1. 's
ISSUES & INSIGHTS
Nonprofits: New Reporting Requirements for Tax-Exempt Bonds
by Barbara Cyphers, Tax Partner
Did your nonprofit organization have a
tax-exempt bond issue with an outstanding
principal amount of more than $100,000 as
of the last day of the year, that was issued
after December 31, 2002? If your organiza-
tion files a Form 990, you will be reporting
additional information to the IRS. Related in-
formation is captured on Schedule K. Is your
organization tracking the necessary informa-
tion to complete an accurate Schedule K?
Schedule K, Supplemental Information on
Tax-Exempt Bonds, was added to the Form porting process. The reality is that many or- to be an insurmountable chore; having to
990 in 2008. For 2008 filings, nonprofit orga- ganizations most likely had loose monitoring gather all of the necessary information and
nizations filing Schedule K were only required policies in place, if any, and will be playing data to ensure a timely filing. If a qualifying
to complete the short informational section to “catch up” to ensure 2009 compliance. It is nonprofit does not file Schedule K, it is filing
satisfy the IRS (the rest of the form was op- imperative to immediately implement solid an incomplete return and could be subject to
tional). Starting with 2009 filings, the IRS monitoring policies which should include late filing penalties. Worse yet, if the non-
requires most nonprofit organizations with documenting the use of bond financed facili- profit is not in compliance with tax-exempt
tax-exempt bonds to fill out the schedule in ties, monitoring investment returns, etc. bond requirements, it could be subject to
its entirety to ensure proper bond compliance. penalties and the bonds could lose tax- ex-
In taking the steps to compliance, an organi- empt status resulting in the organization pay-
Again, Schedule K is completed for bonds zation can appoint a person to be the “bond ing out more returns. This would lead to cash
issued after 2002. Organizations should monitor.” This person would be in charge of flow difficulties in the years to come.
be aware, however, that certain changes to monitoring the investment and use of funds.
bonds issued before 2002, such as mode Since bonds most often finance a structure of In Conclusion
changes, liquidity replacements or document some sort, it would be that person’s respon- Form 990 is often the first place potential
amendments, may trigger a “reissuance” and sibility to annually review how the structure donors and media look, and with Schedule
make them subject to Schedule K disclosure. was used and how the administration hopes K now being a mandatory part of that filing,
to use it in the coming year. Documenting will have a significant impact on the way
Completing the Schedule K the amount of hours for private use (e.g. an organization receives funding. If a non-
Schedule K calls for a listing of the “purpose” weddings) and public use of the facility is a profit is not able to issue tax-exempt bonds
of each issue and starting with 2009 filings good “best practice” to conduct throughout (if found to be noncompliant), its cash flow
requires answers to detailed questions about the year. The key is to keep monitoring and strategy would be severely compromised.
the breakdown of the use of proceeds and documenting on an ongoing basis to provide Our nonprofit team at Armanino McKenna is
private business use. The answers to these support in case of an audit and to avoid any currently assisting our affected clients with
questions should be consistent with the posi- surprises at the time of filing. It’s always eas- the reporting requirements. Is your organi-
tion taken by an organization’s bond or tax ier to prevent compliance deficiencies than zation positioned to comply?
counsel upon issuance. Care should be taken to fix them once they’ve occurred.
to clearly define the purpose of each bond, as
well as the “bond-financed property.” In cases where two or more nonprofits are For questions or com-
beneficiaries of the same bond, each must ments regarding this
Steps to Compliance file its own Schedule K. Coordination be- article, contact Barbara
The first step is to be aware of the rules sur- tween these nonprofits is key to ensure there Cyphers, Tax Partner
rounding tax-exempt bonds. Although or- are no conflicts in the answers provided. at Armanino McKenna
ganizations should have been monitoring at 925.790.2600 or by
tax-exempt bond compliance from the start, The Consequence of Noncompliance email at Barbara.Cyphers@amllp.com.
not until 2009 has there been a mandatory re- Waiting until the time of filing might prove
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