Fred Longwood, a tax manager, presented an agenda on new developments for 2012 affecting tax-exempt organizations. Key points included new regulations clarifying capitalization rules, changes to DC nonprofit law and budget laws increasing some taxes, and W-2 reporting of health insurance costs. Longwood warned of increased state efforts to assert nexus and collect taxes. He advised preparing early for 990 filings and performing a flux analysis to identify disclosure areas.

1. 2012 Exempt Organization Tax Update
January 13, 2012
Fred Longwood, CPA, MST
Tax Manager
(202) 419-5116
flongwood@tatetryon.com

2. Agenda
 What is new for 2012/tax year 2011
 Potential tax “pitfalls” to watch out for
 Plan for having a successful filing season

3. What is new for 2012 / tax year 2011
 Deduction vs. Capitalization of tangible
property costs regulations
 District of Columbia nonprofit corporation
act
 District of Columbia budget support
legislation for 2012
 W-2 reporting changes
 Form 8955-SSA

4. Capitalization regulations
 Background. Costs are currently deductible as a
repair expense under Code Sec. 162 if they are
incidental in nature, and neither materially add to the
value of the property nor appreciably prolong its
useful life. Costs also are currently deductible if they
are for materials and supplies consumed during the
year. Expenses must be capitalized under Code Sec.
263 if they are for permanent improvements or
betterments that increase the value of the property,
restore its value or use, substantially prolong its
useful life, or adapt it to a new or different use.

5. Uniform capitalization regulations
 IRS has issued temporary regulations, effective in
tax years beginning after 2011, on the application of
Code Sec. 162(a) and Code Sec. 263(a) to amounts
paid to acquire, produce, or improve tangible
property.
 The regulations clarify and expand the standards in
the current regs; provide certain new bright-line
tests for applying these standards; provide guidance
under Code Sec. 168 and include rules for
determining whether costs related to tangible
property are deductible repairs or capital
improvements.

6. Capitalization regulations
 In 2008, IRS issued proposed regulations on when
amounts are treated as paid to acquire, produce, or
improve tangible property. The new temporary
regulations adopt and refine many of the rules
already contained in the 2008 proposed regulations,
including:
 a new definition of “materials and supplies”
 a book conformity de minimis rule for acquisitions of
units of property
 a safe harbor for routine maintenance

7. Capitalization regulations
 The bottom line -- who does this affect?
 Exempt organizations with UBI activities against
which they claim depreciation expense deductions
 Taxable subsidiaries that acquire depreciable fixed
assets

8. DC Nonprofit Corporation Act
 The new DC Nonprofit Corporation Act
became effective July 2, 2011, and will be
applicable to all post-1962 Act nonprofit
corporations as of January 1, 2012.
 Some uncertainty remains as to whether "old
act" corporations can effectively opt out of
the new law, because the law states that "If
the corporation desires to do business in the
District, the corporation must file articles of
incorporation with the Mayor and otherwise
comply with this title."

9. DC Nonprofit Corporation Act
 The act is more of a legal matter than tax law,
but the highlights include:
 Increased membership involvement in board
decisions
 Requirement to provide certain defined classes of
membership proper notice of a meeting of
membership
 Requirement to maintain certain organizational
records and documents at the primary place of
business

10. DC budget law changes
 On July 28, 2011, the District of Columbia
passed legislation to provide additional
revenue for funding the 2012 budget (L. 2011,
Act 19-98). The provisions outlined below
were subject to the approval of Congress,
and became effective as of October 1, 2011.

11. DC budget law changes
 The legislation provides additional funding for the
District of Columbia's 2012 budget through
additional tax revenue, including the following:
 The requirement for combined reporting
 Imposes tax on most municipal bond interest
 Increases the minimum franchise tax
 The adoption of an apportionment formula with a double-
weighted sales factor
 Modifies the safe harbor from estimated franchise tax
underpayment penalties
 Extends (and increases) sales tax on selected services
 Imposes a sales tax on internet sales

12. DC budget law changes
 Items of particular interest to exempt
organizations:
 Minimum Corporate and Unincorporated
Business Franchise Taxes
 The minimum corporate and unincorporated business
franchise tax is increased under the Act from the
current $100 to $250. In addition, if D.C. gross receipts
are greater than $1 million (in UBI), the minimum tax
payable is increased to $1,000.
 The change to the minimum tax applies for tax years
beginning after December 31, 2010.

13. DC budget law changes
 Estimated tax safe harbor:
 The Act increases the prior year tax safe harbor from
estimated tax penalty for underpayment of estimated
tax from 100% to 110% of the tax shown on a
corporate or unincorporated franchise tax return.
 The change to the minimum tax applies for tax years
beginning after December 31, 2011.

14. DC budget law changes
 Apportionment of Business Income:
Double-Weighted Sales Factor
 The Act changes the current corporation franchise tax
apportionment formula of equally-weighted property,
payroll, and sales factors to a formula utilizing a
double-weighted sales factor.
 The change to the minimum tax applies for tax years
beginning after December 31, 2010.

15. W-2 reporting changes
 For tax years beginning on or after Jan. 1,
2011, Code Sec. 6051(a)(14), which was
added by PPACA §9002, generally provides
that the aggregate cost of the applicable
employer-sponsored health insurance
coverage must be reported on Form W-2,
Wage and Tax Statement.
 IRS has issued revised guidance on health
insurance coverage information reporting for
employers (Notice 2012-9, 2012-4 IRB)

16. W-2 reporting changes
 In Notice 2010-69, the IRS made this new
reporting requirement optional for all employers
for the 2011 Forms W-2 (given to employees in
January 2012).
 In Notice 2011-28, the IRS provided further relief
for small employers (i.e., those filing fewer than
250 Forms W-2) by making Code Sec.
6051(a)(14) reporting optional for health
coverage provided through at least 2012, or until
further guidance is issued by IRS.

17. W-2 reporting changes
 Notice 2012-9 modifies, adds to, and replaces the
guidance in Notice 2011-28 with additional guidance, in
question and answer format, for employers who are
subject to the information reporting requirement for the
2012 Forms W-2, and employers that choose to
voluntarily comply with it for either 2011 or 2012.
 Employers subject to the informational reporting requirement for
2012 include all employers that provide applicable employer-
sponsored coverage under IRC § 6051(a)(14) and issue 250 or
more W-2 forms for 2011.
 IRS emphasizes that this reporting is for an employee’s
information only in order to inform them of the cost of their health
care coverage, and doesn't cause excludable employer-provided
health care coverage to become taxable.

18. Form 8955-SSA
 ERISA plans (which includes 401(k) 403(b) plans) must
report separated plan participants who have deferred
vested benefits for plan years beginning on or after
January 1, 2009
 Replaces Form 5500 Schedule SSA
 Due date for filing 2009 and 2010 plan years is January
17, 2010
 Form must be filed by the last day of the seventh month
following the last day of that plan year plus extensions
(same deadline as Form 5500)
 Based on information provided by plan administrators

19. Potential tax “pitfalls” to watch for in 2012
 Sales and use tax registration
 State unemployment insurance tax
 Unclaimed property returns
 Personal property tax returns
 State charitable registrations
 DC Occupancy and real estate tax
 Common theme – mostly state tax issues

20. State taxation and Nexus
 States are becoming increasingly aggressive
in asserting their right to tax out-of-state
businesses. How might they accomplish
this? Through Nexus!

21. State taxation and Nexus
 What is Nexus?
 The amount of physical presence or degree to which
a business activity must be present before an entity's
activities can be subject to state tax.
 Nexus is the determining factor of whether an out-of-
state business selling products into a state is liable for
collecting the tax on sales in the state.
 In general, a state will have the power to impose a tax
or tax collection duty on a taxpayer if the taxpayer has
sufficient nexus with the state.

22. State taxation and Nexus
 What causes Nexus?
 Nexus is created when there is a temporary or
permanent physical presence of people (employees,
service providers, or independent sales/service
agents),
 Property (inventory, offices, warehouses)
 Or economic activity (internet and telemarketing
sales and solicitations)

23. State taxation and Nexus
 People, property and economic activity
include:
 Annual meetings, conventions and trade shows
 Catalog and internet sales
 Inventory/warehouse storage
 Telecommuting employees
 Branch office locations
 Charitable solicitations

24. State taxation and Nexus
 What to do?
 Obtain a certificate of authority for doing business in a
particular state
 Register for sales, use, property, income w/h tax,
unemployment insurance, and in some states a gross
receipts tax
 Registration is often made with a “combined
registration” Form (in DC it is a FR-500)

25. Sales and Use Tax
 When :
 Most states require the collection of sales tax for
sales that occur within that state (physical presence)
such as at trade shows.
 Many states require the collection of sales tax for
transactions that do not entirely occur within the state
(internet and telephone sales).
 Use tax often imposed by states to “make up the
difference” for equipment used within a state that was
brought in from another state (such as by a
telecommuting employee)

26. Other state tax issues:
 State unemployment insurance tax registration
 Telecommuting employees
 Opening of branch offices
 Unclaimed property returns
 Most commonly uncashed checks (vendor and payroll)
 Each state has different filing, dormancy periods, and remittance rules
 Personal property tax returns
 Generally Section 501(c)(3) organizations exempt
 Filings may be required even if no property is owned (MD)
 State Charitable registrations
 Telemarketing, direct mail (active – you will know where to register)
 Website solicitations (passive – you may not know where to register)

27. Plan for having a successful filing season
 Audit and tax = one comprehensive
engagement!
 With the Form 990, what is the ultimate goal?
 For exempt organizations to provide the IRS with financial,
governance, and program information so that the IRS may
ensure that an organization is operating within the parameters of
its exempt purpose
 For a Section 501 (c)(3) organization, it may be used as a
fundraising tool to provide the general public with the most
favorable representation of the organization
 For a Section 501 (c)(6) organization, it may be used as a tool to
provide the membership information on its activities in an effort
achieve better accountability

28. Plan for having a successful filing
season
 How to accomplish this goal?
 Provide your tax preparers with executive
compensation information (ODKE) in January
 Perform a flux analysis on the prior year’s Form 990
Parts III, IV, V, and VI with the current year (2011)
activity to identify areas that may require increased
disclosure
 Communicate draft and delivery needs with the tax
manager during the audit fieldwork

29. Speaker Biography
Frederick Longwood, CPA, MST, is a manager in the Firm's
Exempt Organization Tax Department with over 15 years of
experience working with a broad range of tax-exempt
organizations including research and educational
organizations, public charities, civic leagues, membership
organizations, and private foundations. Mr. Longwood has
advised exempt organizations on a variety of issues including
Taxation of employee benefit plans, intermediate sanctions,
unrelated business income tax, and taxable subsidiaries.
In addition to his exempt organization advisory and compliance experience, Mr.
Longwood participated in the "Preparing for the new Form 990," Tate & Tryon client
seminar series held October 2008 and March 2009 highlighting the changes to the
Form 990 and was also a coauthor of the "Guide to the Newest IRS Form 990:
Interpreting and Complying with the New Tax Reporting Requirements for
Transparency and Accountability," (published by ASAE). Fred is a member of the
American Institute of CPAs (AICPA) and the Greater Washington Society of CPAs
(GWSCPA).