD. Finally, the donor acknowledgment letter must state that the contribution was a qualified charitable distribution from the taxpayer’s IRA.

Charities need to be familiar with the tax laws so that they do not make mistakes that harm their donors or lead to the loss of donors and, therefore, income.

Nonprofit Notes
Spring 2018

By Rhonda G. Williams, CPA
Barraclough & Associates, P.C.
Certified Public Accountants & Consultants

Surprise, the Tax Cuts and Jobs Act Affects Tax-Exempt Entities, Too!

Tax-exempt entities do not pay taxes, so why would the new tax act affect them? Actually, all tax-exempt entities have to pay taxes on certain types of income. Nonprofit organizations in New Mexico must report unrelated business income (UBI) on Form 990-T and New Mexico Form CIT-1. Trust accounts must report UBI on Form 990-T and FID-1. Not only have the mechanics for calculating UBI on Form 990-T changed, but the form itself will now be used to report and calculate the tax on disallowed employee benefits.

An unrelated business is any trade or business the conduct of which is not substantially related to the exercise of an organization’s exempt purpose. If a nontaxable entity has gross income of $1,000 or more from a regularly conducted unrelated trade or business, including UBI reported to it on Form K-1, it must file Form 990-T, even if taxable income is zero. This affects:
1. any domestic or foreign organization exempt under IRC Section 501, and
2. trust accounts as defined in IRC Sections 408(e), 408A, 529(a), 220(e), and 530(a). These include IRAs, SEP IRAs, SIMPLE IRAs, Roth IRAs, Coverdell Education Savings Accounts, Archer Medical Savings Accounts, and Health Savings Accounts.
Each account of a type listed above is treated as a separate trust for unrelated business income tax purposes (even if there is a single owner or beneficiary for multiple accounts). A custodian is treated as a trustee.

No aggregation of income and losses – In the past, income and losses from various UBI activities could offset each other on Form 990-T. The new law does not allow multiple activities to be aggregated. Now, the entities’ total UBI must be computed by adding together the net UBI of each separate unrelated trade or business. For this purpose, the net UBTI of each trade or business may not be less than zero. Therefore, the net operating loss of each trade or business must be tracked separately. In the past, net operating losses could be carried back two years, then forward. The new law requires that net operating losses be carried forward.

Tax on disallowed employee benefits – Tax-exempt entities often provide nontaxable fringe benefits to employees, such as athletic facilities, parking facilities, and transportation benefits. The new tax law requires tax-exempt entities to pay tax on the value of those benefits by treating the disbursements as UBI. In other words, those previously nontaxable benefits will now be taxable, but the tax will be assessed on the tax-exempt employer, not the employee, and will be paid via Form 990-T.

Please contact your tax advisor for additional information.

Nonprofit Notes
Winter 2018

By Rhonda G. Williams, CPA
Barraclough & Associates, P.C.
Certified Public Accountants & Consultants

Attorney General Balderas Announces Charities Compliance Sweep in New Mexico
FOR IMMEDIATE RELEASE:                                                                       Contact: James Hallinan
December 19, 2017                                                                                                  (505) 660-2216

Albuquerque, NM – Today, Attorney General Hector Balderas announced he is launching the New Mexico Charities Compliance Sweep. The Office of the Attorney General has started sending out notices to charities across the state that are delinquent in their registration and reporting requirements as required by the Charitable Solicitations Act. The sweep offers delinquent charities the opportunity to come into compliance without having to face formal legal action.
“New Mexicans who open their hearts and wallets deserve to know where their hard-earned money is being spent by a charity,” said Attorney General Balderas. “I am offering charities the opportunity to self-report and come into compliance with state law without facing formal legal action from our office. However, if out of compliance charities do not take this opportunity, they will face the consequences of action by the Office of the Attorney General.”
The registration and reporting requirements imposed by the Charitable Solicitations Act serve the charitable community and the public by providing easily accessible information to support the charities’ duty of transparency, and to allow the public to view tax forms and other documents on the internet as they determine the best recipient of their charitable donations. All organizations in New Mexico that have tax exempt status from the IRS under section 501(c)3 or which hold themselves out as having a charitable purpose must register with the Office of the Attorney General and provide annual reports if they are to lawfully exist, solicit or operate in New Mexico.
Failure to do so may result in legal action by the Attorney General to stop a non-compliant charity from pursing its mission in New Mexico.
It is a charity’s responsibility to register with the Office of the Attorney General. However, rather than proceeding directly to formal legal action against delinquent charities, the Charities Compliance Sweep provides notice to charities of any delinquencies and the opportunity to come into compliance voluntarily. Voluntary compliance allows the charity to avoid the expense, inconvenience and potential harm to the reputation an organization may face if it is a named defendant in a lawsuit brought by the Attorney General.
Regardless of whether a charitable organization has yet received notice, Attorney General Balderas encourages all charitable organizations to review their compliance status on the electronic registration and reporting system at https://secure.nmag.gov/coros/ to remedy any potential late or incomplete reports.
New Mexicans are generous donors to charitable causes, and the information provided on the electronic system is available to help them evaluate possible beneficiaries of their donations.