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Editorial 10 MIN READ

The nonprofit corporation in September 2020: a field report

The parking tax is gone, CARES put the sector on payroll protection, and §4960 has final regs to live with

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 6 sections
  1. The state charter did not change
  2. The parking tax was repealed, retroactively
  3. CARES § 1102 put the exempt sector inside the PPP
  4. § 4960 now has final regulations
  5. What the last twenty months actually changed
  6. Sources

he nonprofit corporation lost one tax, got a forgivable loan, and received final regulations on another tax, all in the nine months between December 2019 and June 2020. A sector that walked into 2019 carrying three new federal tax bills walks into the fall of 2020 carrying two of them, with the third refunded and the book closed.

Twenty months after the nonprofit corporation revisit, the front-of-house mechanics have not moved: Form 1023 is still $600, Form 1023-EZ is still $275, and the state charter is still the state charter. The back-of-house tax surface has moved in three different directions at once.

The state charter did not change

California still codifies its Nonprofit Corporation Law at Corporations Code §§ 5000 to 9927, split across public benefit (§ 5110), mutual benefit (§ 7110), and religious (§ 9110). Texas still governs nonprofit corporations under Chapter 22 of the Business Organizations Code, with a $25 Form 202 certificate of formation. Delaware still declines to maintain a separate nonprofit statute and runs its nonstock corporations through 8 Del. C. § 114. New York's Not-for-Profit Corporation Law, as amended by the Nonprofit Revitalization Act of 2013, still classifies entities as "charitable" or "non-charitable."

Drafting hygiene has not moved either. Articles still need an exempt-purposes clause tracking § 501(c)(3) and a dissolution clause committing the assets to another exempt organization or to a government. The IRS still publishes suggested language in the Form 1023 instructions; state SOS templates still do not. The amendment fee, paid twice by organizations whose state articles lack this language, is still the most common avoidable expense in year one.

One small operational note for 2020 filers: since January 31, 2020, Form 1023 itself is e-file only. The IRS retired paper submission of the long-form application with Rev. Proc. 2020-8, 2020-8 I.R.B. 447, which modified Rev. Proc. 2020-5, 2020-1 I.R.B. 241 to require electronic filing through Pay.gov. There was a 90-day transition; since May 1, 2020, paper 1023s have been rejected. The user fee is unchanged at $600, and Form 1023-EZ, which has been online-only since inception, stays at $275. Those fees are set annually by Rev. Proc. 2020-5, which replaced Rev. Proc. 2019-5 on the same rolling basis that Rev. Proc. 2019-5 replaced 2018-5 and 2017-5.

The 27-month retroactivity window under Treasury Regulation § 1.508-1(a)(2) is also unchanged. File Form 1023 within 27 months after the end of the month of incorporation and exemption runs from formation. Miss it and exemption runs from the postmark.

The parking tax was repealed, retroactively

Section 512(a)(7) was the charge that grafted the employer side of the TCJA § 274(a)(4) parking disallowance onto exempt organizations as UBTI. A church with five reserved staff spaces was, on the statute's terms, a UBIT filer at 21%. The January 2019 write-up described Notice 2018-99's four-step allocation methodology, the March 31, 2019 grace period to unreserve spots retroactively, and a political environment in which a bipartisan coalition was pushing for repeal.

Repeal arrived on December 20, 2019, when the Further Consolidated Appropriations Act, 2020 was signed into law as Pub. L. No. 116-94. Section 302 of Division Q, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 folded into the broader appropriations vehicle, struck § 512(a)(7) from the Code and made the repeal effective as if it had never been enacted, that is, for amounts paid or incurred after December 31, 2017. The provision was gone retroactive to its own effective date.

For organizations that filed and paid UBIT on parking benefits for tax year 2018 or 2019, the IRS issued refund guidance. Organizations could amend the relevant Form 990-T to claim a refund. The IRS published dedicated instructions at irs.gov/charities-non-profits/how-exempt-organizations-can-request-a-refund-of-512a7-taxes-paid covering the mechanics: file an amended 990-T, write "Amended Return" at the top, enter zero on the 512(a)(7) line, and attach a statement referencing § 302 of Division Q of the FCAA 2020. Refunds are processed at the ordinary pace.

That leaves § 512(a)(6), the UBTI silo rule, as the surviving TCJA UBIT change. Proposed regulations finally issued in April 2020 under REG-106864-18, 85 Fed. Reg. 23172 (April 24, 2020). The proposed regs adopt the Notice 2018-67 NAICS-two-digit approach in modified form (the final two-digit code, not the six-digit code), provide transition rules for pre-existing NOLs, and address the investment-partnership exclusion with a cleaner de minimis test. Comments closed June 23, 2020; final rules are expected but not yet issued as of this writing. Organizations preparing a 990-T for a tax year beginning in 2020 can rely on either the proposed regulations or a reasonable good-faith interpretation of the statute, with the proposed regulations increasingly the better-supported choice now that a formal agency position exists.

CARES § 1102 put the exempt sector inside the PPP

Before the Coronavirus Aid, Relief, and Economic Security Act, the Small Business Administration's 7(a) loan program excluded § 501(c)(3) organizations from most eligibility. The CARES Act, enacted March 27, 2020 as Pub. L. 116-136, did two things that restructured the relationship between nonprofits and SBA lending for the duration of the emergency.

Section 1102 of CARES created the Paycheck Protection Program as a new 7(a) loan category and explicitly made § 501(c)(3) organizations and § 501(c)(19) veterans' organizations eligible alongside small businesses, sole proprietors, and independent contractors. The eligibility provision appears in § 1102(a)(2) amending 15 U.S.C. § 636(a)(36)(D)(i). The cap was 500 employees (or the SBA size standard for the industry if higher), and the loan size was the lesser of 2.5 times average monthly payroll or $10 million. Loan proceeds could cover payroll (capped at $100,000 annualized per employee), rent, utilities, and mortgage interest.

Section 1106 of CARES provided that amounts spent on payroll, rent, utilities, and mortgage interest within the covered period could be forgiven, with the forgiven amount excluded from gross income. For exempt organizations this was academic on the gross-income side, but the exclusion of forgiveness from UBTI and the explicit eligibility provision let tens of thousands of charities through the door.

The initial $349 billion appropriation was exhausted in thirteen days. The Paycheck Protection Program and Health Care Enhancement Act of April 24, 2020 added $310 billion. Program terms evolved rapidly: the Paycheck Protection Program Flexibility Act of June 5, 2020 extended the covered period from 8 weeks to 24 weeks, reduced the mandatory payroll share of forgivable expenses from 75% to 60%, and pushed the loan maturity on new loans from 2 years to 5. The application window for new PPP loans closed August 8, 2020.

For exempt-organization board minutes and audit files, the relevant citations are CARES § 1102 (eligibility), § 1106 (forgiveness), and the PPP Flexibility Act for the covered-period mechanics. SBA and Treasury interim final rules implementing PPP live in the Federal Register across April through June 2020; the consolidated PPP FAQ maintained by Treasury is the single most useful operational reference for organizations reconciling expenses to forgiveness. Larger exempt organizations that received a PPP loan in excess of $2 million will also want to read the SBA's May 2020 guidance on necessity certifications; smaller loans are deemed to have satisfied the good-faith certification under a safe harbor announced in FAQ 46.

§ 4960 now has final regulations

IRC § 4960, the 21% excise tax on remuneration above $1 million paid by an applicable tax-exempt organization to a covered employee, and on excess parachute payments, went from one notice to proposed regulations to final regulations in 30 months. Notice 2019-9, 90 pages long, governed the 2018 tax year. Proposed regulations issued as REG-122180-18 in June 2020. Final regulations followed in T.D. 9901, released on public inspection June 11, 2020, and applicable to tax years beginning after December 31, 2021. For the 2019, 2020, and 2021 tax years currently being prepared, taxpayers may rely on Notice 2019-9, the proposed regulations, or the final regulations, with consistent application.

The substance the final regs settle:

The "covered employee" definition is locked in as any of the five highest-compensated employees for the current tax year plus anyone who was a covered employee for a preceding tax year beginning after December 31, 2016. The group only grows. Once in, always in. Part-year employees are tested on annualized remuneration. Related-organization aggregation is required; an exempt organization cannot shop out the top officer's salary to a taxable subsidiary to avoid the group.

The medical-services exclusion, the most contested part of Notice 2019-9, is preserved and tightened. Remuneration for "medical services" performed by a licensed medical professional is excluded from the § 4960 base; administrative, research, teaching, and supervisory pay is not. Organizations must make a reasonable allocation between medical and non-medical services, and the regs provide safe harbors using employment-agreement designations and time-tracking records.

The parachute rules under § 4960(c)(5) follow § 280G mechanics in spirit but are their own regime. A parachute payment is contingent on separation from service and exceeds three times the employee's five-year average compensation. The excess over one times the five-year average is the taxed amount.

Timing-wise, § 4960 liability is reported on Form 4720, due by the 15th day of the 5th month after year-end. Organizations with off-calendar tax years beginning in 2018 are filing for those years under Notice 2019-9; 2019 and 2020 returns can rely on Notice 2019-9, the proposed regulations, or T.D. 9901, applied consistently.

What the last twenty months actually changed

The headline is smaller than it reads. Parking tax gone. PPP added and already closed to new applications. § 4960 substantively the same as it was, with more paper around it. § 512(a)(6) silos the same as they were, with proposed regs modifying the NAICS-six-digit interim approach to a NAICS-two-digit final approach.

The undercurrent is larger. Two calendar years after TCJA, the exempt sector has learned to read the Internal Revenue Code as a source of liability, not only a source of protection. The determination letter still matters. The organization's tax posture is still, at its core, exempt. But the filings the treasurer prepares each year now include a 990, potentially a 990-T with silos, potentially a 4720, and for organizations that took PPP, a lender-forgiveness application and an SBA certification file. The word "nonprofit" has not stopped meaning what it meant in 2017. The operational package around it has thickened.

For boards doing year-end planning in September 2020, three housekeeping items carry over from the 2019 guide. Amend any 2018 or 2019 Form 990-T that paid § 512(a)(7) parking tax and claim the refund. Check whether any of the top five compensated individuals, including those grandfathered in from prior years, crossed the $1 million line on a calendar-year or off-calendar basis. Make sure the PPP forgiveness application and its supporting payroll file live in the same folder as the 990 workpapers, because the documentation a lender accepts and the documentation an IRS examiner will accept are not quite the same document.

For founders forming a new § 501(c)(3) this fall, the cost picture is unchanged. Figure $25 to $100 for the state filing, $275 or $600 for the IRS user fee, and an electronic Form 1023 that is now the only form 1023. The 27-month clock starts at the end of the month of incorporation. Everything else in this article is a tax treasurer's problem, three or four years down the road.

Sources

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