Five Scenarios That Require Arts + Culture Nonprofits to Report Foreign Activity

May 21, 2024

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Arts and culture organizations occupy a unique space in the nonprofit landscape. Their activities are often not restricted to the local community; instead, they may find themselves traversing international borders, or bringing talented performers from across the world to their venue. 

For example, a symphony might send its orchestra overseas to perform or an art museum might scout artwork in Europe to broaden their museum’s reach. 

Many of these nonprofits might also hold foreign investments–whether as a direct investment in an organization in another country or through investing their funds in a hedge fund that invests internationally.

In each of the above cases, the nonprofit may need to disclose these foreign financial activities. If it fails to do so, it could be subject to significant penalties. 

It is up to the organization to determine and fulfill its foreign activity reporting requirements. This article will explore a series of common activities that trigger foreign reporting requirements for nonprofits, detail the associated filing requirements, and outline the potential penalties for noncompliance.

Five Scenarios That Trigger Foreign Reporting Requirements

Any activities that result in a nonprofit organization spending or receiving money overseas may be subject to foreign reporting requirements. This could include expenses, revenue, grants, investments, and more.

In most instances, there is a reporting threshold, meaning that you must spend or earn a certain amount before the reporting requirement comes into effect. 

Here is a breakdown of common scenarios to watch out for: 

  1. Foreign-Sourced Expenses and Revenue

If your nonprofit conducts any kind of activity overseas, it may generate revenue or incur expenses that you need to report. For example, a US-based orchestra touring Europe may earn money for their organization through ticket sales or incur costs, including travel, lodging and food. 

If either of these amounts surpass $10,000, the organization would need to disclose them and provide a breakdown of these costs on Schedule F of Form 990.

  1. Grants to Foreign Organizations or Individuals

Another way arts organizations support their mission is by extending financial support to international persons or organizations. For example, a music foundation may award grants to up-and-coming composers around the world or provide grant funding to foreign schools offering music education in impoverished communities. 

If these grants exceed $5,000, the nonprofit would need to report them on Form 990, Schedule F, including details about the purpose of the grants and who received them. 

  1. Foreign Investments

Nonprofits  often try to diversify asset portfolios by investing portions of their endowments or excess cash with professional wealth managers, who may invest these funds in foreign entities on behalf of the organization, or even directly investing in foreign entities themselves.

Foreign investments are subject to much higher reporting requirements, including filing additional forms (generally a form 926 for a foreign corporation or form 8865 for foreign partnerships) to report information about the investment, its assets and activities. Specific reporting requirements and thresholds vary depending on the type of investment. 

If the organization is invested in a foreign entity through a US entity (often seen with hedge funds), they will receive a Schedule K-1 detailing this activity and any necessary information for foreign reporting. If an organization directly invests in a foreign entity, it will need to make sure it files the appropriate disclosure forms for their investments. Certain investments may also result in the nonprofit owing Unrelated Business Income Tax (UBIT)

  1. Funds in Foreign Bank Accounts

Arts and culture nonprofits that work internationally may keep some funds in foreign bank accounts. This can make conducting international business transactions or financing projects overseas easier. However, foreign account balances exceeding $10,000 may trigger foreign reporting obligations. 

In this case, nonprofit organizations would file FinCEN 114 (FBAR) separately from their tax return to report these foreign accounts and include information such as account numbers, names, and maximum account balances during the reporting period. All signers on the account would also be subject to the FBAR filing requirements.

  1. Payments to Foreign Individuals 

Many nonprofits bring international artists, performers and arts groups to the United States to perform. For example, a nonprofit theater company may recruit a well-known foreign actor for a guest performance. 

If a nonprofit makes any income payment to a non-US individual,  they would be required to document and report it using Form 1042-S, regardless of amount and withholding (if any).  There are complex withholding rules and treaties among c-ountries, so hiring a knowledgeable accountants is critical to understand the complexities. 

With a better idea of the scenarios that require foreign reporting, your organization may ask, “What do we do next?”. 

Reporting Activity Accurately: IRS Forms and Filing Requirements for Foreign Activities

Navigating foreign activity filing requirements can get complicated for nonprofits, as specific needs can shift on a case-by-case basis. As such, it’s important for organizations to consult with an experienced nonprofit accounting firm like Smith + Howard to ensure all obligations are met and activities are reported correctly. 

In general, nonprofit organizations will report foreign activity using the following forms: 

  • Form 990, Schedule F: Provides a comprehensive overview of the nonprofit’s foreign activities, including foreign expenses, revenue, grants and investments. Nonprofits must attach Schedule F to their Form 990 if they meet certain thresholds. 
  • Form 926: Reports the transfer of property to a foreign corporation in exchange for stock, including entities like foreign museums or cultural institutions. Form 926 requires detailed information about the transfer, including the property’s fair market value, the type of property transferred, and the identity of the foreign corporation.
  • Form 8865 Reports partnership investments in foreign entities. Nonprofits must report their share of income, deductions, and credits from the foreign entity and provide extensive information about the entity, including its income, assets and activities. 
  • FinCEN 114 (FBAR): This form is required for nonprofits with a financial interest or signature authority over foreign accounts that exceed $10,000. It requires details such as the account number, name, and address of the financial institution and the maximum value of the account during the reporting period.

This list is not exhaustive. Depending on the nonprofit’s foreign activities, additional forms may be necessary to fulfill reporting requirements. For example, they may need to submit Form 5471 for interests in or control over foreign corporations or Form 3520 for transactions with foreign trusts. 

Consulting with experienced advisors may help to determine which additional forms are applicable in specific circumstances. This helps nonprofit leaders ensure full compliance and gives them confidence that they aren’t at risk for penalties.

Potential Penalties for Noncompliance with Foreign Activity Reporting

If a nonprofit organization fails to report foreign activity or fails to do so before the deadline, the specific penalties may vary based on the nature and circumstances of the nondisclosure. Penalties are significant, starting at $10,000 per filing, per tax year, and rising to much higher levels depending on the seriousness of the offense. 

These penalties can add up quickly, and for a nonprofit with limited resources, they could be challenging to recover from. An accounting advisor skilled in nonprofit reporting could guide the organization in avoiding or mitigating these penalties. 

Smith + Howard: Experienced Advisors to Arts and Culture Nonprofits

The arts have an undeniably global impact. From childhood lessons to symphonies, from the stage to the art gallery, the arts help people connect with one another across decades, borders and oceans. It’s no surprise that arts and culture nonprofits are similarly global, investing in international causes and working together to uplift each other’s communities. 

But to succeed in this endeavor, nonprofits must honor their foreign reporting requirements–a task that may seem intimidating without the necessary expertise. 
Smith + Howard is deeply committed to helping arts organizations understand and uphold their regulatory obligations without losing sight of their core mission. Our advisors have in-depth fluency in the nonprofit landscape, with particularly notable experience advising arts and culture organizations. To learn more about how we can help you with foreign activity reporting or to have us review your current situation, please provide your name and organization here, and Nicole Davis will reach out to you soon.

How can we help?

If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.