Thirty years ago, when Christopher Anderson, now a shareholder with Maloney + Novotny, began his tax and consulting career, not-for-profit entities pretty much kept a low profile when it came to tax exemption status.
“But a lot more attention has been paid to not-for-profits over the past 10 to 15 years. Unfortunately, a lot of it was because of the scandals that came out with the very large organizations involving executive compensations or someone having a private jet that was paid for by donations from the rank and file,” says Anderson, who also serves as the vice chair of the American Institute of CPAs Exempt Organizations Tax Resource Panel. “With all of the media attention, Congress and the IRS got involved.”
The result has been more regulations for not-for-profits and tax records, which are “open to public inspection and widely available on the internet, including on the IRS website,” according to Anderson.
“I tell my not-for-profit clients that we have to pay a lot of attention to what I call an organization’s ‘most important public relations file’ because tax information is so widely available. An organization might have done a report to its constituents or to a community that, by definition, has a limited distribution. But now, anyone with a computer who goes to the right places can look at an organization’s Form 990.”
Congress passed the Tax Cuts and Jobs Act of 2017, designed primarily to reduce tax rates for businesses and individuals. Anderson believes the act also made it possible to see not-for-profit organizations as “revenue raisers” making up for the loss of taxes elsewhere. Those entities that had taxable income already could face higher tax bills with the Silo Rules of the Tax Cuts and Jobs Act. Anderson points to the Silo Rules for some of the changes that particularly affected medium to large companies, although not many small not-for-profits that were fundraisers for one cause.
“A not-for-profit is tax-exempt on things it does for its exempt purposes. When a college takes in fees for student tuition, it’s not taxed on that income. But if it does things that are outside of its exempt purposes, then it pays the taxes on that just like corporations do. An example is if a college or university allowed the community to buy a pass to use its athletic facilities that are really meant for students and non-students used it,” explains Anderson, adding, that to complicate matters, auxiliary services, including things such as parking and concessions, also come into play.
Not-for-profits were once able to offset income from silos, which made money with silos that were losses, so the tax bill might not have been as great, if anything. But when the tax law changes ended that action, suddenly the tax collector stepped forward. To the credit of the IRS, Anderson says the classifications and number of silos categories eventually were reduced, making it less traumatic for not-for-profits who encountered tax filing nightmares.
“But it’s still difficult. Keep in mind that not-for-profit organizations are the only taxpayers that are not allowed to net losses and income together from one activity or several activities against the other actions,” warns Anderson, adding that not every not-for-profit entity is completely aware of the fine print or the nuances of tax laws. “Right now, not-for-profit organizations have to figure out pandemic-related tax questions and have the added burden of having to pay taxes for the first time. In addition, they have to pay advisers to help them figure it all out for them.”
But doing taxes right the first time can obviously save frustration, time and money in the long run. Anderson often suggests not-for-profits go back three years if they are concerned about their tax records to determine if adjustments are necessary.
“I can only make suggestions,” says Anderson. “But I’d use every tool available to me if I was a not-for-profit, including attending tax seminars and viewing information on websites such as ours. And always, always, ask questions of any kind of your advisers.”