Redesigned Form 990 Eliminates the Advance Ruling Period, And More…
- Redesigned Form 990 Eliminates the Advance Ruling Period, And More…
- November 1, 2008
- Tax and Trusts & Estates UPDATE
- Area(s) of Practice:
- Tax Law
Advance Ruling Period:
For many years, charitable organizations have been required to follow a two-step process in order to receive IRS recognition as a publicly supported charity: (1) applying to the IRS on Form 1023 and declaring that the organization expected to be publicly supported going forward; and (2) providing the IRS with public support schedules on Form 8743 at the end of a five-year "advance ruling period" demonstrating that the organization actually met the public support test. Organizations meeting the test would then receive a final IRS determination letter of public charity status, while those that failed to do so would be re-classified as a private foundation retroactively to the date of their incorporation, and thereby subjected to certain excise taxes and possibly a punitive termination tax.
On September 8, 2008, the IRS issued temporary regulations streamlining the application process for new organizations seeking approval as public supported charities. The advance ruling period is now eliminated. Instead the IRS has redesigned the Form 990 (the annual informational return required to be filed by all charities) to incorporate (on the Form 990 Schedule A) reporting relative to the public support test. This revision eliminates the need for the prior two-step process.
Under these new regulations (effective September 9, 2008) if, on the initial application for exemption (Form 1023), an organization can establish to the satisfaction of the IRS that the organization can reasonably be expected to meet a public support test during its first five years, the organization will initially be classified as a public charity. The organization will retain its public charity status for its first five years and will not be subject to any excise taxes regardless of the amount of public support it in fact receives during that period. However, when filing its annual Form 990 for the fifth fiscal year during the organization's sixth year, it must demonstrate on Schedule A that it actually is publicly supported. The Schedule A calculation calls for an average of the five-year period that includes the current tax year and the four preceding tax years in computing an organization’s public support. Once that is demonstrated, the organization will be allowed to continue its classification into the sixth and seventh year (and in all succeeding years, as long as the test continues to be met).
Organizations that have already received an advance ruling, but are still in their first five years of existence, can use their advance ruling letter as their final determination letter and no Form 8743 is required at the end of the five year term. If an organization's advance ruling period expired before June 9, 2008, the organization remains subject to the prior regulations, and if it does not submit a public support schedule on Form 8734, it will be reclassified as a private foundation unless it submits documentation to the IRS demonstrating that it met the public support test during the advance ruling period.
Other Aspects of the Redesigned Form 990:
In addition to streamlining the approval process, the new regulations include other modifications as a part of the IRS's implementation of the redesigned Form 990:
- Public Support Computation - the computation period has been changed from the four years prior to the organization's current year, to five years (including the organization's current tax year in addition to the prior four tax years).
- Accounting Method - support must be reported using the organization's overall method of accounting, instead of requiring the cash method of accounting for support calculations.
- Compensation - not only have the threshold amounts been increased for reporting compensation paid to certain individuals, such as directors, officers and key employees, but compensation also must now be reported on a calendar year basis, even if the organization operates on a fiscal year.
If you would like to receive additional materials discussing specific aspects of the redesigned Form 990, please contact Tracy K. McSweeney at email@example.com.