August 2, 2022
Recent state law developments could affect tax-exempt organizations
The following state tax developments could affect tax-exempt organizations operating in those jurisdictions. Given the possible effects on their operations, tax-exempt organizations should consider monitoring state tax developments regularly.
Massachusetts comments on IRS standards for LLCs to qualify for IRC Section 501(c)(3) status
In a comment letter (IRS-2020–0042–0011), the Non-Profit Organizations/Public Charities Division of the Massachusetts Attorney General recommended that the IRS (1) continue to require members of a tax-exempt limited liability company (LLC) to also qualify as an IRC Section 501(c)(3) organization or governmental unit; and (2) instruct tax-exempt LLCs to consult state law to determine their obligations to state charity officials.
Responding to the IRS's request for comments on standards that an LLC must satisfy under Notice 2021-56 to be recognized as an IRC Section 501(c)(3) tax-exempt organization, the letter highlighted differences between Massachusetts and federal law affecting public charities. (For more on Notice 2021-56, see Tax Alert 2021-1952.)
The comment letter noted that Massachusetts law does not prohibit using the state's LLC statute to create a charitable entity. All nonprofit entities, regardless of their form, are subject to oversight by the Massachusetts Attorney General's Office, which includes registration and annual financial filing requirements with the Charities Division. These requirements, the letter noted, would also apply to LLCs functioning as charities.
The letter also pointed out that provisions in the state's "nonprofit corporations statute place affirmative obligations on charitable entities formed under that chapter [and] establish additional, more formal, reporting requirements to the Charities Division." These provisions require judicial review and approval of (1) conveyance of all or substantially all of a public charity's assets for less than fair market value; and (2) distribution of a public charity's assets upon dissolution. The Massachusetts LLC statute, the letter noted, does not address these two issues. Therefore, "the Charities Division could reasonably expect to receive fewer of these formal 'life cycle' types of notices from charitable entities that elect to form under the LLC statute — because they simply are not required by that statute." The comment letter cautioned that these "diminished regulatory reporting requirements" could create "an incentive for charitable entities to elect to form as an LLC, and give the Charities Division reason for concern."
New York eliminates requirement for donor names/addresses on Schedule B
In response to a 2021 U.S. Supreme Court decision, New York no longer requires charities to submit contributors' names and addresses in annual reporting to the New York State Department of Law. The change will be reflected in the online annual filing form (CHAR500).
In Americans for Prosperity Foundation v. Bonta, the Supreme Court concluded that California's requirement that charities in the state submit federal Form 990 Schedule B, Schedule of Contributors, to the California Attorney General was not narrowly tailored to the state's interest of investigating misconduct by charities. Following the High Court's decision, the NY AG's Charities Bureau stated on its website that it was suspending collection of federal Form 990, Schedule B, "while we review any amendments that may be necessary to our policies, procedures and forms." (For background, see Tax Alerts 2021-1521 and 2021-1350.)
Effective March 16, 2022, New York State permits, "registrants other than private foundations that file Schedule B with the Internal Revenue Service [to] omit the names and street addresses of donors on Schedule B filed with the Charities Bureau." Registrants that file Form 990 Schedule B with the IRS and also file Form 990 with New York State may either (1) provide on Schedule B only the amount of each donation and the donor's state, or (2) select a dollar range to indicate the gross contribution amount received from New York State donors. Entities that do not file Schedule B with the IRS must include in CHAR500 the gross amount of contributions they raised in New York State during the applicable reporting period. Private foundations must still file Schedule B with their annual financial report.
Nevada proposes exemption letter amendments
The Nevada Tax Commission has proposed amending the rules for exemption letters that the Commission issues to religious, charitable or educational organizations for sales and use tax purposes. Under the revised rules, the exemption letters would state that they are effective for sales and use tax obligations occurring after the issue date of the letter.
Minnesota Tax Court holds rehabilitation center affiliated with hospital is exempt from property tax
In Allina Health System v. County of Washington (C6-O5-541), the Minnesota Tax Court held that a rehabilitation center owned by a health system is exempt from property tax as a public hospital, finding that the property at issue is "functionally interdependent" with a tax-exempt hospital operated by the health system, "thereby making it an auxiliary facility under Minnesota's statutory public hospital provision."
The court found that the rehabilitation center, located on the hospital grounds, was functionally and organizationally integrated with the hospital and therefore qualified as an auxiliary facility to an IRC Section 501(c)(3) entity. The county had argued the rehabilitation center was not entitled to exempt status because the exemption would give it at an unfair economic advantage over neighboring facilities.
Georgia increases tax-credit limit for contributions to rural hospitals, enacts other legislation
A new Georgia law (H.B. 1041; Act 832) increases from $60m to $75m the aggregate tax credit limit for contributions made to rural hospital organizations. The increase is effective for tax years starting on or after January 1, 2023.
Other pieces of pertinent tax legislation enacted in Georgia in 2022 will (1) extend the sunset date for the historic tax rehabilitation credit from December 31, 2022 to December 31, 2024 for historic homes and to December 31, 2007 for certain other structures (H.B. 469); (2) reinstate the conservation tax credit (H.B. 586), which expired in December 2021, effective June 1, 2022 (with a sunset date of December 31, 2026); and (3) extend the sales tax exemption for sales of tickets to eligible fine arts performances and exhibits at a facility owned or operated by an exempt organization from December 31, 2022 to December 31, 2027 (H.B. 586).
Florida addresses changes to corporate income/franchise tax credits for certain charitable contributions
The Florida Department of Revenue issued guidance on applying for the New Worlds Reading Initiative Tax Credit and Strong Families Tax Credit available to taxpayers with corporate income or franchise tax obligations. The applications must be filed by the day before the original or extended due date of the corresponding Income/Franchise tax returns.
Kansas enacts new tax credits for contributions to certain education programs
New law (2022 KS HB 2239) provides a credit to taxpayers that contribute to a community college or technical college located in Kansas for capital improvements, deferred maintenance or the purchase of technology or equipment. The credit can be claimed against income tax, premium tax or privilege fees, or the privilege tax on financial institutions. The credit is allowed for contributions made on and after July 1, 2022 and for tax years 2023–2026. The amount of the credit equals 60% of the total amount contributed during the tax year to such colleges located in Kansas. The credit is capped at $250,000 for each taxpayer per tax year and the amount of contributions to any one community or technical college eligible for the credit cannot exceed $500,000 per tax year. In Notice 22-03, the Kansas Department of Revenue provides guidance on these new provisions, explaining that contributions can include cash, stock and bonds, personal property and real estate.
These recent developments demonstrate state efforts to both more closely regulate tax-exempt organizations and provide them with additional tax benefits and incentives. Tax-exempt organizations should continue to monitor state tax law developments through legislation, state court rulings, and regulatory guidance to ascertain and respond to new requirements and legal challenges.
Please contact your Ernst & Young LLP professional for further information.