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Five Year-End Tax Tips for Not-For-Profit Organizations

As 2020 comes to a close, it’s a perfect time to review some key considerations for NFP organizations year-end planning. We provide 5 year-end tips to help with this process:

1. Make sure donors know It’s a great time to give… AND receive an enhanced deduction!

It’s that time of year where, both for altruistic and prudent tax planning reasons, charitable giving reaches its apex. In fact, according to some reports, most nonprofits take in 40-50% percent of their annual revenue during the holidays.

With that in mind, it’s critical that public charities ensure that their major donors are aware of the enhanced benefits for giving through December 31st.

Specifically, legislation signed into law earlier this year removed the existing cap on deductions for cash contributions to public charities by individuals, raising it from 60 percent of adjusted gross income (AGI) to 100 percent (for corporations, the annual limit is expanded from 10 percent to 25 percent) through the end of 2020.

This provision provides a significant benefit to taxpayers who make qualified contributions, while encouraging much needed giving to public charities struggling due to the devastating virus.

2. The clock is ticking on required charitable distributions

The end of the year presents some unique challenges for private foundations. The requirement to distribute charitable grants equal to 5% of investment assets annually can be a complex one, and many organizations must scramble to comply by the December 31st deadline.

If a foundation fails to comply, it will be required to pay an excise tax that is equal to 30 percent of the distribution’s shortfall; this can increase to 100% if not corrected withing 90 days of IRS notification.

A great solution for foundations struggling with meeting this requirement can be to utilize a Donor Advised Fund (DAF). A distribution to a DAF will count toward the foundations required distribution for the current year and provide additional time for the foundation to direct its charitable grants.

By utilizing this structure, foundations can satisfy their distribution requirements under law while ultimately still being able to direct their much-needed assistance to the charitable causes they support.

3. UBIT Activity is an island unto itself

Under new rules, unrelated business income from an activity can only be offset against expenses from that same activity. Essentially, each UBIT activity is in its own “silo”, and organizations will not be able to deduct expenses from an activity that produces losses, while still being taxed on activities that produce gains.

The requirement that unrelated business activity silos be created to calculate the gain and loss on each individual activity has substantial consequences and can result in a significantly larger unrelated business income tax liability.

With the complexity of these requirements, it’s imperative that organizations keep sufficient records and monitor all UBIT activities to ensure inclusion in the correct “silo.”

In addition, organizations may want to consider placing multiple lines of unrelated businesses into a taxable subsidiary, allowing losses from each separate business to once again offset taxable income from all activities.

4. Distancing from new payroll tax obligations 

Although these days the focus is on distancing and remote work, many organizations may find themselves coming into unwanted contact with a new tax jurisdiction.

Typically, State income tax withholding is based on the state in which an employee provides services, and not the state where the employee resides. However, with remote work environments being the new normal due to the COVID-19 pandemic, employers may need to register with their employees’ respective states of residence and withhold payroll taxes.

Given the unprecedented pandemic, some states have offered guidance, indicating that if the employee’s remote work location is due to COVID-19 and is temporary, the state will not impose withholding requirements.

With the new year approaching, and subsequent employment filing season, employers should ensure they know where employees are working from, track their time spent working in each location and monitor any guidance issued by applicable states concerning payroll tax reporting.

5. ‘Tis the season… to apply for grants!

The end of the year is right around the corner, a time when donors usually have a better sense of their financial position, and the spirit of the holidays inspire charitable giving.

This giving period, including all fundraising efforts and donations from Giving Tuesday (typically the Tuesday following Thanksgiving) through year-end, brings in a significant portion of most charitable organization’s yearly donations and creates a “busy-season” of fundraising efforts.

In addition to a solid annual fundraising strategy and year-end campaign, organizations should make sure to stay aware of grants available to them, especially from private grant-making foundations whose donors may be looking to meet their annual distributions requirements for the year, during this period.

Whether internally or through a professional fundraiser/grant-writer, organizations should make all efforts to stay aware of their grant options, and make sure to take full advantage of this opportune time of year!

If you have any further questions for yeaer-end tax planning, please contact a member of our tax team for further assistance.

Year-End Tax Planning

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