2020 Year-End Tax Guide

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One big question that many were looking to be addressed is that of volunteers who are not compensated by the nonprofit but received substantial compensation from potentially related for-profit organizations. The proposed regulations state that amounts paid to an individual who was never employed by the ATEO in question is not considered for purposes of section 4960. Similarly, an individual who provides services solely as an employee of a related organization, including a related organization that provides services to the ATEO, is not employed by the ATEO and therefore isn’t a factor when determining the ATEO’s five highest compensated employees. When an employee of a related non-ATEO provides limited services to the ATEO without compensation, the proposed regulations would provide a limited-hours exception for determining the five highest- compensated employees, if the hours of service the employee performs for the ATEO comprise 10 percent or less of the employee’s total hours of service for the ATEO and all related organizations during the applicable year. An individual would be deemed as having satisfied this requirement if the individual works no more than 100 hours for the ATEO and all related ATEOs during the year. After 40 years, the IRS updated procedures under which recognition of exemption from federal income tax for tax exempt organizations described in Section 501 (c) may be obtained on a group basis for subordinate organizations affiliated with and under the control of a central organization. Notice 2020-36 sets forth updated procedures a central organization must follow to maintain a group exemption letter. The proposed revenue procedure updates Revenue Procedure 80-27, the IRS’s primary authority on group exemptions, which has been in effect since January 1980. The IRS also announced that it will not accept any requests for group exemptions until final guidance on group exemptions is published in the Internal Revenue Bulletin. The IRS states in the proposed revenue procedure that its goals in updating Revenue Procedure 80-27 were to reduce that burden, increase efficiency, improve the integrity of data collected, increase transparency, and increase compliance by central and subordinate organizations. In addition to providing amended rules for group PROPOSED GROUP EXEMPTION REVENUE PROCEDURE

exemptions going forward, the proposed revenue procedure provides a transition rule and a grandfather rule to address how the changes would apply to preexisting group exemptions. The proposed revenue procedure would add two requirements that a central organization would need to meet to obtain and maintain a group exemption: (1) have at least five subordinate organizations to obtain a group exemption and at least one subordinate organization thereafter; and (2) maintain only one group exemption. Consistent with Revenue Procedure 80-27, the proposed revenue procedure would require a central organization to establish that each subordinate organization included in the group exemption be affiliated with the central organization and subject to its general supervision or control, but would require subordinates to meet the more specific conditions of affiliation, general supervision, and control. These requirements would require a much more uniform structure for all subordinate organizations and limit the ability to cover a variety of types of nonprofits under the same group exemption. Unfortunately for the IRS, there has been a lot of immediate responses to these regulations, indicating a high level of concern by many organizations that heavily use group exemptions, especially religious organizations and other groups with diverse types of affiliated and subordinate organizations that feel the proposed regulations are not workable for these complex structures. The new requirements will not go into effect until the revenue procedure is finalized, and it will be interesting to see how the IRS reacts to the largely negative initial public response to its attempt to update and clarify the law in this area. SUMMARY As we move towards the end of another year, facing the results of a new election, and dealing with the impact of a global pandemic, we anticipate continued discussion about these and many more topics applicable to nonprofit organizations in the months ahead. Contact your Marcum professional for assistance with any of the above or other issues of concern to your organization.