Tax and GAAP Updates for Nonprofits

In recent years, several laws have passed that have shifted the nonprofit tax landscape, most notably the 2017 Tax Cuts and Jobs Act. Since then, there have been additional changes. In 2022, Congress passed the Inflation Reduction Act: a new bill that contains a variety of tax opportunities for nonprofit organizations. 

Several Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) have also gone into effect in the past few years. These ASUs herald changes to the way that nonprofits handle various elements of their accounting, and leaders must understand the implications of these changes to ensure their organization remains in compliance with Generally Accepted Accounting Principles (GAAP). 

In this overview, we highlight a series of key tax and GAAP updates nonprofit leaders should bear in mind amid this ever-evolving tax landscape. We’ll cover the new opportunities in the Inflation Reduction Act, share a deep dive into Unrelated Business Income (UBI) reporting requirements, and summarize the most significant ASUs. 

Nonprofit accounting and tax planning is a complex field that requires a detailed understanding of the latest regulations and an intimate knowledge of an organization’s activities. It’s always advisable for nonprofits to work with experienced professionals such as those at Smith + Howard: a renowned advisor to the nonprofit community. 

Section 179D: Energy-Efficient Construction Incentives

Section 179D deductions aren’t anything new. These incentives allow organizations engaging in construction and renovation projects to receive tax deductions if they meet certain energy efficiency standards. However, for nonprofit organizations with minimal taxable income, this previously offered no real benefit. 

Thanks to the Inflation Reduction Act, tax-exempt organizations can now allocate Section 179D deductions that their construction projects qualify for to vendors. Provided their building meets certain energy-efficiency criteria, nonprofits may transfer deductions to partners such as architects and engineering firms with taxable income. 

This paves the way for organizations to gain increased concessions on major construction projects while upgrading their infrastructure in an energy-efficient way. If you’re considering upgrading roofing, lighting, or HVAC systems in any of your buildings, connect with your tax advisor to explore this opportunity. 

Learn More: Attention Nonprofits: New Energy Efficient Building Tax Deductions in the Inflation Reduction Act

Elective Payment Option (AKA Direct Pay)

Also included in the Inflation Reduction Act was the elective payment option. This provision allowed tax-exempt entities to receive a payment equal to the totalvalue of the tax credits for qualifying clean energy projects. 

Guidance is still evolving in this space, but so far, we understand that there will be a requirement for organizations to pre-register. Many clean energy projects qualify for these rebates, including installing electric vehicle charging stations, adding solar panels, and upgrading vehicles to electric vehicles. The direct pay option will be made on a timely filed Form 990-T. Organizations that are filing or extending returns should consider if this election should be made and file the proper form to ensure they receive these credits.

Form 990 Compliance Requirements

Many organizations have resumed many of the activities that were paused during the pandemic. If your organization is engaging in foreign activities or hosting special events that haven’t been part of its program for the last few years, ensure you understand your Form 990 reporting requirements. 

As you consider these reporting requirements, keep in mind that Form 990 is almost as much a marketing tool as a tax filing. Use the opportunity it affords to weave a positive narrative around your organization’s work and demonstrate its role in the community. 

Deep Dive: Unrelated Business Income Reporting Requirements

Many nonprofit organizations have embraced more diverse revenue streams in recent years in an effort to diversify. While a significant net positive for many, this move may open your organization up to Unrelated Business Income Tax (UBIT). 

Three criteria determine whether the income from an activity is considered taxable:

• Is the income from a trade or business? The activity has to generate income. If an activity consistently generates losses and the organization does not expect it to be profitable, it’s not considered a trade or business, and is therefore not UBI. 

• Is the activity regularly carried on? If an organization devotes the same amount of time to an activity that a for-profit business would spend, it may be considered UBI. 

• Is the activity related to your exempt purpose? Some activities, such as selling replicas of artwork in a museum gift shop, are typically considered to be related to the organization’s tax-exempt purpose and would not be considered UBI. Others, such as renting out a parking lot for a nearby event, are not related and are therefore typically considered UBI. 

Determining whether an activity qualifies as UBI demands that your organization understands the facts and circumstances of the activity. There are no specific rules: an activity considered UBI in one organization may not be considered UBI in another due to differing facts and circumstances. 

Organizations often have multiple streams of unrelated business income. The 2017 TCJA requires nonprofit organizations to delineate income into distinct silos for each activity. Losses in one silo may not be used to offset losses in another. All losses carry forward, and in any taxable year, up to 80% of unrelated business income may be reduced by losses carried forward from previous years. 

Much like any tax law, some exceptions disqualify certain types of income from being characterized as UBI:

• Passive Income: income an organization does not work to receive, such as investment income, is generally not taxable. Example: dividend income from an investment. 

• Volunteer Exemption: if work is being carried out by unpaid volunteers, income is generally not taxable. Example: a school yearbook committee selling advertising spots. 

• Sale of Donated Goods: many organizations, such as Salvation Army, Habitat for Humanity, and Goodwill, have thrift stores that sell donated merchandise to raise money for the organization’s mission. Since the goods for sale are donated, any profits are excluded from taxation.

• Convenience Exemption: many activities that may seem taxable, such as concession stands selling beverages and snacks in symphony halls, may not be considered taxable if their primary purpose is to provide convenience for patrons. 

One common question we hear from nonprofit leaders: how much unrelated business income is too much?

There is no bright line test from the IRS that answers this question. However, in general, we find that if 25% of an organization’s gross revenues come from unrelated business income, it may be time to re-evaluate your organizational structure and explore different ways to house this for-profit activity. 

Significant ASUs Impacting Nonprofit Accounting

The past decade has seen significant changes to nonprofit accounting standards. The FASB has issued many ASUs, some of which have signaled major changes, most notably ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-14, Nonprofit Financial Statements, and ASU 2016-02, Leases.

These ASUs have now all taken effect, but there are other, more recent ASUs that are in varying stages of adoption. Below is a summary of the most significant:

• ASU 2016-13, Current Expected Credit Loss (CECL): first implemented for fiscal years ending 12/31/23, this ASU requires organizations to consider current conditions and the foreseeable future when recognizing credit losses. Credit losses should now be recognized when a loss is expected, not when it has been incurred. 

• ASU 2018-08, Contributions Received and Made: introduces a framework that nonprofits must use to distinguish between conditional and unconditional contributions. This ASU also provides for the inclusion of additional disclosures in financial statements, creating additional clarity and consistency for financial statement users. 

• ASU 2020-07, Contributed Non-Financial Assets: this ASU has been in effect for a couple of years, but some confusion remains. The update changed how nonprofits report the fair market value of non-financial assets such as professional services or raffle items donated to the organization. 

• ASU 2023-08, Accounting for and Disclosure of Crypto Assets: requires organizations holding crypto assets to present these entities in a separate line of their financial statements. The value of these assets should be updated each reporting period. This ASU goes into effect for fiscal years beginning after 12/15/24.

To learn more about how these ASUs impact your organization’s accounting, we encourage you to reach out to our nonprofit accounting team. 

Smith + Howard: Experienced Nonprofit Accounting Professionals

Tax might not be an issue that’s top of mind for your nonprofit, but as we’ve shared here, it’s a topic lined with opportunities. Taking a sophisticated approach to your nonprofit organization’s tax strategy allows your business to plan for the future and generate additional income in a tax-efficient manner, enabling you to channel more funds toward your organization’s mission. 

Pairing that with a comprehensive understanding of the latest accounting regulations is crucial to ensuring your organization remains in compliance with U.S. GAAP and can provide an accurate accounting of its financial position. 

The support of an experienced nonprofit accounting and tax advisor is vital in this endeavor. At Smith + Howard, our nonprofit professionals bring decades of experience advising a diverse range of nonprofit clients, from independent schools to arts and culture organizations.

To learn more about our services, contact an advisor today.