Maine Nonprofit Law E-Bulletin March 2011

In this Issue:

• Introduction
• Nonprofit Exemptions Targeted By Various Bills
• Federal Tax Roundup
• New Form 990 Filing Requirement Thresholds

Introduction

Welcome to the latest issue of the Maine Nonprofit Law E-Bulletin.  I send E-Bulletins 3 or 4 times per year to provide updates and analysis on legal and policy matters respecting Maine nonprofit organizations.  I do my best to keep the messages brief, timely, and useful to nonprofit staff, board members, volunteers, advisors, and donors.  At the same time, no one may rely on these E-Bulletins as legal advice, and I encourage you to consult a qualified attorney for advice on any particular situation.

If you find this free E-Bulletin to be valuable and interesting, please share it with a friend or colleague.  Subscriptions remain free, and I respect my subscribers’ privacy.  Anyone who would like to receive this E-Bulletin or the Maine Land Conservation Law E-Bulletin can e-mail me at rob [at] roblevin.net.  If you’d like to be removed from the distribution list, simply drop me a line at that same address.

Nonprofit Exemptions Targeted By Various Bills

Even when Democrats controlled the Maine governorship and legislature, fiscal realities created pressure to exact more tax revenues from nonprofits.  But with the recent transfer of power to Republicans in Augusta, Maine nonprofit organizations are now especially vulnerable.  A variety of bills have been submitted that would eliminate or narrow tax exemptions for Maine nonprofits.  The Maine Association of Nonprofits is tracking these bills, and will be coordinating opposition efforts.  A list of the worst bills can be found here.  Contact Brenda Peluso at bpeluso [at] nonprofitmaine.org if you’d like more information or to help out in stopping these bad ideas become law.

Federal Tax Roundup

We all read about the great tax compromise of 2010 brokered between President Obama and Congressional Republicans.  Most nonprofit corporations are tax-exempt and don’t have to worry about such matters, right?  Think again.  Some of the provisions directly affect tax-exempt organizations, and others affect the financial picture for major donors.  Here’s a quick summary of what the tax bill included, and how it might impact your nonprofit and its donors:

• Payroll Tax Cut For 2011 — Employees normally pay 6.2% of their first $106,800 in salary into Social Security.  (Employers match that amount, and each party also pays 1.45% into Medicare.)  The one-year payroll tax reduction will reduce employees’ contributions by two points, meaning employees will pay only 4.2%.  Also, the IRS announced a January 31, 2011 deadline for adjusting withholdings.  See IRS Notice 2010-1036.

• Extension of Tax-Free Charitable Donations from IRA’s — A 2006 law allows for tax-free charitable donations from Individual Retirement Accounts (IRAs) of taxpayers aged 70 ½ or older.  This was due to expire in 2010, but was extended through end of 2011.  Up to $100,000 per year per charity.

• Federal Capital Gains Rate Remains at 15% — Instead of returning to 20%, the federal capital gains tax rate will remain at 15% through 2012.  This will affect donors who are considering whether to donate appreciated capital gains property (land, stocks, etc.) to a charity.

• Federal Ordinary Income Tax Rates Remain at Bush-Era Levels – Instead of returning to Clinton-era tax rates (top rate of 39.6%), the rates will remain at Bush-era levels (top rate of 35%) through 2012.

• Federal Estate Tax Changes – There is a new federal estate tax exemption of $5 million per person, $10 million per married couple.  And the exemption is now “portable” between spouses, thus arguably reducing the need for trusts and other estate planning.  The top tax rate is 35 percent, down from the Clinton-era top rate of 45 percent.  As with the income tax rates, the effect on charitable giving is the subject of much debate.  Note that the Maine estate tax exemption remains at $1 million, although Republican efforts are afoot to increase this level.

• Federal Gift Tax Changes — Prior to 2011, federal gift tax lifetime exemption was $1,000,000 per individual.  For 2011 and 2012, lifetime exemption is linked to estate tax exemption, all the way up to $5,000,000.  Because of uncertainty over what happens after 2012, this means that wealthy people will be transferring many assets to their children in 2011 and 2012.

How do these various changes affect charities?  It’s complicated.  In general, these tax changes benefit the wealthy much more than the poor or middle class.  And they add greatly to the federal deficit, which, as we see above for Maine, creates fiscal pressures that target nonprofits.  Republicans claim that lower taxes on the wealthy will lead to stronger economic growth, but this is a very dubious claim among nonpartisan economists.  What about the effect on charitable giving?  One argument suggests that donors, with more money in their pockets, will have more capacity to donate.  Another view, to which I am partial, suggests that the incentive to donate is minimized as tax rates go down.

New Form 990 Filing Requirement Thresholds

There’s good news (assuming you don’t enjoy paperwork) for many small tax-exempt organizations:  Starting with tax year 2010, the filing requirement threshold for filing a Form 990 or Form 990-EZ has jumped to $50,000 (up from $25,000, where it stood for many years) in average annual gross receipts.  This means that organizations in the $25,000- $50,000 range that previously had to file a Form 990 or 990-EZ may now simply a file the much easier 990-N E-postcard.  Remember, annual gross receipts are just about any money or property (based on its fair market value) that comes in the door during the organization’s fiscal year.

However, for mid-sized tax-exempt organizations there are also new threshold requirement for filing the Form 990-EZ.  Organizations with gross receipts of less than $200,000 and with total assets of less than $500,000 may file the Form 990-EZ instead of the Form 990.  On the one hand, these thresholds are down from the $500,000/$1.25 million levels of the previous year.  On the other hand, they are up from the longtime thresholds of $100,000/$250,000.

Keep in mind that none of these filing thresholds apply to private foundations, which must continue to file the Form 990-PF.

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              CIRCULAR 230 DISCLOSURE: Any federal tax advice contained in this communication or attachment is not to be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending any transaction or matter addressed in this communication.

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