2019 California Nonprofit Tax and Compliance Updates

Updated: Sep 7, 2019


Over the past year, the IRS and U.S. Treasury provided guidance on the 2017 Tax Cuts and Jobs Act (TCJA) that significantly impacted the nonprofit sector. This guidance clarified taxation on parking fringe benefits, excise tax on excess executive compensation, excise tax on investment income of private colleges, and other areas of impact for nonprofit organizations. While the California Revenue and Taxation Code does not conform to TCJA changes, the state has moved forward with an agenda of its own. This agenda includes new rules for Gift-In-Kind valuation, Crowdfunding, and Donor-Advised funds.


GIFT-IN-KIND VALUATION


On February 21, 2019, California Assembly Member Monique Limón introduced California Assembly Bill 1181 that would change the way California nonprofits value gifts-in-kind distributed to foreign markets. This bill was driven by recent lawsuits the California State Attorney General brought against several nonprofit organizations for allegedly overvaluing medication donations from pharmaceutical companies. These organizations allegedly reported the U.S. list price of these medical donations as revenue on their financial statements, which inflated program service revenue and hid excessive fundraising costs. This reporting most likely made these organizations more appealing to the public and potential donors.


If passed, the California bill would require such organizations to value these donations at the list price of the foreign country to which they will be distributed. The proposed legislation states:


“This bill would require those financial records to be maintained on the basis of generally accepted accounting principles as established only by the Financial Accounting Standards Board. The bill, despite this limitation, would require a noncash contribution received by a charitable organization that is restricted by the donor from being used in the United States to be valued using the fair value of the end recipient market or a reasonable estimate thereof if the end recipient market value cannot be ascertained following a reasonable inquiry. The bill would also require a charitable organization, if the end recipient market is unknown when the noncash contribution is received, to value the contribution using only those markets in which the contribution is reasonably likely to be distributed or used. “

While this bill would keep nonprofits accountable for non-mission driven donations, it could create a compliance burden for certain charities. Such charities would have to provide one set of financials to California and another set to IRS and other states.


CROWDFUNDING


California Assembly Bill 1539 was also introduced in February 2019 and aims to prevent misleading crowdfunding efforts. The bill would require charities to obtain written consent of another charitable organization before using its name in an internet solicitation. In addition, the bill would require charities to file an additional annual report, under oath, that contains specified information with the Attorney General’s Registry of Charitable Trust.


DONOR-ADVISED FUNDS


Donor-Advised Funds (DAFs) have become explosively popular over the past decade, particularly with donors seeking tax-efficient strategies that will allow them to itemize deductions under the TCJA. Although IRS Notice 2017-73 expressed consideration to address certain issues related to DAFs, federal legislation to govern these types of funds has not kept up with the demand. In response to the need for legislation, California Assembly Member Wicks introduced AB 1712 in February 2019. This bill would require the Attorney General to adopt rules to require DAFs to file reports that will disclose whether the managed funds are being administered properly.


The California Association of Nonprofits, California Assembly Member Wicks and philanthropist Kat Taylor are some of the few key players to back the California bill. According to Assembly Member Wicks, the bill was introduced because “we must ensure that tax incentives meant to encourage charitable contributions are being used as they were intended: to directly benefit the people and causes of service providers. They should not be used as a vehicle to benefit a few wealthy individuals, while depriving the general public of the benefits that result from direct gifts to charitable service providers.”


For more information, see California Assembly Bill 1181, California Assembly Bill 1539, California Assembly Bill 1712

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