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Updated Nonprofit Taxation for US Based Organizations Featured

Updated Nonprofit Taxation for US Based Organizations recha oktaviani

The year 2020 was the most challenging in the history of the modern world, perhaps even more than the great depression. It was the year that many changes were brought into our lives. Many pandemic-related measures were implemented to both for-profit and nonprofit organizations to curb the spread of the virus and mitigate the economic impact of the pandemic. The sweeping changes did not leave behind the nonprofits’ aid programs. Although many people have written about the non-pandemic-related changes, many pandemic-related changes will affect charities in 2021. Here are some of these changes. 

  • Electronic form filling

Although electronic tax form filling has been there for years, for example, Forms 1099-MISC or 1023-EZ, the nonprofit-specific filling moved online in 2021. It seems the online craze is finally catching with the nonprofit tax filling as well. The new nonprofits are required to file their Form 1023 applications online via website. This change became mandatory from January 31, 2020, but had a 90-day grace period. The change in filing will likely benefit those applying for tax exemption as stipulated under Section 201 (c)(3) because the shift to online filing should reduce the application processing time. 

Nonprofits seeking exemption under section 501(c) (4) are required to file Form 1024-A. However, from January 5 this year, this form was amended to allow these organizations to file for electronic filing through The IRS provided a 90-day grace period to allow paper applications to be filed, but the mandatory electronic payment became effective from April 5, 2021. Apart from the above forms, electronic filing is going to affect many other forms. For instance, the 2019 IRC amendment by the Senate requires a majority of the exempt organizations to file their applicable Form 990 information return and 4720 electronically. 

  • Universal charitable deductions

To spur charitable giving, the CARES Act implemented a $300 above-the-line deduction per married couple and non-itemizing individuals for the cash gifts made last year to most nonprofits. This was expanded and enhanced by the Consolidated Appropriations Act of 2021 to enable individuals who make cash donations to eligible charities to take as much as $300 above-the-line deduction or a joint $600 per married couple.  

  • Unrelated Business Taxable Income (UBTI)

The Tax Cuts and Jobs Act Section 512(a) (6) added in 2017 to the tax code requires exempt organizations with multiple unrelated trades and businesses to calculate the UBTI separately of each trade or business. The IRC Section 501 tax-exempts various tax-exempt and mutually beneficial organizations, although organizations recognized by this code as tax-exempt such as nonprofits, may be liable for tax if they engage in and derives income from businesses that are not related to their activities. The Internal Revenue Service (IRS) requires nonprofits to identify every separate unrelated trades or businesses using the North American Industry Classification System (NAICS) code, which accurately describes the trade or business. If the NAICS codes are different, the businesses are considered unrelated for UBTI calculation. The UBI has an adverse consequence for nonprofits. For instance, a nonprofit found to be engaged in unrelated businesses can lose their tax-exempt status. 

As electronic filing continues to gain fame, IRS is considering providing additional electronic form filing services and tools. This includes online determination letters and tax assistance tools. This will impact exempt organizations in the coming years, and more development in taxation will be realized. While these are just but a few changes in the nonprofit taxation scheme, many are likely to come into effect in the coming days as the pandemic persists.

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Scott Koegler

Scott Koegler is Executive Editor for PMG360. He is a technology writer and editor with 20+ years experience delivering high value content to readers and publishers. 

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