In this Issue:
- Affordable Care Act and HIRE Act Provisions Affecting Nonprofits
- Low-Profit Limited Liability Companies Authorized in Maine
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 firstname.lastname@example.org. If you’d like to be removed from the distribution list, simply drop me a line at that same address.
Affordable Care Act and HIRE Act Provisions Affecting Nonprofits
Two bills passed in Congress, the Affordable Care Act (otherwise known as the “health care bill”) and the HIRE Act, provide tax-saving opportunities for certain nonprofit employers. Here are the highlights:
Small Employer Health Credit — This credit is available to nonprofit organizations that have 25 or fewer full time equivalent employees who earn less than $50,000 in average wages, where the nonprofit pays at least 50% of the insurance premium cost for its employees. Eligible nonprofits can start claiming the credit as early as when they file their second quarter payroll tax returns. Note that because the eligibility formula is based on FTEs instead of the number of employees, some organizations will qualify even if they employ more than 25 people. For a useful overview of how the credit applies to tax-exempt organizations, see here and here.
- Dependent Health Coverage — Health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. The IRS announced that these changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. See IRS Notice 2010-38 for an explanation of these changes and further guidance.
- HIRE Act Payroll Tax Exemption — The Hiring Incentives to Restore Employment (HIRE) Act, signed by President Obama on March 18, establishes a special payroll tax exemption for certain newly-hired workers in 2010. The exemption applies to the employer’s 6.2% share of the Social Security payroll tax for the remainder of 2010 for any nonprofit (or for-profit) employer that hires a worker who had been unemployed for at least 60 days. Recently, the IRS released a new Form W-11 to help employers claim the exemption. Also see the IRS’ frequently-asked questions about the payroll tax exemption and the related new hire retention credit.
Low-Profit Limited Liability Companies Authorized in Maine
In April, the Maine Legislature passed a bill that authorizes low-profit limited liability companies under Maine law, beginning in July 2011. See 2010 P.L. ch. 629, codified at 31 MRS § 1611. A low-profit limited liability company (known as an “L3C”) is a new type of entity that was first established in Vermont in 2008 and has spread very quickly to other states.
An L3C is a hybrid between a traditional for-profit LLC and a nonprofit charity. It can be owned and invested in just like a business, but it must “significantly further the accomplishment of one or more charitable or educational purposes.” An L3C can have a purpose of generating income, but it can not be a significant purpose.
An L3C might be appropriate in a number of situations in which neither a traditional business nor a charity would be legal or suitable. One key advantage of an L3C is that it is set up to attract investments from private foundations, for it is intended to qualify as a “program related investment,” a special type of investment that is allowed by private foundations. Until now, many private foundations have been reluctant to invest in anything other than traditional 501(c)(3) nonprofit organizations. But as a 501(c)(3), an organization’s purposes must be exclusively charitable or educational, and a profit motive can jeopardize its 501(c)(3) status.
The L3C model has been considered and used in a variety of contexts in which a traditional business model has not worked out. For an example of a Maine-based L3C that has already been established (albeit under Vermont law, as it was set up prior to Maine’s passage of the L3C bill), see this recent article discussing MOOMilk, a group of Maine organic dairy farmers who formed an L3C to process and distribute their product. Also see www.moomilkco.com.
However, it is important to note that there remain several unresolved questions about L3C’s, including: whether the IRS will automatically recognize them as program-related investments, who will determine whether charitable/educational purposes remain “significant”, and whether they are (or should be) subject to oversight by the Attorney General. Despite these questions, L3C’s might be a useful option, either for new start-ups, conversions from existing businesses, or spin-off programs of existing nonprofits. It is possible that the Legislature may revisit L3C’s in the next legislative session, as the act does not take effect until July 2011.
A useful memo on L3C’s prepared by an Illinois attorney can be found here.
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.