Armanino Blog

Nonprofits: New Requirements for Tax-Exempt Bonds

by Katy Brown
October 05, 2010

Is your organization tracking the necessary information to complete an accurate Schedule K? If your organization files a Form 990, you will be reporting additional information to the IRS. Related information is captured on Schedule K. Is your organization tracking the necessary information to complete an accurate Schedule K?

Schedule K, Supplemental Information on Tax-Exempt Bonds, was added to the Form 990 in 2008. For 2008 filings, nonprofit organizations filing Schedule K were only required to complete the short informational section to satisfy the IRS (the rest of the form was optional). Starting with 2009 filings, the IRS requires most nonprofit organizations with tax-exempt bonds to fill out the schedule in its entirety to ensure proper bond compliance.

Again, Schedule K is completed for bonds issued after 2002. Organizations should be aware, however, that certain changes to bonds issued before 2002, such as mode changes, liquidity replacements or document amendments, may trigger a “reissuance” and make them subject to Schedule K disclosure.

Completing the Schedule K

Schedule K calls for a listing of the “purpose” of each issue and starting with 2009 filings requires answers to detailed questions about the breakdown of the use of proceeds and private business use. The answers to these questions should be consistent with the position taken by an organization’s bond or tax counsel upon issuance. Care should be taken to clearly define the purpose of each bond, as well as the “bond-financed property.”

Steps to Compliance

The first step is to be aware of the rules surrounding tax-exempt bonds. Although organizations should have been monitoring tax-exempt bond compliance from the start, not until 2009 has there been a mandatory reporting process. The reality is that many organizations most likely had loose monitoring policies in place, if any, and will be playing “catch up” to ensure 2009 compliance. It is imperative to immediately implement solid monitoring policies which should include documenting the use of bond financed facilities, monitoring investment returns, etc.

In taking the steps to compliance, an organization can appoint a person to be the “bond monitor.” This person would be in charge of monitoring the investment and use of funds. Since bonds most often finance a structure of some sort, it would be that person’s responsibility to annually review how the structure was used and how the administration hopes to use it in the coming year. Documenting the amount of hours for private use (e.g. weddings) and public use of the facility is a good “best practice” to conduct throughout the year. The key is to keep monitoring and documenting on an ongoing basis to provide support in case of an audit and to avoid any surprises at the time of filing. It’s always easier to prevent compliance deficiencies than to fix them once they’ve occurred.

In cases where two or more nonprofits are beneficiaries of the same bond, each must file its own Schedule K. Coordination between these nonprofits is key to ensure there are no conflicts in the answers provided.

The Consequence of Noncompliance

Waiting until the time of filing might prove to be an insurmountable chore; having to gather all of the necessary information and data to ensure a timely filing. If a qualifying nonprofit does not file Schedule K, it is filing an incomplete return and could be subject to late filing penalties. Worse yet, if the nonprofit is not in compliance with tax-exempt bond requirements, it could be subject to penalties and the bonds could lose tax- exempt status resulting in the organization paying out more returns. This would lead to cash flow difficulties in the years to come.

In Conclusion

Form 990 is often the first place potential donors and media look, and with Schedule K now being a mandatory part of that filing, will have a significant impact on the way an organization receives funding. If a nonprofit is not able to issue tax-exempt bonds (if found to be noncompliant), its cash flow strategy would be severely compromised. Our nonprofit team at Armanino is currently assisting our affected clients with the reporting requirements. Is your organization positioned to comply?

October 05, 2010

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Katy Brown - Manager, Tax - San Ramon CA | Armanino
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