Wednesday, April 25, 2012
New Schedule K-1 Reporting Requirements and New PRI Regs.
Posted by Armanino Nonprofit Team
If your organization is a partner in a partnership, every year the partnership issues a Schedule K-1 to your organization. The Schedule K-1 performs a function similar to that of Form W-2 or Form 1099-MISC; it is used to report your organization’s share of the partnership’s income and expense for that year. When the Schedule K-1 is received from the partnership, your organization must include those items in its taxable income as if the organization had earned the revenue and incurred the expenses.
As a practical matter, most public charities record the contributions to the partnership and any distributions from the partnership. Most, however, do not incorporate the items of income and expense reported on the Schedule K-1. Because of timing differences and book/tax differences, the amounts reported on the Schedule K-1 are often different from the book income and expense numbers reflected in the partner’s capital account. Beginning with 2011 returns (subsequently postponed until the 2012 returns), the instructions to the Form 990 require that the amounts on the balance sheet in the Form 990 reflect the capital account(s) of the partnership investments as reported on Schedule K-1 and that the income and expense amounts on the Form 990 reflect the amounts reported on Schedule K-1.
What this Means to the Exempt Organization
Unless the IRS changes its reporting requirements, any exempt organization that is a partner in a partnership will have to wait until it receives a Schedule K-1 from each of its partnership investments before it can complete its Form 990. The organization will also have to identify what it has included in its books for the year with regard to the partnership. Finally, the organization will either 1) adjust its books to reflect the Schedule K-1 amounts or 2) calculate the book/ tax differences so that the Form 990 will reconcile to the organization’s financial statements.
Based upon preliminary comments received from the tax-exempt community when the 2011 instructions for Form 990 were released, the IRS delayed the “Schedule K-1” reporting requirement for one year. To date, the IRS has made no indication that it intends to further postpose or eliminate this requirement. The IRS is, however, accepting comments on this requirement.
This is our opportunity to let the IRS know that this new requirement will increase the already onerous compliance burden on public charities. The IRS’ position with regard to this requirement is that it will increase transparency and accuracy. We do not believe that the use of the Schedule K-1 numbers will improve transparency or accuracy. With the exception of amounts identified as unrelated business income, public charities do not generally pay tax on the income from pass-through investments. Given that, we do not understand how this extra compliance burden will result in any improvement of any kind for these organizations, their donors or the public. The link to Announcement 2012-19 is below. We encourage anyone who has an opinion to share with the IRS with regard to this requirement to share those thoughts with the IRS according to the instructions in the Announcement.
Program-Related Investment Guidance Adds More Current Examples for Exempts
On Thursday, April 19, the IRS issued new guidance on program-related investments to illustrate the breadth and flexibility of the investments as a tool for furthering charitable purposes. The examples were added under proposed rules (REG-144267-11) that said that program-related investments can accomplish a variety of charitable purposes, such as advancing science, combating environmental deterioration, and promoting the arts.
The link to the new guidance published in the Federal Register is below. Program related investments are investments made by private foundations where the primary purpose is to accomplish a charitable purpose. The idea is that the investment would not be made except for the fact that it will further the foundation’s charitable mission, without making money as the primary goal. These new examples provide additional guidance and are meant to encourage the use of these types of investments.
Nonprofit organizations have specialized audit, tax and operational needs that require specialized service. Armanino has been committed to the nonprofit sector since 1953, and we now work with more than 500 nonprofit clients. This hands-on experience gives our staff of CPAs and former CFOs a deeper understanding of the issues nonprofits face, so we’re able to meet their needs and help them fulfill their missions in the most efficient, cost-effective way possible.