Once an organization’s tax‐exempt status is recognized by the Internal Revenue Service (IRS), applicable states, and other authorities, the task is to maintain such status. This chapter contains checklists that outline compliance requirements and areas of primary concern. The checklists are designed to remind an exempt organization that it is a taxpayer and to allow its managers and professionals to assist the organization in areas of concern deserving annual review. The objective is to ensure an organization’s ongoing qualification for exemption.
The sheer number of items on the lists is evidence of the complexity and scope of issues involved in maintaining exempt status. As you first read the opening checklist, do not expect to understand all the terms if you are not a nonprofit organization specialist. Many of the issues are considered in depth in other chapters, and they should become clear as you study the materials.
These checklists can be used yearly to test compliance with a variety of requirements, including the organizational test, the operational test, identification of unrelated business income, payroll tax compliance, public support tests, private foundation sanctions, filing requirements, excise and estimated tax requirements, property contributions, fund‐raising event disclosures, public inspection requirements, and group exemption filing requirements.
Exhibits 19.9 through 19.12 address special compliance issues that a tax‐exempt organization might face. The sections referred to in brackets after the checklist questions are sections in this book where the text pertaining to the issue can be found.
Readers who have used the prior editions of this book will recognize a difference in the Annual Tax Compliance Checklist for §501(c)(3)s. It now comprises two checklists: one designed for completion by the organization/client (Exhibit 19.1) and one to be used by the tax return preparer (Exhibit 19.2). The author hopes this experiment is helpful to users; reader feedback and comments will be welcome. This chapter includes the following checklists:
EXHIBIT 19.1 Annual Tax Compliance Checklist for §501(c)(3) Public Charity
Organization ____________________________________________________________________ | |
Prepared by ________________ Reviewed with ________________ Date __________________ | |
A. FEDERAL TAX EXEMPTION MATTERS | |
1. New organization: Has Form 1023 been filed within 27 months after date of formation? | __________ |
2. Donative public charities: Is cumulative public support percentage 50% or more? If not, is organization monitoring its % closely to ensure above 33⅓% for two years? | __________ |
3. All organizations: Review Form 1023, IRS correspondence, and determination letter for exempt purposes originally represented to IRS to verify category of exemption. See if current activities match original purposes. If not, changes should be reported on Form 990 filed for year of change. | __________ |
4. Has IRS examined the organization? If so, review report for compliance with recommendations or required changes. | __________ |
B. STATE AND LOCAL TAXES | |
1. Must the organization file returns in states other than the state in which it is operating? | __________ |
2. Verify state tax exemption(s) are in place or prepare application(s) for exemption. | __________ |
3. Does organization claim exemption from state taxes (such as sales tax) which it is entitled to? | __________ |
4. Must the exempt organization (EO) collect sales tax on goods or services sold? Are timely returns filed? Is tax deposited on time? | __________ |
5. Does the organization pay real or personal property tax? | __________ |
a. Would use of property qualify it for exemption? |
__________ |
b. For property classed as exempt, is it devoted to exempt use or has it been converted to commercial use? |
__________ |
6. Go to http://ecpa.cpa.state.tx.us/coa/Index.html (or applicable state website) to verify corporate status is in good standing and that registered agent name and address are correct. | __________ |
C. CHARTER AND BYLAWS | |
1. Were there any changes to the charter or bylaws this year? If so, obtain copy for attachment to Form 990 (if name change); otherwise, obtain description of changes to be reported in Form 990. | __________ |
2. Were there substantial changes in exempt activities or mission to report? If so, get description and consider impact on exempt status. | __________ |
3. Review the minutes of director’s meetings to see if they reflect exempt purpose of the EO’s activities. | __________ |
D. PRIVATE INUREMENT OR BENEFIT | |
1. Does the EO make any payments or provide benefits to persons (and/or their relatives) who control, manage, or fund it? If so, get detailed information. | __________ |
2. Is compensation paid to personnel (both employees and independent contractors) reasonable? | __________ |
If total comp of >$110,000 per individual is paid, complete Intermediate Sanction Checklist. |
__________ |
3. Did loans or other financial transactions occur between organization and its officers or directors? If so, gather details and consider reasonableness and self‐dealing. | __________ |
4. Does the EO have a conflict‐of‐interest policy that is regularly monitored? | __________ |
5. Do employees submit adequate expense reports for reimbursement requests? | __________ |
6. Does the organization benefit a broad charitable, or exempt, class rather than a limited number of persons? | __________ |
E. EXEMPT ACTIVITIES | |
1. Do activities further the purposes for which the EO was determined to be exempt? Review Form 1023 and prior Form 990 Part III disclosures. | __________ |
2. Are files maintained to document or provide an archive of the nature of activities and related expenditures? | __________ |
3. Does the EO have a record retention and destruction policy? | __________ |
4. Does the organization lobby? If so, should the §501(h) election be made by filing Form 5768? Verify compliance on Form 990 Schedule C. | __________ |
5. Has organization participated in prohibited electioneering? Review newsletters for mention of candidates/issues. | __________ |
6. Does the EO have unrelated business income? If so, verify correct reporting in Form 990 Part VIII and complete Form 990‐T and UBI Checklist (Exhibit 19.8). | __________ |
7. Does the EO make payments for personal services? If so, complete the checklist in Exhibit 25.2 (Employee versus Independent Contractor IRS Checklist) for individuals to verify worker classification. | __________ |
8. Does the EO have a written policy for distinguishing between employees and contractors? Are W‐9s on file? Are Forms 1099 filed? | __________ |
9. Are federal payroll tax reports filed and taxes deposited in a timely fashion? | __________ |
10. Must state unemployment reports be filed and tax paid? (For Texas, an EO with 4 or more employees is subject.) Note that federal Form 940 is not required. | |
11. Must Forms 5500 be filed for employee benefit plans? Are limitations on maximum employee contributions adhered to? | __________ |
12. Does your organization have a website? If so, complete the website checklist in Exhibit 19.10. | __________ |
F. FILING REQUIREMENTS | |
1. Form 990‐N: (c)(3)s with gross receipts normally less than $50,000 that do not voluntarily file Form 990‐EZ. | __________ |
2. Form 990‐EZ: (c)(3)s with gross receipts between $50,000 and $200,000 and assets $500,000 or less; includes applicable schedules. | __________ |
3. Form 990: (c)(3)s with gross receipts $200,000 or more with assets $500,000 or more file long form and applicable schedules. | __________ |
4. Form 990‐PF filed by all private foundations. [See separate checklists in Exhibits 19.5 and 19.6.] | __________ |
5. All §509(a)(3) supporting organizations must file either Form 990‐EZ or 990 with regard to revenue level; cannot file Form 990‐N. | __________ |
6. Was an extension of time requested? [Form 8868] | __________ |
7. If the return is being filed late, can penalty abatement be requested for reasonable causes? [§18.2] | __________ |
8. Does the EO wish to change its fiscal year or its accounting method for tax purposes? An automatic change may be available. [§18.3] | __________ |
9. Group exemption: If the EO is covered by a group exemption, verify that separate Form 990 should be filed. | __________ |
10. Does the EO have alternative investments requiring other returns? [Exhibit19.11] | __________ |
G. ELECTRONIC FILING | |
1. Must return be filed electronically? Watch for changing rules on this matter. | __________ |
H. PROPERTY CONTRIBUTIONS | |
1. Has the EO received gifts of property (other than listed securities) for which Form 8283 is required? Remember that the EO is not responsible for valuation! | __________ |
2. Must sales of $5,000+ donated property made within three years from date of gift be reported on Form 8282? | __________ |
I.VALIDITY OF FINANCIAL INFORMATION | |
1. Has a compilation, review, or audit checklist been completed to ensure proper financial reporting and adherence to accounting principles? Verify if states or donors require audited financials. | __________ |
2. Should an amended return be filed to reflect restatement or correction of prior year(s)? | __________ |
J. PUBLICLY SUPPORTED ORGANIZATIONS | |
1. Verify public charity classification on irs.gov/eo, IRS Business Master File, or Foundation Source Grant Safe. | __________ |
2. Can the EO meet its public support tests under §509(a)(1) or §509(a)(2)? (Obtain list of >2% donors). [Chapter 11] | __________ |
3. Does the EO maintain records of donations by name of donor? | __________ |
4. Update cumulative database of substantial contributors. | __________ |
5. Consider whether member dues and government grants are donations. [§11.5] See Checklist for Tax and Accounting Issues for Grants [Exhibit 19.12]. | __________ |
6. For organizations classified as supporting organizations, verify type. For Type III, consider its “functional integration” with supported EO(s). [§11.6] | __________ |
7. Is fund‐raising conducted in a state that requires reports? Consider Internet gifts and state charitable solicitation rules and impact on required state filings. | __________ |
8. Do fund‐raising solicitations reflect fair market value (FMV) of benefits offered to donors in return for gifts? For +$75 payments, is disclosure of value of benefit and cash or description of property given complete? [§24.2(c)] | __________ |
9. Do donor thank‐you letters contain proper disclosures for $250 or more donors? [§24.2(b)] | __________ |
10. Is the method for calculation of FMV of benefits provided to donors reasonable and documented? [§24.3] Does value of benefit compared to ticket price create reportable loss? | |
11. Has the EO furnished copies of Forms 990 and 1023 to members of public requesting to see or buy them? [§18.2] | |
12. Does the EO have excess lobbying expense [§23.5], political expenditures [§23.2(c)], or intermediate sanctions [§20.9] subject to excise tax? Form 4720 filed? | |
13. Reconsider the need to elect §501(h) for lobbying activities, in view of §4912 tax. [§23.4(b)] | |
14. Are expense allocations and shared expenses with related §501(c)(4), (c)(5), or (c)(6) or other tax‐exempt organizations and related parties documented? [§22.2] |
EXHIBIT 19.2 2010 §501(c)(3) Public Charity Tax Preparer Checklist
Client Name | ||||
Prepared by | ||||
Date | Reviewed by | Date | ||
DONE | N/A | COMMENTS | ||
TAX‐EXEMPTION MATTERS | ||||
Review Part III descriptions with client to see that mission and accomplishments are described with a view to public disclosure. | ||||
Review prior‐year returns, memos, workpapers, carryforward notes and correspondence, planning suggestions, and audit results. | ||||
Has the IRS examined the organization? If so, review report for compliance with recommendations or required changes. | ||||
Verify that client’s franchise tax account status is in good standing and notify client if address may need to be updated. | ||||
PUBLIC CHARITY STATUS | ||||
Evaluate public‐support percentage with a view to (1) meeting the test in the future and (2) proximity of the end of the advance ruling period. If current year <33⅓%, alert client about private foundation (PF) conversion issue. | ||||
For organizations classified as supporting organizations, verify reporting information provided by client. | ||||
DONOR DISCLOSURES | ||||
Scrutinize sponsor acknowledgments for quantitative and qualitative information and value of benefits provided to sponsor. | ||||
Review sample donor disclosure for +$75 quid pro quo solicitation and $250 donors | ||||
Does the organization provide disclosable member benefits of value that reduce contribution portion of dues payments? | ||||
ANALYSIS OF INFORMATION | ||||
Consider types of revenue to determine if any can be considered UBI. | ||||
See if quantifiable and qualitative info for sponsor makes revenue advertising and produces reportable UBI. Consider fragmentation of contribution portion of sponsorship payment if material. | ||||
Calculate percentage of program service cost to total expense and consider discussing with organization if less than 75%. | ||||
Consider whether membership dues and government grants are donations versus fee‐for‐service revenue. | ||||
Analyze organization’s investments to determine if additional filings are necessary (such as 990‐T, 8621, 8865, and FBAR). | ||||
Ask if client has an employee vs. independent contractor policy. | ||||
RECOMMENDATIONS | ||||
If the EO conducts lobbying activities, ask how they monitor permissible level of expense. If §501(h) does not apply, consult with the EO about electing. | ||||
Prepare list of tax‐planning ideas needed for recordkeeping, internal controls, improved functional accounting, description of activities, valuation of donor benefits, etc. |
EXHIBIT 19.3 Annual Tax Compliance for Tax‐Exempt Organizations—Short Form
Organization | |
Prepared by ________________ Reviewed with ________________ Date | |
ORGANIZATIONAL TEST | |
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OPERATIONAL TEST | |
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FILING REQUIREMENTS | |
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EXHIBIT 19.4 Annual Tax Compliance Checklist for Non‐§501(c)(3) Organizations
Organization | |
Prepared by ________________ Reviewed with ________________ Date | |
ORGANIZATIONAL ISSUES | |
FEDERAL TAX EXEMPTION | |
New organization: Has Form 8976, Notice of Intent to Operate under §501(c)(4), been filed within 60 days of formation? Form 1024 is no longer required. [§18.1] | __________ |
All organizations: Review Form 8976 or 1024, IRS correspondence, and determination letter for exempt purposes originally represented to IRS to verify category of exemption. Are activities in keeping with expressed purposes? | __________ |
STATE AND LOCAL TAXES | |
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CHARTER AND BYLAWS | |
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OPERATIONAL ISSUES | |
PRIVATE INUREMENT OR BENEFIT | |
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VALIDITY OF FINANCIAL INFORMATION | |
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EXEMPT ACTIVITIES | |
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FILING REQUIREMENTS | |
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NOTICE OF NONDEDUCTIBILITY | |
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PUBLIC INSPECTION REQUIREMENTS | |
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EXHIBIT 19.5 Annual Tax Compliance Checklist for Private Foundations (PFs)
Private Foundation | |
Prepared by ________________ Reviewed with ________________ Date | |
FEDERAL TAX‐EXEMPT STATUS | |
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Review the minutes of director’s meetings. | __________ |
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Is a new 1023 required? | __________ |
Has there been a substantial contraction or termination? | __________ |
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STATE AND LOCAL TAXES | |
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§4941 SELF‐DEALING | |
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§4942 MANDATORY DISTRIBUTION REQUIREMENT | |
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§4943 EXCESS BUSINESS HOLDINGS | |
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§4944 JEOPARDIZING INVESTMENTS | |
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§4945 TAXABLE EXPENDITURES | |
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VIOLATIONS OF §4941/4945 SANCTIONS | |
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§4940 INVESTMENT EXCISE TAX | |
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FILING REQUIREMENTS | |
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CONTRIBUTIONS RECEIVED | |
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(Provision of benefits would indicate self‐dealing.) | __________ |
EXHIBIT 19.6 Annual Tax Compliance Checklist for Private Foundation (PF)—Short Form
Organization | |
Prepared by ________________ Reviewed with ________________ Date | |
If the answer to any of these questions is yes, complete long‐form checklist. | |
§4941 SELF‐DEALING [CH. 14] | |
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§4942 MANDATORY DISTRIBUTION REQUIREMENT [CH. 15] | |
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§4943 EXCESS BUSINESS HOLDINGS [CH. 16] | |
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§4944 JEOPARDIZING INVESTMENTS [CH. 16] | |
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§4945 TAXABLE EXPENDITURES [CH. 17] | |
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§4940 INVESTMENT EXCISE TAX [CH. 13] | |
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OTHER TAX COMPLIANCE ISSUES | |
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EXHIBIT 19.7 Annual Tax Compliance Checklist for §527 Political Organizations (POs)
Organization | |
Prepared by ________________ Reviewed with ________________ Date | |
FEDERAL TAX EXEMPTION | |
HAS FORM 8871 BEEN FILED? | __________ |
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STATE AND LOCAL TAXES | |
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CHARTER AND BYLAWS | |
WERE THERE ANY CHANGES TO THE CHARTER OR BYLAWS THIS YEAR? | |
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EXEMPT ACTIVITIES | |
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FILING REQUIREMENTS FORM 990 | |
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FILING REQUIREMENTS FORM 1120POL | |
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FILING REQUIREMENTS FORM 8872 | |
FORM 8872: PO MUST FILE UNLESS EXCEPTED BECAUSE: | |
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NOTICE OF NONDEDUCTIBILITY | |
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PUBLIC INSPECTION REQUIREMENTS | |
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EXHIBIT 19.8 Annual Tax Compliance Checklist—Unrelated Business Income
Organization | |
Prepared by ______________ Reviewed with ______________ Date | |
I. UNRELATED BUSINESS INCOME | |
1. Does the EO sell goods or services in an activity that does not relate to or further its exempt purposes? [§§21.4 and 21.5] | __________ |
2. Does the “related business” have a commercial taint? If so, complete Commerciality Test Checklist. [Exhibit 21.1 in §21.5] | __________ |
3. Are revenues and codes correctly reported on Form 990, Part VIII? | __________ |
4. Is the business activity substantial (as measured by gross revenue or staff time devoted to it) in relation to the organization’s exempt activity? [§21.3] | __________ |
5. Does the organization do any of the following? | __________ |
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6. For unrelated revenues, does an exception or modification apply? | __________ |
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II. FILING ISSUES | |
1. Do accounting records reflect allocation for expenses? [§21.11] | __________ |
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2. Has Form 990‐T been filed in prior years? | __________ |
3. Is IRS alerted 990‐T is required because Form 990, page 9, Part VIII, column B contains a number? | __________ |
4. Does the gross income exceed $1,000? If loss realized, 990T required and useful to establish net operating loss carryover or carryback and start statute of limitation time period. | __________ |
5. Should estimated tax payments be made for 990‐T tax? | __________ |
6. Are federal tax deposit coupons (Forms 8109) available? | __________ |
7. If 990‐T is required, complete Checklist for Preparation of Form 990‐T. | __________ |
EXHIBIT 19.9 Intermediate Sanction Checklist
This two‐part checklist evaluates the possibility that the intermediate sanctions could apply to penalize the recipient of “excess benefits” and managers of the organization who approved the making of payments. “Yes” answers in the first part indicate that the second part should be completed. | |
Organization _________________________________________________________________ | |
Prepared by ______________ Reviewed with ______________ Date | |
Excess benefit occurs when economic benefit provided directly or indirectly to a disqualified person (DP) exceeds the value of benefits provided by the DP. | |
Manager is an officer, director, trustee, or one with similar responsibilities. | |
Disqualified Person is one with substantial influence over the organization’s affairs and their family members and 35%+ controlled entities. | |
PART A. DID AN EXCESS BENEFIT TRANSACTION WITH A DP OCCUR? | |
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PART B. IF SO, HAS REQUIRED DOCUMENTATION BEEN OBTAINED AND RETAINED? | |
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Prepared by ___________ With (client representative) _________ Date ___________________ |
EXHIBIT 19.10 Checklist for Website Exemption Issues
Organization ___________________________________________________ | |
Web Address _______________ With (client representative) _______________________ | |
Prepared by ______________ Reviewed with ______________ Date _________ | |
1. Study home page and other representative pages from the EO’s site to review scope of information presented on site. | __________ |
2. Does the site reflect the EO’s mission as described in Part III of Form 990 or Part XV of Form 990‐PF? [§2.2(j)] | __________ |
3. Are goods and services offered for sale on the site? | __________ |
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4. Does the organization solicit contributions and/or memberships on its site? | __________ |
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5. Can the accounting system capture costs related to the site? | __________ |
6. Can revenues be fragmented by related and unrelated sources? [§21.4(c)] | __________ |
7. Does the site contain discussion of public affairs? | __________ |
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8. Is the site linked to other sites? If so, follow the link to determine whether: | __________ |
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9. Review organization’s information reported on Guidestar.org and IRS Publication 78. | __________ |
EXHIBIT 19.11 Checklist for Alternative Investments of Tax‐Exempt Organizations, Including Private Foundations
This checklist is designed to make tax‐exempt organizations aware of the tax issues posed by investments in ventures not taxed as normal corporations. Investors must report the income and corresponding deductions from such entities on Forms 990 and 990‐PF and possibly Form 990‐T, according to information reported on Form K‐1. | |
Organization | |
Prepared by ______________ Reviewed with ______________ Date | |
FORM OF INVESTMENT ENTITY | |
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CHARACTER OF INCOME | |
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FIDUCIARY RESPONSIBILITY/JEOPARDIZING INVESTMENT | |
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TAX BASIS/GAIN ON DISPOSITION | |
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VALUATION ISSUES | |
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EXCESS BUSINESS HOLDINGS | |
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FORM 990‐T | |
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Completed by ___________ Discussed with client _________ Date |
EXHIBIT 19.12 Checklist for Tax and Accounting Issues for Grants and Contributions Received
Organization ______________________________________________________ | |
Title of Grant _____________________________________________________________ | |
The federal tax rules and generally accepted accounting principles (GAAP) do not always reach the same conclusion. The financial accounting standards for nongovernmental entities are contained in the FASB Accounting Standards Codification (ASC). ASC Topic 958‐605 provides guidance on distinguishing contributions from exchange or other types of revenue for financial reporting purposes. This checklist asks a series of questions to identify whether a grant is classified as a donation or as exempt function income. The next questions seek to identify those revenues taxable as unrelated income. Last are questions intended to identify whose money is whose, or when the EO does not recognize revenue because it is serving as agent to receive and pass through the funding to another organization. | |
DONATION: “Yes” answers to the following questions indicate a donation for tax reporting: | |
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FEE FOR SERVICES: “Yes” answers indicate fees for service revenue for tax reporting: | |
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UBI QUESTIONS: If answers are “No,” complete unrelated business checklist. | |
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AGENCY TRANSACTION: A recipient EO that accepts assets from a donor and agrees to use those assets on behalf of, or transfer assets to, another entity may be acting as an agent or intermediary rather than a donee. If answer below is “Yes,” the EO has no income for tax reporting: | |
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Prepared by ___________ With (client representative) __________ Dat |
18.220.184.6