December 6, 2021

Nonprofits: A Glance Behind and a Look Ahead

Nonprofits: A Glance Behind and a Look Ahead Tax-Exempt Business

As we glance back at the global pandemic that began in 2020 and the far-reaching and massive changes in tax law to which we have adapted, we notice that 2021 tax law changes were much more in line with the traditional pace and subtlety to which we are accustomed, perhaps reflecting a shift toward recovery and evolving priorities on the cusp of a new normal. Indeed, if 2020 was a year of sweeping paycheck protection loans, employee retention credits, economic injury and disaster loans, and the Main Street Lending Program, to name a few, tax law changes in 2021 went mostly unnoticed.

Beginning on January 19, 2021, final regulations for Section 4960 of the Internal Revenue Code were posted in the Federal Register, imposing an excise tax on remuneration to a nonprofit executive in excess of $1 million and any excess parachute payments paid by an applicable tax-exempt organization to any covered employee for tax years beginning after December 31, 2017. While there have since been several modifications, final regulations adopted most of the original draft issued in June 2020. The final regulations apply to tax years beginning after December 31, 2021.

In June 2021, the Internal Revenue Service issued a reminder that certain exempt organizations are required to file information and tax returns electronically for tax years beginning after July 1, 2019. It was announced that Form 4720 filed by a private foundation with a due date on or after July 15, 2021, must be filed electronically. A limited exception applies for 2020 Form 4720 returns with a due date on or after July 15, 2021, when submitted on paper, provided there is a postmark date on or before June 16, 2021.

On September 3, 2021, the Service released Revenue Procedure 2021-40, which reiterates that the agency will not issue private letter rulings on whether certain transactions will be considered an act of self-dealing within the meaning of Section 4941(d) of the code. Under this revenue procedure, the Service will not issue private letter rulings related to situations where a private foundation owns or receives an interest in a limited liability company (LLC) or other entity that owns a promissory note issued by a disqualified person. In addition, the Service will review its prior ruling position on these types of transactions.

Now looking forward, the Tax Exempt & Government Entities Division has released its priorities for the 2022 compliance program, and what they’ve outlined seems to echo the need to serve the taxpayer and provide more transparency in reporting requirements. For 2022, the program includes the following initiatives:

  • Strengthen compliance activities.
  • Improve operational efficiencies.
  • Maintain a taxpayer-focused organization.
  • Ensure awareness and collective understanding.
  • Leverage technology and data analytics.
  • Develop the Division’s workforce.

Much of the priority around maintaining a taxpayer-focused organization has been actualized, and taxpayer resources are now available through several websites. The Service is providing technical guides (TGs), free webinars to help charities better understand reporting activities and documentation, updated FAQs, links to attend international events that the Service itself participates in, and 18 new seminars focused on education.

Adaptations to mission strategy are not only driven by changes in the tax code or the IRS, but also by the needs of the community at large and the world in which these communities live. If the past 24months have taught nonprofits about flexibility and service, the next 12 months will serve as an opportunity to actively focus on the communities they serve. As workforces continue to shift and needs are reprioritized, nonprofits have a responsibility to meet communities where they are, through impactful and direct connections. Mission strategies will need to be supported by secure virtual environments and be ever-more sensitive to charitable services’ success in reaching the communities they serve. Flexible work environments that focus not solely on the outcomes and deliverables, but more importantly on the workforce and community being served, are essential.

Staying abreast of global, domestic and local shifts affords nonprofits the ability to swiftly adapt and readily respond to change. Data breaches are increasing. As we look forward, electronic environments and their security are increasingly as important as physical security for in-person events. Having an actionable contingency plan and continually evolving cyber security are paramount. The environment is forever changed, and therefore, so are the communities being served, and protecting how they are served is paramount.

2021 Year-End Tax Guide